Monday, March 18

9. Working with a Financial Planning Professional on Your Retirement Plan

ProfesstionalWould using a well-qualified professional financial planner help you do a better job of personal financial planning including retirement? Before answering that question, you must understand what kinds of financial planners and services are available, the potential advantages and dangers of using a planner, and how to evaluate individual planners' qualifications.

Many financial planners who help you create an overall plan also make specific recommendations on investment plans and types of investments. This is particularly true of planners who earn all or part of their income from commissions on products they sell to you. Our focus in this chapter, however, is on overall financial planning, of which retirement planning is an important part.

Why is it critical that you do your homework first?

There are two primary reasons:

  • 1) In most states, lack of regulation means that anyone can call himself or herself a "financial planner," "financial advisor," or "financial consultant" and go into business without any training, experience, or other qualification. In contrast, federal and state laws require that individuals and firms who sell securities be registered and/or licensed. These individuals may be called "investment advisors," "stockbrokers," or other titles. But because many, if not most, financial planners also advise on investments or sell securities, the overlapping designations and functions can be confusing.
  • 2) Knowledgeable, well-trained financial planners may have several different types of professional certification related specifically to financial planning. Each certification has different criteria for education and experience and different tests. Some types of certification may indicate different emphases in specialization as well.

For these reasons, it is important to first educate yourself about the role of financial planners. Then, it's important to carefully check out the background of any financial professional with whom you are considering working.

What are the most common types of credentials for financial planners?

Among the most common are the following:

  • CFP stands for a "Certified Financial Planner." Professionals with this certification have a minimum of 3 to 5 years experience, have taken specific courses, have passed a 10-hour, two-day comprehensive exam covering a wide range of financial planning topics, and take continuing education. This certification is issued by the Certified Financial Planner Board of Standards. Planners so certified must agree to abide by the standards set by this board. Many consumer experts consider this certification to have the most rigorous standards.
  • AICPA/PFS stands for a Certified Public Accountant with Personal Financial Specialist qualification. The credentials are issued by the American Institute of Certified Public Accountants. In addition to CPA training and certification, CPAs who have passed a 6-hour exam in six financial planning areas and have met substantial financial planning experience requirements may be certified as Personal Financial Specialists. Continuing education is also required.
  • ChFC stands for a Chartered Financial Consultant. This professional designation is issued by the American College upon completion of a course of study and examinations. Chartered Financial Consultants maintain certification issued by the Society of Financial Service Professionals. Many of these planners specialize in Insurance and estate planning.
  • CLU stands for a Chartered Life Underwriter. This professional designation is issued by the American College upon completion of ten college-level courses and examinations in insurance and related fields. Persons with CLU credentials typically specialize in life insurance sales and planning. Chartered Life Underwriters maintain certification issued by the Society of Financial Service Professionals.
  • CFA stands for Chartered Financial Analyst. This credential and program are administered by the CFA Institute. Professionals holding this designation specialize in portfolio management and investment analysis. Candidates must have three years experience, membership in AIMR, and pass three levels of exams. No continuing education is required for maintaining the credential designation.

How are financial planners paid?

Financial planners may be compensated by fees only, by commissions, or by a combination of commissions and fees. There are many reputable, experienced, able financial planners who are compensated by each of these methods. In selecting a financial planner, ask directly for the way in which they are compensated. Here's a brief rundown of what each method of compensation means.

  • Fee-only. Financial planners receive compensation only from fees paid by their clients, not from commissions for products sold or from any other source. The fees may be a flat fee for a certain project (such as developing a comprehensive plan for an individual), an hourly fee, a percentage of assets under management, or a percentage of income from investments managed.
  • Commissions. Many financial planners receive their income entirely from commissions on the products they recommend and sell. Financial planners who work entirely for commissions may offer low-cost or "free" planning services. A FoolProof Tip: These advisors stand to gain financially from their recommendations, which can color some advisors' recommendations. Don't be shy about questioning any specific recommendation.
  • "Fee-based" or "Fee-offset." Some financial planners receive both fees and commissions. "Fee-based" typically means that the planner receives a fee from the client and commissions on any products or services sold to that client. If a planner appears to be using "fee-based" to suggest that they are "fee-only," experts recommend avoiding them. "Fee-offset" means that the planner charges a fee that is then subtracted from the cost of a product's or service's sale if the client purchases the recommended product.

Where can you find more information about evaluating and selecting financial planners?

The following websites and organizations provide a variety of information and tools, such as checklists of questions to ask prospective financial planners, that can help equip you to make a more informed decision.

The Working with an Investment Professional section of offers an informative discussion about investment professionals including questions to ask when interviewing them.

The Financial Planning Association provides information from and about Certified Financial Planners, also called CFP Professionals. They make their case for how using a Certified Financial Planner can help and provide a thorough checklist you can use to interview potential planners. The site also provides referrals to Certified Financial Planners.

The National Association of Personal Financial Advisors (NAPFA) is an organization of "fee-only" financial advisors and planners. The site presents the benefits they feel are offered by fee-only planners. NAPFA's website provides discussions of what's involved in various financial planning service arrangements and provide a checklist of questions to use in interviewing a Financial Planner.

How can you find a knowledgeable financial planner?

Most experts recommend starting with recommendations from family, friends, and co-workers who have used financial planners successfully. Other professionals, such as accountants or lawyers, with whom you have a business relationship may also have recommendations. Finally, most of the professional organizations that provide credentials or certification also provide referral services; just check their websites above.

Because no two people have the same financial planning needs, you are the best judge of whether or not you need a financial planner. But be an educated judge and consumer of financial services—do your homework, then double check it!