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 A lot has been written about financial planning and financial planners.
Although no legal definition of the term exists, financial planning
generally involves evaluating and recommending strategies to achieve
your financial goals. Planning advice should be objective and
comprehensive. It should coordinate your investment purchases with other
aspects of your financial life. For instance, you may want advice about
employee benefits, college costs, taxes, retirement, and estate
planning. The title, "financial planner," also not legally defined, is
used by a variety of individuals _ accountants, brokers, insurance
agents, for example -- to imply they offer comprehensive financial
planning services.
Not everyone needs the advice of a financial planner. By doing your own
homework (such as reading the many publications geared to helping you
make the best use of your money and/or taking objective financial
education courses), you can undertake your own financial planning.
Even if you decide to hire a financial planner, you still need to know
as much as you can about your own individual financial situation.
Without that knowledge, it's nearly impossible to evaluate whether a
planner's recommendations make sense for you.
A good financial planner will review your total financial picture and
offer advice about what might make your money work for you in the most
advantageous ways -- given your income, goals, objectives, and attitudes
toward financial risk. Between 250,000 and 400,000 people in this
country call themselves financial planners.
Many of these people have professional experience as life insurance
agents or stock brokers. Others have professional careers such as
bankers, accountants, investment advisers, tax and estate planning
lawyers, or bookkeepers. Only some of these people, however, have taken
specialized courses in all aspects of financial planning. The focus of
this publication is on selecting a financial planner for those of you
who may feel you need help investing your money.
As with any individual you pay for advice, you need to carefully check
credentials. There is little regulation of the financial planning
industry and, in most states, anyone can claim to be a financial planner
-- with or without valid training. In addition to the risk inherent in
almost any investment, consumers lose millions of dollars in fraudulent
investment schemes every year; and, some of these fraudulent schemes
have been sold by individuals calling themselves financial planners.
There is a further note of caution: most financial planners earn all or
part of their living from the commissions on the products they sell. If
you visit a financial planner, you probably will be asked to consider
purchasing some financial products as part of your overall financial
plan. Although an overwhelming number of financial planners are
dedicated, responsible, and competent, many still are in the position of
advising you to purchase investment products from which they receive a
commission. Be wary of planners who promise quick riches or instant
financial gain. Building a secure financial future is not accomplished
overnight or with one single investment. Financial planning is a
process that requires diligent yearly attention. Knowing this may help
you more carefully weigh the pros and cons of any investment someone
tries to sell you.
Decide If You Need a Financial Planner
Although financial planners can help you make investment decisions,
hiring a planner presumes you have discretionary income to invest.
Experts say most investments should not be made until you have financed
some very basic living items, such as housing, insurance, a cash reserve
fund for emergencies and retirement plans available through your
employer. If you find you cannot meet these (and other) necessary
financial requirements, you may decide you need help not in investment
planning, but in basic money management. The right planner may be able
to help you set up a budget and monitor it so that you can move from
short-term spending to begin saving for future goals.
To decide if you really want to contact a financial planner, plan to go
through some of the same preliminary steps a good financial planner
would take you through. Though this may require some time and effort,
it is a necessary part of the financial planning process. When you have
completed this process, you will have a clearer picture of your
financial profile and will have laid the foundation for future
investment decisions. At that point, you may decide you are doing very
well on your own. Or, you may determine you would like to confer with a
financial expert, on a short or long-term basis, to find out if you have
other investment options to consider.
Set Long-Term Goals
It's hard to make long-term financial commitments if you don't know your
long-range financial goals. Though this sounds simple, many people have
only vague ideas about why they want to save money. Husbands and wives
may have very different ideas from one another.
So, before you consider any specific investments, you may want to think
hard about what is important to you in life. It may be saving for
retirement, buying a special house, paying for a child's college
education, cutting back work to spend more time with your family, taking
exotic vacations every year, or any number of things.
If you have a spouse, you will want to do this thinking first alone and
then together. Often, writing down these ideas can help.
This process may take hours -- or weeks. But visualizing concretely why
you want to save money is a very important step. For when you know (and
can agree on with a spouse) what's most important to you, you are in
much better shape to tackle your financial future.
Organize Your Important Papers
It may be impossible to plan your financial future accurately unless you
can easily find all your important papers and financial documents.
Without this information, your calculations may be based on too much
guesswork. Your filing system doesn't have to be elaborate, but it
should be organized. Spending time doing this may be tedious, but it
will help you follow all the other steps we mention here.
Figure Out How Much You Own and Owe
An important financial document for many people is their financial
statement. A financial statement tells at a glance what you own and how
much you owe. This basic tool is often the starting point for future
financial decisions. Just the process of compiling a financial
statement may point out revealing things about the way you handle your
money.
The financial statement tells your net worth by subtracting everything
you owe (liabilities like credit card balances, mortgages, taxes, etc.)
from what you own (assets you could sell or cash in).
You may not want to show your Financial Statement to a financial planner
until after you have established a contractual agreement.
Note: Each item will have a value as of a specific date, preferably
within 6 to 12 months of each other. The following are definitions of
different types of ownership:
Types of Ownership
Sole Ownership (S): The property has one owner. If the owner dies, the
property is distributed according to his or her will or, if there is no
will, state law. However, solely owned property with a designated
beneficiary, individual retirement accounts (IRAs), pensions, and life
insurance investments pass automatically to the beneficiary.
Tenancy in Common (TC)*: The property is owned by two or more tenants
(owners) in equal or unequal shares. The tenants may include spouses or
others. When a tenant dies, his or her share is distributed the same as
with sole ownership. It does not pass automatically to a spouse or
other tenant(s).
Joint Ownership with Rights of Survivorship (JTWROS)*: The property is
owned by two more tenants in equal shares. Tenants may include spouses
or others. If one tenant dies, his or her share passes automatically to
the surviving tenant(s).
Tenancy by the Entirety (TE): A type of ownership available to married
couples in some states. Property is owned fifty-fifty. It cannot be
sold without the consent of both spouses. Upon the death of one spouse,
it passes automatically to the surviving spouse.
Community Property (CP): The property and debts acquired by a married
person in a community property state: California, Louisiana, Arizona,
Nevada, Texas, Washington, Wisconsin, Idaho, New Mexico, and Puerto
Rico. Community property is owned fifty-fifty, regardless of which
spouse's name appears on the title. It includes real estate, wages,
savings accounts, IRAs, pensions, securities and other personal
property. It does not include "separate property" owned before marriage
or acquired by gift or inheritance. If one spouse dies, his or her
community property and separate property are distributed the same as
with sole ownership. The property does not automatically pass to the
surviving spouse.
*A tenant or tenancy in common or joint tenancy with rights of
survivorship property can sell his or her share of property without the
consent of the other tenants(s).
Determine Where the Money Goes
Unless you know how much money you spend and for what, it's unlikely you
will ever be in control of your financial situation. While collecting
this information may seem overwhelming, it may be one of the most
important steps you take in your financial life.
To do this, you will need to collect receipts, check stubs, credit card
statements, and the like for a period of time -- say, the previous year.
Many items are fixed each month, such as mortgage payments or rent,
insurance, and car payments. Life and car insurance payments may be due
once a year. Other expenses change, such as restaurant or clothing
charges. Be sure to use actual figures from bank statements, check
registers, etc. Review your pay stubs to include expenses deducted from
your paycheck.
Many people find that writing down all expenses, no matter how small,
helps track spending. Don't be surprised if you find you're spending
more money than you thought in some categories. Most people have little
idea where their money really goes -- especially for miscellaneous
items. You may want to look at the sample cash flow statement included
here to help guide you. Based on this information, you may decide you
need to develop a budget -- to track the money you have and to limit
unnecessary spending.
Take careful note to make sure you can make ends meet on some of your
important basic expenditures: housing, food, education, insurance, and
health care. Are you saving regularly? Do you have an emergency cash
fund equal to about three to six months of your expenses?
Once you know where your money is going, you're in a much better
position to know what funds, if any, you have available for investment
purposes. Then, and perhaps only then, will you want to think long-term
investment goals.
SAMPLE CASH FLOW STATEMENT
INCOME
Salary/Wages
Interest/Dividends
Social Security
Retirement Plans
Reimbursement/Refunds
(only if included below as expense)
Sale of Investments
TOTAL INCOME
EXPENSES (how you actually spent your money)
Savings
(including pension plan contributions)
Income Taxes
Property Taxes
Insurance
(health, disability, life, car, home)
Mortgage/Rent
Utilities
(heat, electricity, water, garbage, phone)
Debt payments
Transportation
Vacation
Medical (not insurance)
Personal (misc. cash, haircuts)
Charity
Food/Supermarket Items
Restaurants
Recreation
Holiday Expenses
Gifts
Education/Classes
Clothing
Other, i.e., children,
professional fees, hobbies, etc. (If large expenditures, create a
line item for each)
Miscellaneous
TOTAL EXPENSES
What to Expect from a Good Financial Planner
If you decide to use a financial planner, a good one should assist you
in the following ways:
* Assess your relevant financial history, such as tax returns,
investments, retirement and estate planning, wills, and insurance
policies.
* Review your net worth statement, examine your debts, and determine if
any should be consolidated, paid off from other available funds, or
refinanced.
* Help you develop a financial plan, based on your personal and
financial goals, history, preferences, and psychological investment
risk-level.
* Identify financial areas where you may need help, such as building up
a retirement income, improving your investment returns, buying or
selling an insurance policy, tax saving suggestions, etc.
* Write down and discuss an individualized financial plan and work plan
(timetable) that you both understand and are willing to sign.
* Help you implement your financial plan, including referring you to
specialists, such as lawyers or accountants, if necessary.
* Review your situation and financial plan periodically and suggest
changes in your program when needed.
Guidelines for Selecting a Good Financial Planner
There are several ways to look for a financial planner. One place to
start is to look for planners who are certified. Certification does not
guarantee that a person will be a wise or creative planner. It does
indicate, however, that he or she has studied important subjects of the
financial planning field such as wills, trusts, investments, taxes, home
ownership, and life and health insurance.
The major groups that represent financial planners who have taken
courses and passed examinations are: the National Association of
Personal Financial Advisers (NAPFA); the Registry of Financial Planning
Practitioners of the International Association for Financial Planning
(IAFP); the Institute of Certified Financial Planners (ICFP); and the
Chartered Financial Consultants (ChFC).
You can get a list of names of those financial planners in your area who
are certified by writing to these organizations. (The addresses are at
the end of this document.)
"Registered Investment Advisers" are people who furnish investment
advice for a fee and are required to register with the Securities and
Exchange Commission. This does not indicate that they are financial
planners or have had any special training. By law, however, they are
supposed to disclose their educational backgrounds and financial
planning experience on a federal government form called Form ADV.
The registration form, Form ADV, is divided into two parts.
Part One covers information used by the Securities and Exchange
Commission(SEC) to evaluate the adviser's application. It includes
detailed information about the applicant's disciplinary history,
including civil or criminal actions against the applicant and
disciplinary actions by federal and state regulatory agencies and
self-regulatory organizations.
Part Two of the Form ADV includes extensive information that advisers
are required to disclose to potential clients such as the method of
compensation, affiliation with other financial industry activities,
education, and types of service offered.
Recommendations of friends and colleagues may play a role as you select
a financial adviser. But an investment adviser who impresses one client
may be unsuitable for someone else. Select a firm or individual who has
the skills and expertise to meet your specific needs, including being
sensitive to how much risk you are willing to take with your
investments.
You may be invited to attend free financial seminars offered by various
individuals or companies. Stockbrokers and planners often arrange to
teach financial planning classes at local schools. Going to these
seminars makes some sense if you want to shop around before deciding
what investments to purchase or which financial planner to work with.
Keep in mind, however, that these seminars may also be an opportunity
for professionals to promote their business and themselves -- and they
can be very personable and appear trustworthy. Go with pad and pencil
and a healthy dose of caution!
Beware of planners who use high-pressure tactics or promise unusually
high rates of return. Remember: no investment is so good that you can't
go home first to think it over. Check with the local Better Business
Bureau and Office of Consumer Affairs as well as the professional
associations and the Securities and Exchange Commission (SEC) to see if
any complaints have been lodged against the planner you may consider
using. Be aware, however, that because years may pass before
investments are found to be worthless, it may take time before
complaints surface against a particular financial planner.
Questions to Ask in a Preliminary Interview
If you are looking for a financial planner, consider asking each one you
interview the following questions:
1. What credentials do you have to practice financial planning?
Financial planners come from a variety of backgrounds and,
therefore, may hold a variety of degrees and licenses. There are no
regulations in most states for the financial planning industry.
However, some take specialized training in financial planning and
earn credentials such as Certified Financial Planner (CFP) or
Chartered Financial Consultant (ChFC). Others may hold degrees or
registrations such as lawyer (JD), Certified Public Accountant
(CPA), or Chartered Life Underwriter (CLU). Question financial
planners carefully about their background and experience. Be
certain that any planner you consider hiring has ample knowledge of
taxes, insurance, estate and retirement planning issues, as well as
the basics of investments and family budgeting.
Be wary of individuals who promote various investment items without
discussing any overall financial planning goal. They may lack the
expertise to formulate one or they may be focusing solely on selling
particular investments.
2. Are you registered with the federal Securities and Exchange
Commission (SEC) or with a state agency?
Anyone who may be giving advice on securities (including tax
shelters), use of the stock market, or the value of securities over
other types of investments should be registered with the SEC or
registered under state law dealing with investment advisors.
Be sure to ask for the Form ADV, Parts One and Two, which will give
you information about the planner's background. Don't use a planner
who doesn't have one or won't give you a copy.
3. How would you prepare my financial plan?
Financial planners usually prepare financial plans after carefully
discussing and analyzing your personal and financial history, your
current situation, and your future goals. Some financial planners
enter relevant financial information into a computer to generate
standard financial plans. This type of plan may be useful, but be
certain your unique financial situation is taken into account. Be
sure to find an advisor who will give you personalized advice for
your situation. Ask if you will be given a written analysis of your
financial status and the planner's written recommendations to meet
your goals.
Also, ask the planner about the process for handling your account
while you travel or, for some reason, cannot be reached. For
example, if you give planners discretionary power over your account,
they could buy and sell securities without your prior knowledge or
approval. Discretionary authority is legal only when it is in
writing. If you choose to give this power to your planner, be sure
you and your planner agree in plain English exactly what action you
want the planner to take. To revoke this discretionary permission,
send a certified, return receipt-requested letter to the planner. Be
extremely careful about handing over this power to a planner. Many
complaints to regulatory agencies about planners have to do with
their misuse of discretionary power. And, be sure the planner is
bonded. This insurance should protect you in case of fraud.
4. How many companies do you represent?
Someone who represents only one or two companies is probably not a
financial planner, but a broker or salesperson. It will be to their
advantage to see you purchase only those products offered by the
companies they represent. You may want to seek an advisors who can
offer you a wide range of choices to suit your needs. A fee-only
planner does not represent any company.
5. Who will I work with on a regular basis?
You will want to work consistently with someone who is completely
familiar with your account. If you work with a large firm offering
many financial services, ask how the firm will provide a coordinated
method of referral among the various experts who advise you. If you
work with an individual planner, ask if the planner will provide you
with professional references.
6. How do you keep up with the latest financial developments?
You may want to look for a planner who enrolls in continuing
education courses (or, perhaps, teaches in a business school) to
keep current on tax and investment strategies. Regular members of
the National Association of Personal Financial Advisers (NAPFA) and
the Institute of Certified Financial Planners (ICFP), for example,
are required to complete 30 hours of continuing education every year
in order to maintain full membership status.
7. Will you be involved in evaluating and updating the plan you suggest?
Financial planners should develop a plan specifically tailored to
your situation and needs. Some planners also will include
provisions for updating your plan to adjust to changes in your life,
current economic conditions, and tax laws. A financial planner also
can periodically review your plan to show you the progress being
made in reaching your goals. Some planners offer continuous advice
and management of your investments. Ask if your planner provides
this type of ongoing service and what those services would cost.
8. Will you provide me with references?
Ask for references of clients who have at least three years'
experience with the planner. Talk to several. Ask these clients
what they would most like to improve about their relationship with
the planner.
9. Will you report the overall rates of return from all my investments
so I can easily monitor results?
Ask for a copy of this report for similar clients over the last five
years (leaving the names of clients blank). Be careful not to
compare stocks to CDs or stocks to bonds. To assess the impact of
the planner's compensation on your investment results, be sure to
ask for rates of return for before and after the deduction of the
planner's compensation.
Determining Fees
Financial planners are paid in a variety of ways. Ask specifically how
the fee is calculated and what it will be. Explore some of the following
arrangements to see which fee option serves your interests best:
Fee-only Financial Planners
Fee-only planners base their charge on gathering your financial data,
analyzing it, recommending a plan of action and helping you implement
it. They do not earn income from the financial products they might
suggest you buy. You may pay some costs to unaffiliated companies for
investment and insurance products.
Your planner should be able to estimate these costs. Hourly or flat
fees are most common. Payment is required whether or not you implement
the suggested plan.
Commission-only Planners
Some planners charge no fee for service to their client but make their
money through commissions paid by the marketers of the investment
products they sell. For example, if a client buys insurance on the
advice of a financial planner, the planner will not charge the client
for that advice but will receive a commission from the insurance
company. If your planner earns a commission, make sure you get a
disclosure of the commission you will pay before recommended investments
are implemented. Since commissions are often not disclosed, it is
difficult to know how much you are paying your adviser and whether, for
example, the fee was necessary at all. (Commissions on mutual funds can
average about 5 percent; commissions on insurance can be 50 percent or
more of the first year's premium. Generally, higher risk products offer
the highest commissions.) Some commission-only planners might be
inclined to direct your financial plan toward the purchase of products
that provides them with the best commissions. Therefore, until you
develop a trusting relationship with a planner who knows your complete
financial picture, you may want to exercise caution in following the
advice of someone who works solely on commission. As a prerequisite for
doing business, make a written agreement to disclose yearly total
commissions earned by the planner and the planner's broker/dealer on
recommendations made to you.
Fee and Commission Planners
Some financial planners receive payments from both a sales commission
and a fee. If the planner receives a commission from the company that
sells the product you purchase, the fee you are charged may be less.
No matter which fee structure you work with, make sure you get a written
estimate of what services you can expect for what price. Compare this
estimate with others and select the package of services that best meets
your needs at a reasonable cost.
If You Need to File a Complaint
If you have a complaint against a financial planner, send a certified
letter to the planner's/firm's compliance officer detailing the
complaint. Report the problem to your state's Attorney General's Office
or state Securities Commission. These offices can advise you about the
next steps to take or the appropriate organization to contact to file
your complaint. Depending on the product you were sold, you may be
referred to the National Association of Security Dealers, (301)
590-6500; the Securities and Exchange Commission, Office of Consumer
Affairs and Information, 450 5th Street, NW, Washington, DC, 20549 (202)
272-7440; or your state Securities Commission. You may also wish to
contact the Federal Trade Commission, Correspondence Branch, at
Washington, DC 20580.
Planners who have been admitted to the Registry of Financial Planning
Practitioners or who hold the designations CFP or ChFC or are members of
the National Association of Personal Financial Advisers (which represent
fee-only planners) have codes that they are expected to uphold. These
codes basically include honesty, avoiding misleading representations,
and disclosure of any potential conflicts of interest. In addition,
fee-only planners affirm that they serve as fiduciaries for their
clients, which means they put their client's interest first. Should
financial planners violate these standards, they could lose their
association with their group and/or their designating initials.
If you have problems with a financial planner, you may want to contact
the appropriate organization listed below:
The International Association for Financial Planning
Registry of Financial Planning Practitioners
The International Association for Financial Planning
Two Concourse Parkway, Suite 800
Atlanta, GA 30328
404-395-1605
The Institute of Certified Financial Planners
Two Denver Highlands
10065 East Harvard Avenue/ Suite 320
Denver, CO 80231-5963
1-800-282-7526
Chartered Financial Consultants
The American College
270 Bryn Mawr Avenue
Bryn Mawr, PA 19010
215-526-1000
National Association of Personal Financial Advisers
1130 Lake Cook Road
Suite 150
Buffalo Grove, IL 60089
1-800-366-2732
A Final Note
It's up to you, of course, to decide whether you need to hire a
financial planner. Even if you do, it is essential to keep abreast of
what is happening on the financial scene. No one has as much at stake
as you do regarding your finances -- not even your financial planner.
You may want to keep up-to-date in the field by regularly reading a
variety of financial publications. Some magazines that feature money
and investment information and advice in laymen's language include:
Money Magazine, Kiplinger's Personal Finance Magazine, Consumer Reports,
and Personal Investor. Sylvia Porter's Retirement Newsletter and the
No-Load Investor Newsletter are available by subscription or in most
libraries. The following publications offer more technical information:
The Wall Street Journal, Barron's, Forbes, Fortune, Harvard Business
Review, Nation's Business and the financial pages of a metropolitan
newspaper. You will find many others in bookstores and libraries.
Because the financial marketplace is constantly changing, no one can
afford to sit back and expect a financial plan to take care of itself.
By reading, talking, and attending classes on money matters, you will
learn when to consider revising your financial plan and when to make new
financial moves. An annual review is advisable. In addition, changes
in your personal situation, for example, marital, financial, or health,
also may make a revision of your plans necessary. And that holds true
whether you do -- or don't -- hire a financial planner.
Copyright 1995 by the American Association of Retired Persons.
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