Your financial situation grows more complex as you take on more responsibilities, create new goals, and hit big life milestones. No matter what you want your life to look like, it takes planning to turn your ideas and hopes into reality.
This is where a financial planner can come in and help make it happen. Financial planners and advisors provide outside, objective, and expert perspectives and advice. The best will keep you on track to meet your goals, whatever they may be, and can stand between you and making big mistakes with your money.
Your financial planner can serve as your guide through complicated decisions, helping you make rational ones instead of taking emotionally charged action. And her or she can serve as accountability partners to ensure you’re taking the steps you need to grow your wealth.
If you’re looking for a professional, you probably already know this – but the confusing part is how to choose a financial planner who’s going to best serve you and work with your interest in mind and not a commission fee.
The Challenges Consumers Face in Choosing an Advisor
The confusion starts with the fact that the terms “financial planner” and “financial advisor” aren’t regulated. Planner and advisor are interchangeable, and “advisor” sometimes appears as “adviser.” Anyone can call themselves a planner or advisor or “money coach” or a variety of other terms. This isn’t necessarily a bad thing, but it does make it more difficult to understand what a professional does when you first meet them.
For example, big banks and insurance companies employ many advisors that call themselves financial planners, but do very little comprehensive planning and instead focus on selling the bank or insurance company’s products. They function as salespeople but use the title of planner.
This looks very different than an advisor who provides comprehensive financial planning that includes a plan to repay your student loan debt, set up the right savings accounts for you, and map out what you need to do in order to reach your goal of quitting your job in the next three years to launch your own business instead. And yet both these people may go by the same title.
Understanding How Financial Planners Are Paid
There’s a lot of confusion around the job title for planners and advisors, which causes some issues. But an even bigger problem? Most people don’t understand the differences in how advisors receive compensation for their work.
There are three main ways an advisor is paid:
Commission-based: These advisors only receive payments through commissions on products they sell. These products could include life insurance, mutual funds, or annuities. This presents a huge conflict of interest. They’re incentivized to sell products whether or not those products make sense for you.
Fee-based: Fee-based advisors can earn commissions off product sales, but they also offer services for flat fees paid by their clients. While this eliminates some conflicts, fee-based service models still leave the door open for an advisor to make a recommendation that isn’t necessarily the best for their clients.
Fee-only: Fee-only financial advisors are not the same as fee-based. Fee-only advisors are paid a set fee by their clients for the services they provide. They do not earn commissions off product sales. For this reason, there are inherently no conflicts of interest between you and your advisor if they’re fee-only. Fee-only planners are only getting paid by you to provide the best advice.
Two Different Sets of Standards
To recap, “financial advisor” or “financial planner” can mean a lot of different things and the title applies to people who do very different work. It’s critical that you understand what type of advisor you’re considering and how they’re paid. Fee-only advisors are only paid for the services they offer, and that payment comes directly from the client. For that reason, fee-only advisors can operate with the least amount of conflict of interest.
In fact, they’re even held to a higher standard than other advisors: they need to uphold the fiduciary standard. The fiduciary standard requires professionals act in the best interest of their clients at all times. That includes putting their clients’ interests ahead of their own or their business.
Believe it or not, acting as a fiduciary is not the rule in the financial planning industry. There’s another standard that most fee-based and commission-based advisors fall under. It’s called the suitability standard, and it requires only that an advisor make a recommendation that is suitable for their clients. It doesn’t have to be the best option.
If you’re looking for a financial advisor, choose one who operates under the fiduciary standard. You can ask them to sign a fiduciary oath before working with you, and if they refuse, keep looking. There are too many qualified professionals out there who can work with you and put your interests ahead of everything else (including their own).
How to Choose a Financial Planner
There’s a lot to think about when you choose a financial planner. When starting your search, look for someone who is:
- a fee-only financial advisor
- willing to work as your fiduciary – and will sign (or has signed) a fiduciary oath
Additionally, you want to make sure the professional you find is qualified and experienced, and understands your needs and goals. Here’s what to ask when you talk to a financial planner:
What kind of designations do you have? Look for marks like CFP, CPA, and so on; or ask if they’re working toward these designations. The CFP, for example, requires considerable education, training, testing and three years of work experience to obtain. Plenty of good planners can add value to your financial life, but may still be in the process of earning their CFP.
What services do you offer? Planners can offer a variety of different services. You want to ask to determine if what they offer fits your needs. You may want comprehensive planning, investment management, or both. Some planners also offer “quick start” sessions, which is a one-time engagement that costs much less than ongoing service.
What kind of clients do you work with? You want to ensure your planner is familiar with the needs – and wants – of someone like you. If you’re interested in reaching financial independence so you can travel the world, working with an advisor who specializes in retirement planning and Social Security analysis doesn’t make much sense for you.
Where to Find Your Ideal Financial Advisor
Not sure where to start looking? Search these organizations for a financial planner to connect with. They’re all groups of fee-only financial advisors who uphold the fiduciary standard.
XY Planning Network: XYPN is the leading organization of fee-only financial advisors who specialize in serving Gen X and Gen Y clients. All of their members can work virtually, which means you can choose the best advisor for you regardless of physical location.
Garrett Planning Network: GPN is another organization of fee-only planners who serve clients from all walks of life. Their advisors offer planning services on an hourly basis.
National Association of Professional Financial Advisors: NAPFA is the largest organization of professional advisors who meet the highest set standards in the financial planning industry.