By Phil Robertson
When a friend won Florida’s “Fantasy Five” lottery game a few years ago, he faced a quandary: what to do with $215,000. He had a good job, had a mortgage that was down to $50,000, had little credit debt, and drove a leased BMW. So, what was quandary? How to make the most of that “found” money.
What did he do? He called his bank and met with one of their financial advisors.
Why? The answer may be best articulated by Putnam Investments, a 70-year-old investment management company with more than 9 million sharehoIder accounts, $193 billion in assets under management, offices in Boston, London and Tokyo, and 194 investment professionals:
A financial advisor is one of the most important resources you can have as a long-term investor. An advisor can work with you to define your specific financial goals, risk tolerance, time horizon, and investment preferences. An advisor can also help you avoid the mistakes common to investing. Specifically, he or she can:
- Help define your financial goals
- Determine a suitable time frame for meeting those goals
- Evaluate the level of risk appropriate for your situation
- Find investments that match your time and risk profile
- Keep you informed about changes in your investments and time horizon
- Help you stay on track and avoid making common investment mistakes
The Securities and Exchange Commission (SEC) provides the following questions and answers for both novice and experienced investors who are wondering if they should retain the services of a financial advisor or financial planner:
Q: What is an investment adviser?
A: Investment advisers are in the business of giving advice about securities to clients. For instance, individuals who receive compensation for giving advice on investing in stocks, bonds, or mutual funds, are investment advisers. Some investment advisers manage portfolios of securities.
Q: What is the difference between an investment adviser and a financial planner?
A: Most financial planners are investment advisers, but not all investment advisers are financial planners. Some financial planners assess every aspect of your financial life-including saving, investments, insurance, taxes, retirement, and estate planning–and help you develop a detailed strategy or financial plan for meeting all your financial goals.
Others call themselves financial planners, but they may only be able to recommend that you invest in a narrow range of products, and sometimes products that aren’t securities.
Before you hire any financial professional, you should know exactly what services you need, what services the professional can deliver, any limitations on what they can recommend, what services you’re paying for, how much those services cost, and how the adviser or planner gets paid.
Q: What questions should I ask when choosing an investment adviser or financial planner?
A: Here are some of the questions you should always ask when hiring any financial professional:
- What experience do you have, especially with people in my circumstances?
- Where did you go to school? What is your recent employment history?
- What licenses do you hold? Are you registered with the SEC, a state, or the NASD?
- What products and services do you offer?
- Can you only recommend a limited number of products or services to me? If so, why?
- How are you paid for your services? What is your usual hourly rate, flat fee, or commission?
- Have you ever been disciplined by any government regulator for unethical or improper conduct or been sued by a client who was not happy with the work you did?
- For registered investment advisers, will you send me a copy of both parts of your Form ADV?
Be sure to meet potential advisor “face to face” to make sure you get along. And remember: there are many types of individuals who can help you develop a personal financial plan and manage your hard—earned money. The most important thing is that you know your financial goals have a plan in place, and check out the professional you chose with your securities regulator.
Q: How do investment advisers get paid?
A: Before you hire any financial professional – whether it’s a stockbroker, a financial planner, or an investment adviser-you should always find out and make sure understand how that person gets paid. Investment advisers generally are paid in any of the following ways:
- A percentage of the value of the assets manage for you;
- An hourly fee for the time they spend working for you;
- A fixed fee;
- A commission on the securities they sell; or
- Some combination of the above.
Each compensation method has potential benefits and possible drawbacks, depending on your individual needs. Ask the investment advisers you interview to explain the differences to you before you do business with them, and get several opinions before making your decision. Also ask if the fee is negotiable.
Q: Do investment advisers have to register with the U.S. Securities and Exchange Commission?
A: Depending on their size, investment advisers have to register with either the SEC or the state securities agency where they have their principal place of business. For the most part, investment advisers who manage $25 million or more in client assets must register with the SEC. If they manage less than $25 million, they must register with the state securities agency in the state where they have their principal place of business.
Q: How do I find out whether an investment adviser ever had problems with a government regulator has a disciplinary history?
A: Most investment advisers must fill out a form called “Form ADV.” They must file their Form ADVs with either the SEC or the state securities agency in the state where they have their principal place of business, depending on the amount of assets they manage.
Form ADV consists of two parts. Part 1 contains information about the adviser’s education, business, and whether they’ve had problems with regulators or clients. Part 2 outlines the adviser’s services, fees, and strategies. Before you hire someone to be your investment adviser, always ask for, and carefully read, both parts of Form ADV.
You can get copies of Form ADV from the investment adviser, your state securities regulator or the SEC, depending on the size of the adviser. You can find out how to get in touch with your state securities regulator through the North American Securities Administrators Association, Inc.’s web site.
10 Questions Answered By The Institute of Certified Financial Planners
Selecting a financial planning professional is one of the most important decisions you make: Who is qualified to guide and advise you on your financial planning needs? The Institute of Certified Financial Planners (ICFP) is the association of professionals that calls on its members to aspire to the highest levels of ethical conduct, personal development and professional competence.
As the national association exclusively representing CFP® professionals, the ICFP promotes the advancement of knowledge in financial planning, supporting programs that enable CFP members to better serve their clients, and ensuring the integrity and professionalism of ICFP members through endorsement of the Certified Financial Planner Board of Standard’s, Inc. (CFP Board) Code of Ethics and Professional Responsibility. Contact ICFP by calling 800.282.PLAN.
ICFP offers the following 10 questions and answers to help you make that decision.
1. Are all planners the same?
No! Be wary of people who call themselves financial planners with the intent of pushing a particular financial product at the expense of your real needs. True financial planning professionals have an ethical obligation to hold your financial interests above their own.
Moreover, not every financial planner is a Certified Financial Planner® professional. To earn the CFP® designation, individuals must meet education, examination, experience and ethics requirements established by the Certified Financial Planner Board of Standards (CFP Board). To maintain their right to use the CFP designation, individuals must complete the CFP Board’s continuing education requirements and agree to abide by its Code of Ethics.
With a command of these segments, the CFP practitioner is well prepared and qualified to give you sound, professional advice.
2. Aren’t all planners regulated?
While there has been much discussion on the federal and state levels about the need to regulate individuals who hold themselves out as financial planners, there has been little action to date. Many financial professionals are licensed on the state and federal levels within subsets of financial planning, such as insurance and securities, but they are not regulated for their financial planning activities – with the exception of the Certified Financial Planner practitioner, who is licensed by the Certified Financial Planner Board of Standards, Inc. (CFP Board).
By virtue of their CFP license, granted by the CFP Board, CFP professionals are held accountable to the CFP Board’s Code of Ethics for their financial planning activities.
You should also be aware that the Securities and Exchange Commission (SEC) and most states have requirements for investment advisers, a category under which financial planners fall. The Institute of Certified Financial Planners advises you to make sure the planner you choose has met these requirements as an individual practitioner or as an agent of a company that has filed for investment adviser status.
3. What can a CFP professional do for you?
A Certified Financial Planner professional can serve you in a variety of ways. The planner can help you work toward meeting a special financial goal or need such as funding your child’s college education, deciding whether you can retire early, or how you can reduce your tax burden. In more general terms, the planner can analyze your overall financial picture and develop a comprehensive plan to meet your short and long-term needs, focusing on areas such as taxes, estate planning, investments, and insurance.
Some planners can assist you with managing your investment portfolio on an ongoing basis. Whatever your needs, the relationship between you and your financial planner should be an ongoing one, including periodic review of any plan or strategies you have chosen.
4. What are the right credentials?
Most Certified Financial Planner professionals have earned a four-year college degree in areas such as accounting, economics, business administration, marketing, or finance. Additionally, they have completed a course of study in financial planning at one of the colleges or universities that has registered its educational program with the CFP Board. Successful completion of one of these registered programs automatically satisfies the education component of the CFP certification process.
More and more colleges and universities are offering educational programs and degrees in financial planning-related fields that are registered with the CFP Board.
In order to be licensed to use the Certified Financial Planner mark, an individual must meet what the CFP Board refers to as the four Es. The four Es comprise the following:
Examination – An individual must successfully complete the CFP Board’s comprehensive certification examination, which tests the individual’s knowledge on various key aspects of financial planning.
Experience – Depending on the level of degree work completed in an academic setting, an individual must acquire three to five years of financial planning related experience before receiving the right to use the CFP marks.
Ethics – An individual must voluntarily ascribe to the CFP Board’s Code of Ethics and additional requirements as mandated. This voluntary decision empowers the CFP Board to take action if a CFP licensee should violate the Code of Ethics. Such violations could lead to disciplinary action, including the permanent revocation of the right to use the CFP marks.
Education – A CFP licensee must obtain 30 hours of continuing education every two years in the body of knowledge pertaining to the following financial planning areas: estate planning, retirement planning investment management, tax planning, employee benefits, insurance and ethics.
Compliance with these four all-important Es assures you that an individual who holds the CFP license qualified to practice financial planning.
5. How do you choose the right CFP professional for you?
Ask questions. Look at each planner’s back-ground, education, and philosophy of business. We recommend that you interview each planner in person. Choosing a financial planner is as important as choosing a doctor or lawyer. This guide can help you carefully analyze the attributes and abilities of each planner you interview and determine whether the planner is right for you. Ultimately, the quality of any financial planning relationship rests with you.
6. What information should you obtain?
Request a written disclosure document from the financial planner. Prepare a list of questions, such as the following:
- What is your business philosophy? What areas do you specialize in as a planner? What professional affiliations do you maintain?
- Are you a member of the Institute of Certified Financial Planners?
- How will you incorporate my particular situation into the financial planning process? How do you prepare a plan? How extensive is it?
- Do you personally research products you recommend?
- How often will we meet as a result of my situation?
- How are you compensated for your various services?
Not only is the content of the answers you receive from the planner during your interview important, but you should take note of the rapport that you initially develop.
7. What does “full disclosure” mean?
Since the planner you select will ultimately be your decision, be armed with as much knowledge as possible in order to make an educated choice. While it is important that to interview financial planners in person, you should also gather the same basic information, in writing, on every planner you meet with. This will help you compare planners and lead you to an informed decision.
The basic information should provide you with background on the planner’s education, work experience, business philosophy, manner of compensation, and situations where there are real or potential conflicts of interest. This is what the Institute means by full disclosure. If you do not receive full disclosure from a financial planner, that is a sign that you should take your financial planning needs elsewhere.
8. Should you ask for references?
Seek references if they are an important part of your ability to make a decision. Ask for references from friends or business associates who may have used a financial planner. Because of the complexity of financial planning, a planner may consult with other qualified specialists such as attorneys, accountants and banking professionals to help coordinate a client’s plan. These specialists are good references. Check with the Securities and Exchange Commission (SEC), appropriate state agencies, Better Business Bureau and the CFP Board to determine if complaints have been filed against a planner.
9. How specialized are planners?
Many planners concentrate their efforts in a particular profession, income level, age group, or area of planning such as retirement, divorce or asset management. This is why it is important for you to interview prospective planners in person to find the right one to serve your needs.
10. Is the method of compensation important?
Before entering into a relationship with a financial planner, you should have a very clear understanding of how he or she will be compensated for their work. The planner should disclose this to you before starting a working relationship with you. The Institute has no formal position on the merits of any form of compensation. Instead, it is our belief that the planner’s competence should be the primary consideration in your selection process.
Armed with full disclosure from the planner, you have the final say in selecting a financial planner, taking into account your comfort level with the knowledge and experience of the planner and the compensation arrangement that best suits your needs. Different planning situations, lifestyles and age have a major impact on every individual’s decision to do business with and compensate their financial planner.
