Choosing a financial planner or advisor can be a daunting task, especially if you are faced with trying to determine how they are paid, how competent they are, and what credentials are actually important. Let’s discuss each of those “three C’s.”

Compensation

Advisors may be paid through commissions, fees or a combination of both. When an advisor “sells” you a financial product like a mutual fund or an insurance policy they are paid by the insurance company or brokerage firm that “creates” the product. Some advisors are only paid by you; they may charge you for a detailed analysis of their finances and/or they may charge you a percent of any investments they manage for you. There are also advisors that both receive commissions and also are paid by you (“fee-based”) for a plan or for asset management. Whomever you hire, it is important to understand how they are paid since it might (but not always) affect the types of advice you receive. An advisor that charges for a plan or an asset management fee and cannot receive commissions is generally considered a “fiduciary.” A fiduciary is someone that works for you and must legally act in your best interests not their own. Generally, advisors that are compensated this way and act as “fiduciaries” have the fewest conflicts. They should be diligent in disclosing to you any conflicts that might still exist and how they will either avoid the situation that leads to the conflict or how they will “manage” it.

(CFP® certificants will be required to act in your best interests for financial advice regardless of their method of compensation beginning in October 2019.)

With fee-only advisors you always know the cost of the relationship since you pay them directly, with commission based advisors you may not have a clue since sadly there is no requirement that they disclose how much they earn from products they might sell you.

Competency

How can you tell your advisor is competent? It sure is difficult but there are some things to consider. First do they have a certification? There are plenty of advisors out there who do not, yet they have official sounding titles like “wealth advisor.” We’ll describe the education and certification that real advisors should have below. Besides having a designation or certification you may want to drill in on the advisor’s core competency by asking some pointed questions, including “how many years experience do you have,” and “what are your specialties?” Make sure the advisor has formal training in areas they claim as specialties. You may want to ask to view a sample analysis they did for a client (any advisor should have a sample with names changed or blacked out). When you look at the sample plan make sure it has at least the following sections:

  • Planning Assumptions
  • Clients goals
  • Detailed analysis with backup and discussion
  • Detailed recommendations with a discussion of the potential impact of the recommendations and tradeoffs among various recommendations
  • Action item list with due dates

That is just a partial list. Not all advisors will have competency in every area so it is important to discover how they deal with that. For example, Fee-Only advisors cannot sell products but they may recommend you purchase more life or disability insurance. Do they have a list of trusted outside experts that they work with? Does that list include attorneys, insurance agents, and possibly accountants?

There is one membership organization that has pretty specific requirements for their members, that is the National Association of Personal Financial Advisors (NAPFA). Their members are required to:

  • Submit a financial plan for peer review
  • Be CERTIFIED FINANCIAL PLANNER™s (CFP®)
  • Take 60 hours of continuing education every 2 years (the highest requirement in the industry).
  • Adhere to a strict requirement that they be fee-only and act as fiduciaries in every circumstance. In fact they sign an oath compelling them to act as fiduciaries in every circumstance.

While even those strict requirements are not a guarantee that the advisor is competent it does certainly increase the chances that they are prepared to properly assist you.

Credentials

The financial planning field is saddled with a plethora of titles and supposed certifications. It seems as if this is meant to make things more confusing for the consumer who is trying to get good advice. We suggest you ignore all titles like “wealth manager” or “financial consultant” and instead ask what actual education and certifications the person has. While many certifications exist the most important are the ones that require a broad background in many aspects of financial planning. There are two that fit that bill, CERTIFIED FINANCIAL PLANNER™ (CFP®) and Chartered Financial Consultant (ChFC). The CFP® designation is more widely known and it requires that certificants take a comprehensive exam, and a course that requires them to actually write a financial plan. The CFP® designation is owned and awarded by the CFP® board a non-profit organization that protects the mark and also sets high standards for the behavior of its certificants. The ChFC requires more course work but it’s certificants do not have to take a comprehensive exam, they do have to write a financial plan though.

The CFP® board has adopted a very strong set of ethical requirements for their certificants including a new requirement that they act as Fiduciaries whenever they are providing financial advice (beginning October 2019). That strong requirement does not exist for ChFC certificants.

You may encounter many advisors with both designations. You may also encounter advisors who have continued their education and received an advanced degree in the field including a Masters or PhD. Advisors who have done that should be considered the educational “elite” in the field.

One other designation worth mentioning is the Chartered Financial Analyst (CFA) which is owned and awarded by the CFA Institute. While the designation is only focused on investment analysis and management, advisors who hold the designation have acquired very deep knowledge in that specialty. The designation requires that applicants pass 3 exams that are roughly 6 hours in length and the course material includes statistics, economics, investment analysis, portfolio management, etc. Roughly 8-15% of candidates actually finish and receive the designation. Like the CFP® designation certificants are required to adhere to a very strict set of ethical standards. If you are hiring an advisor to help manage your portfolio this designation is important.

Conclusion

We suggest you consider advisors who are fee-only, act as fiduciaries and hold the CFP® or ChFC designation as a minimum.