Good financial advisors can usually improve the finances of almost anyone.
But when money is exchanged for a service—especially a service involves your personal finances — there are important considerations for choosing the right professional. You want an advisor who is ethical and has your best interest in mind.
Add to these considerations the fact that financial planners come with different fee structures. They may be compensated based on the amount of money you’re investing and the return on that investment, or have a vested interest in certain products that may impact your financial picture. There’s potential for some conflicts of interest that you may not see on the surface.
Want to find the best financial advisors to help you plan for retirement? Here are a few key questions you can ask to help determine whether the planner is trained, ethical, and is acting in your best interest.
What is your experience and education?
Not all financial planners are designated equally. Some call themselves financial planners after receiving continuing education, while others have graduated from accredited university programs requiring degrees.
Ask your potential planner where he or she has completed his or her education. What level of degree does he hold? How much continuing education has he completed, and under what time frame?
What are your professional designations and what do they mean?
There are a host of professional designations and organizations that include financial planners, but from CFP, to CPA, CFA, CIC and more, it can be tough to navigate them all. And there’s no single regulatory body to help.
“The truth is that almost anybody in America can call themselves a financial advisor,” Steven Blum, author of ‘Negotiating Your Investments,’ said in a recent interview with ThinkAdvisor. “There’s not a lot of regulation of that. People who call themselves financial advisors come in many different stripes.”
Ask the planner to explain the designations, including how long it took to achieve them and whether there are recertifications needed. Find out whether they are recognized nationally, or on the state level.
“In financial planning, the Certified Financial Planner® designation is the gold standard, much to do with the education, examination, ethics, and experience requirement to hold the mark,” says John Salter, Associate Professor in the Department of Personal Financial Planning at Texas Tech University.
What’s your expertise around taxes?
A financial planner should be versed in tax benefits, as they apply to your investments, and to any products, such as annuities, mortgages and reverse mortgages, and life insurance policies. Some tax breaks apply to the consumer, and others will help the company offering the product.
“But many of those products are priced so that a great deal of the tax benefit is captured by the product provider rather than the client,” Blum says.
Do you operate according to AICPA or some other standards?
The American Institute of CPAs this year adopted and implemented a “Statement on Standards in Personal Financial Planning Services.” This SSPFPS deals both with professional best practices as well as personal conduct.
Under the standards, financial planners must avoid conflicts of interest and must disclose any potential conflicts, and must act in the best interest of their clients. And for the first time, they may be enforceable under law.
Find out whether your state, as many do, recognizes these standards under law. If so, the standards are enforceable and your planner should be held accountable to the code of conduct and ethics.
How do you make money?
Find out specifically how your financial planner is paid. This may include client fees, income from a parent company, transaction fees or a percentage of assets under management.
“If an advisor does have more opaque streams of revenue, then it is incumbent on the advisor to tell you all the things I do to actually minimize that conflict of interest so it doesn’t hurt you,” Blum says.
How does your firm make money and what are its sources of revenue?
“The world of financial planning is not free of conflicts of interest,” Salter says. “Obviously in a commission environment there is the conflict of selling a higher commission product when it is not the most optimal solution for a client.”
But in financial planning situations there are less obvious conflicts, and it’s important to ensure they are not being introduced by the professional you choose to work with.
“Making investment changes often to capitalize on commissions can also be an issue,” he says. “However, conflicts exists in the fee world as well, particularly when charging based on assets managed, in that the conflict is offering recommendations that keep or potentially increase assets when it is not the most optimal solution.”