How to Find a Good Financial Planner
Question: Can you offer any advice on choosing a financial planner? Our financial situation is complicated, and we feel such a person could help us. My husband was offered a free consultation by a financial planner who visited his work place, which he accepted. This man’s claims were so optimistic, even extravagant, that we began to wonder--how do we know his advice is good? Is there some way to check up on him? Obviously, our entire financial future is no small thing--at least to us--and we don’t want to do anything stupid.
When someone offers to make you a millionaire in 10 years--and that’s what this man claimed he could do for us--my initial reaction was one of suspicion. We’re not looking for a get-rich scheme. We just want to handle our money intelligently and pay off our debts, which are considerable, as painlessly as possible. What about tax advice? Do we need another person for this, or can the financial planner do this as well?
We are willing to pay for this advice, although we don’t have much money now. The financial planner we saw was offering us his services free. And, in light of this, it makes me wonder what he stands to gain. I hope you can answer this in your column, as I really don’t know where else to turn for advice.--L.S.K.
Answer: Along with a positive cure for the common head cold there probably isn’t a breathing soul in the country who doesn’t have the perfect investment plan for you (real estate, the options market, gold ingots, pork bellies, engraved thimbles or something).
But when your identical question is asked of any disinterested person the reply is invariably: “Pick a financial planner as you would a doctor or a lawyer--ask around among your friends.” Unfortunately, the practicality of this advice breaks down fast. Everyone, sure enough, has a doctor to recommend (or not), and most people know a good lawyer (or not). But how many of your friends--honestly, now--know any more about financial planners than you do?
For openers, in your case, however, I would go to the library and get the January, 1986, issue of Consumer Reports, which has a fascinating article on this very subject: “Financial Planners--What Are They Really Selling?”
Financial Profile
For its research the magazine equipped its reporters with a fairly standard financial profile: a combined income of $60,000, interest income of $5,000, assets worth $89,000 and so on down the line. Seven biggies in the financial planning arena were consulted whose fees ranged from nothing to $250--the Consumer Financial Institute, Merrill Lynch, Prudential-Bache Securities, Shearson Lehman Brothers, the Sears Financial Network, Aetna Life & Casualty and IDS/American Express.
Among the puzzling things emerging from the seven plans submitted by these planners were these: Two of them made no cash-flow analysis for the couple--no budget at all; one made no recommendation for more insurance although the couple’s profile had deliberately planted an obvious weakness in their situation--inadequate insurance coverage; one recommended almost an additional $1 million in insurance but, again, ran no budget that would pinpoint where the giant premiums were supposed to come from; one drew up a plan that completely overlooked all tax, insurance, educational and retirement requirements; one drew up a plan suggesting that the pair had an annual disposable income for investments and insurance of $18,000, but offered no clarification on how it arrived at this figure on a combined before-tax income of $60,000; one, in computing the couple’s estimated retirement income, forgot to add in their Social Security benefits. And, incredibly, another recommended that the couple save and invest $454,962 annually--obviously a typographical error which Consumer Reports found a bit sloppy for an organization billing itself as a financial planner.
Magazine’s Conclusion
The magazine’s conclusion: “Though most of the plans we looked at contained some useful features, on balance we thought that none of the mass-market plans available for less than $500 represented a good value.” Another finding (not too surprising): The financial planners associated with a brokerage house tended to emphasize stocks, bonds and mutual funds and downplay insurance. Those affiliated with insurance companies tended to play up life insurance, disability insurance and annuities at the expense of stocks, bonds and mutual funds.
If not the big financial planners tied in with some nationwide insurance or investment program, then how about an independent financial planner? This is an attractive alternative, perhaps, but it again brings us right back to your central question: Where and how do you find one? Unfortunately, the field is completely unregulated--anyone can hang a shingle out proclaiming himself a “financial planner”--and the Council of Better Business Bureaus has estimated that American consumers have been bilked out of about $90 million in the last three years by phonies in the field.
There are, however, two national organizations with rather stringent requirements for their members: the Institute of Certified Financial Planners in Denver and the International Assn. for Financial Planning in Atlanta. Both require their members to adhere to a code of professional ethics, and neither is reticent about cracking down on those who wander off the straight and narrow.
Membership in the Denver-based institute, a spokeswoman for the organization said, is open only to individuals who hold the CFP (certified financial planner) designation, and this, in turn, is conferred only by the institute’s sister, but independent, organization, the College for Financial Planning, also in Denver.
“This is a comprehensive six-part course,” she said, “and while some students attend the college on campus, most of it is by correspondence, and it takes about two years to complete.”
Atlanta’s International Assn. for Financial Planning, according to Dick Williams, its director of advertising and public relations, confers no professional designation as such, but membership (currently at about 24,000) is limited to professionals with at least three years of experience in individual financial planning and who hold the required licensing and registration requirements, when applicable (with the Securities and Exchange Commission, for example, for those who actively advise or trade in stocks for their clients). Inclusion in the association’s “Registry of Financial Planning Practitioners”--from which referrals are made--also entails an exhaustive six-hour written essay test (“no multiple-choice and no true-or-false questions,” William said).
“The interest in financial planning is stupendous today,” he continued. “In late ’84 we ran an ad in six national publications about financial planning--who needs it, how to find it, what to look for and look out for, and offered a free copy of our brochure ‘Building A Capital Base,’ and so far we’ve sent out more than 121,000 of them.”
Two Reasons Given
When we read your letter to Williams he immediately found two reasons for disqualifying the “financial planner” who contacted your husband: “For openers,” he continued, “no ethical financial planner is ever going to promise anyone that he’s going to make him a millionaire--that’s ridiculous. Also, I personally would never hire a planner who claims to be independent, as this person does, but who charges no fee. That means he’s strictly on commission with someone, and that’s going to influence anything he recommends.”
“No charge” financial planning is fairly commonplace and perfectly all right, Williams said, as long as the financial planner involved is visibly working with a brokerage or a life insurance company and it is clearly understood by all involved parties that he is working for it.
“Financial planning fees range all over the place,” Williams said, “anywhere from $200 to $5,000 depending on the complexity of the job. Obviously, there’s a lot more work involved in a client with an income of $250,000 a year than there is with one having an income of $40,000. The most popular range, though, is probably in the $200-to-$250 area, although fee-plus-commission is increasing in popularity.”
Under this arrangement, the financial planner might advise, for instance, an investment in certain stocks or bonds. “If you have your own broker and want him to have that business, that’s perfectly all right with the planner. But if you don’t and want the planner to handle it, why, he can do that too, and it’s understood that he’ll get part of the commission on the sale.”
Who needs financial planning in the first place, though?
“That’s a very good question, of course,” Williams admitted. “And while you can probably say, safely, that everybody does, there’s a matter of practicality involved. We’ve done a lot of surveying on the subject, and our general feeling is that if you’re in your early 30s and have an income of $30,000 and up, then you do probably need professional planning if for nothing else than to get your financial house in order and to draw up a budget. As you get older, of course, your needs change, and we find interest in planning peaking again among those 55 years old and older.”
Both Williams’ Atlanta association and the Denver institute have a referral service and, without charge, will send anyone contacting them a list of their members living in the correspondent’s area.
“We’ve got a ‘hot line’ anyone can call--(800) 241-2148--and we’ll feed their ZIP code into our computer,” Williams said, “and provide them a list of 10 names from our registry of financial planners living near them. We’ll also send them a copy of the brochure I mentioned, ‘Building A Capital Base.’ Or, they can write us at Suite 800, 2 Concourse Parkway, Atlanta, Ga. 30328.”
The Denver institute will also provide a list of CFP members practicing in the correspondent’s area on receipt of a request addressed to it at 3443 S. Galena St., Suite 190, Denver, Colo. 80231.
“What I’d recommend in picking a specific financial planner,” the association’s Williams said, “is to take the list of 10 names that we provide and visit at least three of them--no less than that--because it doesn’t cost anything. Ask about their experience, their education, their fees--that’s very important--and then I’d ask them to let me see a sample plan that they’ve prepared for someone in a similar financial position to mine. I would also ask if I have to buy the product--the stocks, bonds, insurance or whatever--from them. I shouldn’t have to. Then I’d look at the sample plan they show me, and if it doesn’t cover at least about six or seven factors--insurance, taxes, retirement, things like that--I’d go to someone else.”
It’s a tip-off, Williams added, if the financial plan you are shown seems top-heavy toward insurance, equities or any other specific investment tool.
The names provided by both the International Assn. for Financial Planning and the Institute of Certified Financial Planners will, of course, contain the names of members that, sure enough, are affiliated with specific brokerage houses and insurance companies.
“But the affiliation is clearly there in black and white,” Williams added. “If you want one who is entirely independent then that’s quite clear too.”
Don G. Campbell cannot answer mail personally but will respond in this column to consumer questions of general interest. Write to Consumer VIEWS, You section, The Times, Times Mirror Square, Los Angeles 90053.
