Selecting A Financial Planner

Selecting a financial planner can be difficult. Do you need a certified financial planner (CFP) or a registered financial planner? What should you look for in choosing one? And what questions should you ask when you meet with him or her. Unfortunately the following happens too often:

Conversation with Typical Financial Planner

Client (CL): Should I invest in the stock market?

Financial Planner (FP): Can't answer that question.

CL: Why not?

FP: Only you can answer that for yourself.

CL: What do you mean?

FP: Well, it all depends on your risk tolerance.

CL: Risk tolerance? ...

FP: Yea, if you have a high tolerance for risk, you probably should invest. If not, you probably shouldn't.

CL: I'm not sure of my risk tolerance, but I do know that I want to make money with my investments; and not lose money.

FP: Join the club.

CL: Huh?

FP: That's what everyone wants.

CL: OK, can you just tell me if I'll make money if I invest in the stock market.

FP: I can tell you that you might make money or you might lose money.

CL: Seems like a crapshoot.

FP: Pretty much … er, I mean, you can look at it that way. Of course not investing may be the biggest risk of all.

CL: You're really losing me….

FP: Well, if inflation takes off then you better not get caught with your money hiding under the mattress.

CL: Wow, ok, well, I've read that diversification of investments is a good idea. Maybe some in domestic stocks; some in foreign; some in bonds, real estate, money markets, gold, etc…

FP: Can be. Or, diversification could be a bad idea – especially if you want to really do well. Problem is that it could limit your results to mediocrity which might not keep up with inflation. In that case, diversification would have been a bad mistake.

CL: I'm not sure how helpful this has been. Do you have any specific suggestions for me?

FP: Be careful. And, be sure to see my receptionist on the way out -- for your invoice.

OK, while the above exchange is fictional and intended to be humorous – it probably hits close to home in too many cases. The reality, of course, is that financial planners really can't predict with certainty what's going to happen in the future and so their advice necessarily is broad and general.

In fact, if they do make specific investment recommendations, that should raise at least a yellow flag in your mind and you should inquire into why they are recommending that specific investment. Is the recommendation solely with your best interests in mind or might there also be an incentive for the planner? Maybe the planner will receive a fee from the investment if you buy into it. If so, you should know that.

Independent financial planners are normally the best bet. They only receive compensation from you, the client; not from the investments they recommend.

Some of the best advice financial planners can give is related to income tax considerations you should think about and plan for in making your investment decisions. There is much to be gained (or lost) through good tax planning.

Of course, you also want your financial advisor to be experienced, particularly with the type of advice you need. If you have a young family with kids growing towards college age you will need different advice than if you are nearing retirement. So, you may need an advisor with different experience and skill set.

You probably will be well served by choosing a financial planner who is certified and/or registered. That's an indication they have at least met certain standards and an indication they are reputable.

Some of the best advice financial planners can give is related to income tax considerations you should think about and plan for in making your investment decisions. They are trained and qualified to assist you in even unique situations like military taxes. There is much to be gained (or lost) through good tax planning.

You can get lots more financial planner information from financial planning organizations like the National Association of Personal Financial Advisors.

Check out this page about what personal finance has to do with estate planning.

Other Articles About Selecting a Financial Planner

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--by Beth Heikkinen
Marquette, Michigan
I just want to thank you for this site. It answered my questions. I think many people that do research on the net take it for granted and when they find what they are looking for they forget "someone put time, money, etc into providing me with this information."

Thank you!

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