Sometimes Recognizing You Need Help Is the Best Move

Now that the stock market--for 10 years the savior of prodigal baby boomers--has suddenly turned fickle, more Americans may be coming to a painful realization: They need substantial help with their finances.

The strategy of saving for retirement by buying the latest hot mutual fund or technology stock is failing many people this year, and millions are discovering that creating a secure retirement nest egg may be a more complicated and time-consuming business than they thought.

When it comes to straightening out your finances, there are two ways to go: alone or with hired help.

Doing it yourself is labor-intensive. If you hire, the problem is finding the right professional. Traditional brokerage firms increasingly offer comprehensive financial management services that go beyond basic investment planning to include such things as retirement planning, estate planning and coordinating insurance coverages. For many people, especially those who have a long-standing relationship with a broker they know and trust, a brokerage firm could be a viable option. It can be particularly helpful if you need help picking stocks, which is the firms’ traditional area of expertise.

However, for those who prefer to avoid dealing directly with someone whose main job is selling stocks, hiring a financial planner is probably the best alternative. But how do you find someone who can do what you want at a price you can afford? Here’s a 10-step guide.

1. Consider your needs.

Many people think they need help with everything, but their main issues usually boil down to one or two things. You may be great at budgeting, for instance, but not know how to invest. Or you may have invested a lot, but now need tax or estate planning advice.

Write down what you hope to accomplish and prioritize your list. Consider whether your profession or family circumstances make your situation unusual.

This is pivotal for two reasons. First, planners specialize. If you need estate planning advice, you need an expert in wills, trusts and tax issues. Indeed, rather than a financial planner, you may need a tax accountant or attorney. If your main concern is budgeting, you may be able to get free or low-cost help from a nonprofit credit counseling service or a book.

There also are planners who concentrate on helping teachers, for example, or parents of disabled children.

Second, if you tell a planner you want it all, be ready to pay a lot. A full-scale financial plan can cost anywhere from a few thousand dollars to tens of thousands, depending on the complexity and the preparation time required.

2. Decide how--and how much--to pay.

There are three ways financial planners are paid: fees, commissions or a combination of the two.

The fee-only approach eliminates obvious conflicts of interest. It’s likely to be the best option for people who have considerably more money than time to evaluate their choices.

However, conflict-free advice comes with an upfront price tag--often $1,000 to $2,000.

Debra McLamb, a 38-year-old lab technologist from North Carolina, is hoping that a fee-only planner will help her save money on insurance products and find investments that will perform well enough to make up for the expense.

“The thing you worry about is whether you’ll get your money’s worth,” she said. “I’d hate to pay $1,000 and have them say: ‘You’re doing a good job. Keep it up.’ That’s an awful lot of money for a pat on the back.”

McLamb, who works two jobs, has tried to improve her odds by spending the last several months collecting names, numbers and referrals for financial planners in her area.

Commission-based planners, meanwhile, charge nothing upfront but recommend products that give them a cut. If the advice proves sound, this method can be the best value for people with modest incomes. But because these planners don’t eat if you don’t buy something, you may not get much help in areas that don’t generate fees.

If you’re somewhere in the middle--say, a family able to meet current obligations but uncertain about whether it’s saving enough to address long-term goals--you may be best served by the hybrid: planners who are paid through a combination of fees and commissions.

Such planners will often create a basic plan, for $250 to $500, that evaluates your budget and goals and suggests ways to address them. However, they’ll also earn commissions on any products they sell, such as mutual funds that carry a sales charge, or “load,” and insurance.

3. Know the potential conflicts involved.

Before you choose a type of planner, evaluate your ability to spot advice that’s in the planner’s interest rather than your own.

“It’s not about how you are paid, it’s about putting the client first,” said Janet Briaud, a fee-only planner with Briaud Financial Planning Inc. in Bryan, Texas. “There are some very competent people out there who are paid by commissions or fees and commissions. You, the consumer, just have to realize that there can be conflicts.”

This process is a bit easier if you understand where the commissions, and thus the conflicts, are biggest. Specifically:

* All insurance products carry commissions. “Term” insurance, the type that pays only a death benefit, pays the smallest commission, while cash-value insurance pays the biggest--as much as the entire premium payment for the first year. (Note that cash-value policies come in myriad varieties, ranging from “whole life” to “variable universal life.” What they have in common is that they build up an investment account within the policy. For more information, go online to https://www.latimes.com/insure101.)

* A load mutual fund charges either an upfront or back-end fee, figured as a percentage of your investment. Generally, the bulk of that fee goes to the planner who recommended the fund. Loads usually range from 3% to 8.5% of the amount you’ve invested.

* Brokerage and asset management services also can provide planners with commissions based on how much you trade or how much money you have the planner manage.

* Limited partnerships, highly popular in the 1980s, are rarely recommended anymore, as loopholes have been closed and tax rates have come down. When they are suggested, look carefully at the partnership documents. Often these investments pay hefty fees--in the range of 25% of your investment--to those who sell them, while offering little assurance of a decent return.

There’s nothing wrong with paying a commission. However, you should know how much you’re paying and be able to evaluate whether you’re getting sufficient value for your money.

For example, if a planner recommends a load mutual fund, ask why that fund is a better choice than a similar no-load fund. On occasion, a load fund will carry significantly lower annual expenses than other funds in its class. If that’s the case, despite the commission, the planner’s advice is likely to be in the best interest of a buy-and-hold investor. If the planner can’t explain why the load fund is superior, seek advice elsewhere.

Likewise, cash-value insurance can be worth the high price if you have a disabled child or a family business and are likely to need insurance forever. (Term insurance gets far more expensive as you get older.) But traditional families who need lots of coverage when their children are young and less as they age are usually better off with a term policy.

4. Do some things yourself.

In an ideal world, you’d hire a fee-only advisor to help you budget, do your investment plan, evaluate your need for life, health and disability insurance, structure your college savings account and help with tax and estate planning.

In the real world, money is finite and top-notch advice is expensive. Consider whether you can afford to pay for advice on just your highest priorities, and address the less important issues with research you do yourself, using newspapers, self-help books and Web sites.

5. Survey your friends.

Have your friends sought financial counsel? Are their situations similar to yours? If so, were they satisfied with the advice they received? Do they have anyone to recommend?

Make a list of planners your friends like and a list of issues to discuss when you interview candidates.

6. Call planner referral lines.

There are a number of financial planner referral lines. These are largely automated and don’t let you request people who specialize in the services you need. However, when you follow up, be sure to ask about their areas of greatest expertise. There’s no point in setting up an interview with someone who will not be able to address your issues.

For fee-only planners, call the National Assn. of Personal Financial Advisors at (888) FEE-ONLY. If you are looking for fee-and-commission-based planners, call the Financial Planning Assn. at (800) 282-PLAN. You can also get a list of local planners on the FPA’s Web site at https://www.fpanet.org. Click on the “consumer service” icon.

If you need an attorney for issues such as estate planning, call your local bar association.

7. Interview prospective planners.

Winnow your list to a few planners. Set up appointments and prepare. (Many planners do not charge for these initial interviews, but a few do. Make sure you know before you go.) Both the FPA and NAPFA offer free booklets that provide a series of suggested questions.

If the planner says he or she specializes in your area of interest, ask about commonly seen problems and how the planner solves them. This should tell you whether the planner knows as much as you do about your group’s specific challenges.

Ask about fees and how the planner likes to work. Will the person talking to you draw up your plan, or will it be designed by someone else on the staff? Whom do you call with questions?

If the planner is paid through fees, are you charged by the hour or a flat fee? If payment is by commission, which products pay the most?

Planners should not be defensive about their fees, Briaud said. If they are--or are simply unwilling to give details--look elsewhere.

Finally, if the planner will be managing money for you, ask how he or she does a self-evaluation. By comparing performance to stock market indexes? If so, which ones?

8. Collect planners’ financial disclosure forms.

All licensed financial advisors are required to file a form ADV with the Securities and Exchange Commission. They are required to give you a copy of the second part of this form, but most planners will give you both parts if you ask.

The form is long and mostly boring, but one section tells you about your planner’s disciplinary history, and another shows how the planner is paid. Look for red flags--such as regulatory sanctions--and compare what the form says about how the planner is paid to what you’ve been told. If the form tells a different story from the planner’s, flee.

9. Double-check planners’ histories with the NASD.

Also call the National Assn. of Securities Dealers’ public disclosure hotline at (800) 289-9999 and get a copy of your broker or planner’s legal history. This ensures that your planner hasn’t altered the report he or she gave you, and it provides information about non-regulatory proceedings, such as arbitration and court judgments.

10. Trust your instincts--and plan to review performance regularly.

When making a final decision, go with your gut. Some things simply don’t show up on a form. Is your prospective planner a good listener? Is this a person who will be willing to answer your questions? Is he or she willing and able to consult other experts on difficult issues?

“The biggest danger is hiring someone who is arrogant,” said Carol Sechovec, a certified financial planner with American Express Financial Advisors in Nevada City, Calif. “Planners have to have enough humility to recognize their limitations and draw on the expertise of others when they run into something that they don’t know.”

And if your planner is managing money for you, use objective standards, such as market indexes, to evaluate their performance.

*

Times staff writer Kathy M. Kristof can be reached at kathy.kristof@latimes.com.

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Where to Go for Help

Need some help with finding a financial planner or creating a plan on your own? Here are a few resources that may help:

Planner referrals

* The Financial Planning Assn., (800) 282-PLAN, will give a list of several certified financial planners in your area. These planners may be paid by fees, commissions or a combination of the two. If how you pay matters, ask.

* The National Assn. of Personal Financial Advisors, (888) FEE-ONLY, provides referrals for fee-only planners. These planners do not charge commissions on any product they sell. However, if they manage money for you, they are allowed to charge a money management fee that’s based on a percentage of the assets you’ve had them invest.

Books

* “The Right Way to Hire Financial Help,” by Charles A. Jaffe (MIT Press, 1999)

* “Personal Finance for Dummies,” by Eric Tyson (IDG Books Worldwide, 2000)

* “100 Questions You Should Ask About Your Personal Finances,” by Ilyce Glink (Times Books, 1999)

* “Ernst & Young’s Personal Financial Planning Guide” (John Wiley & Sons, 1999)

Web sites

* Several Web sites, including https://www.quicken.com and https://www.financialengines.com, can help you determine whether you are saving enough for big financial goals, such as retirement or college.

* You can read Money Talk columnist Liz Pulliam Weston’s recent column on Web sites that help you manage your 401(k) plan investments at https://www.latimes.com/business/

columns/moneytalk/todays.topstory.htm.

Source: Times research