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Financial Planning

In Search of Good Advice

Regardless of your income level or financial goals, there's an adviser out there for you.

Editor's note: This article is adapted from Kiplinger's Retirement Planning guide.

There are two kinds of people in the world: do-it-yourselfers and those who rely on experts for help. Most people swing back and forth between the two camps, depending on the subject matter, time constraints and discretionary income. If, for example, you enjoy fine-tuning your car's engine but not your portfolio, or you're simply too busy to tackle your finances, you may want to hire a financial adviser. But where do you start?

That's the situation that Atlanta residents Greg and Michelle Anderson found themselves in two years ago. Greg, a globe-trotting management consultant, and Michelle, a lawyer, were focused on their careers and their then-2-year-old daughter, Mary Claire. They dreamed of early retirement for themselves, college for their child and any future siblings, and maybe a vacation home.

Although the Andersons diligently saved money, accumulating an impressive nest egg of more than $600,000, they had neither the time nor the energy to develop an investment plan to meet their goals. Their savings languished in low-earning bank and money-market accounts rather than growing in more-aggressive investments appropriate for a couple in their thirties.

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So Greg and Michelle decided to consult with an investment adviser. They wanted someone to design a portfolio, determine the risk they could tolerate to meet their goals and review their progress regularly. Embracing the same level of detail that they bring to their demanding jobs, Greg and Michelle assembled financial statements, worked up a list of priorities, researched the leading national financial firms and some local independent advisers, and paid some personal visits.

The Andersons' search for good advice took six months, and they made repeat visits to three advisers. A year later, they are pleased with their decision to turn their finances over to Raymond James, a national investment firm, although they have switched to a different adviser within the same local office. That's not unusual. Finding the right person to manage your finances involves much more than money. Personal chemistry is critical -- you want to find someone you trust and respect who will listen to your dreams and offer expert advice on how to attain them.

Greg and Michelle are satisfied that their money is invested more appropriately now, and that they have taken care of their life-insurance and estate-planning needs. Their experience, and the helpful list of questions they developed (see the end of the story), could save you a few steps in your quest to find a pro of your own.

Credentials trump titles

With more than 800,000 people nationwide working as personal financial advisers, insurance agents and securities salespeople, the competition for your business is staggering. One recent count found some 50 financial-professional designations, but only a handful deserve your attention. Those are the ones that require a minimum level of experience (measured in years, not three-day seminars) and education (preferably continuing), and are conferred only after passing a comprehensive exam (hopefully not a multiple-choice, open-book test).

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If you're looking for a general financial road map, a certified financial planner may be the answer. CFPs are trained in risk management, investments, and tax, retirement and estate planning. A CFP who manages your investment portfolio will also be a Registered Investment Adviser, which means that he or she must file documents with the Securities and Exchange Commission or state securities regulators, disclose conflicts of interest, and put your interests first.

A Personal Financial Specialist (PFS) is a certified public accountant who has gone on to specialize in financial planning. If you're looking for an investment guru, a Chartered Financial Analyst (CFA) must pass a three-level test on investment analysis, economics, portfolio theory, accounting and corporate finance. Chartered Financial Consultants (ChFCs) are insurance agents who've passed college courses in financial planning; Chartered Life Underwriters have earned the highest designation for life-insurance agents.

Most of these designations share other important traits: They will likely include a code of ethics, a way to check someone's background, or a way to file a complaint with the accrediting body. For example, a Registered Investment Adviser can provide you with his or her Form ADV. (Baby-boomers should be particularly careful as bogus financial "experts" are lining up to take their money.

Show me the money

How a financial adviser is paid is key to the relationship. Planners of all stripes expect to earn a living, but do you want their income to depend on commissions generated from selling financial products? You needn't automatically rule out advisers who work on commission—as stockbrokers do, for instance. But you should be aware that a compensation scheme can pose potential conflicts of interest. Unscrupulous advisers might be tempted to trade a lot -- known as churning -- or recommend inappropriate investments to generate fees, or they may push in-house products when others are cheaper or better.

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In the old days, it was simpler. Investors paid trading commissions and mutual fund loads to a stockbroker, or they paid a percentage of assets under management to a bank trust department. Today, compensation models include fee-only, a percentage of assets plus a fee, all-in-one "wrap" programs, hourly charges and annual retainers. If you pay a flat rate, your bill won't increase with your account balance. With a percentage arrangement, it will (1% to 2% of your assets is typical, with some room to negotiate).

You may prefer a planner whose charges are based on advisory services rather than tied to investment products. Hourly rates typically range from $120 to $300, depending on where you live and the planner's expertise. Or you might pay by the job -- say, $800 to $2,000 for a retirement plan that takes into account how much you'll need to save (and where to invest it), how long you'll need to work or how much you'll need to spend on long-term-care insurance.

Distinguishing between brokers, whose allegiance is to the company they represent, and advisers, who are legally required to put you first, is a little more confusing these days. Earlier this year, a federal court ruled that brokers who perform the duties of advisers (such as giving general, long-term advice) must register as advisers. The regulatory standards for a Registered Investment Adviser are more stringent than for a broker, who is treated like a salesperson.

Cast a wide net

Clearly, you'll need to vet several advisers. Whether you're young or old, just scraping by or a "high net worth" individual, planning for college or searching for elder care, you'll want someone who works with other people like you. Friends, family and co-workers are good sources of recommendations, especially if their financial circumstances are similar to yours. Or you can start your research on the Internet. The National Association of Personal Financial Advisors (www.napfa.org) is a registry of fee-for-service planners. The Financial Planning Association (www.fpanet.org) is the largest planning organization, with both fee-for-service and commission-based members. The Garrett Planning Network (www.garrettplanningnetwork.com) is a nationwide resource for advisers for the budget-minded. And the Alliance of Cambridge Advisors (www.cambridgeadvisors.com) emphasizes providing ongoing advice with open-ended annual retainers.

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Narrow the search

The process of finding an adviser is like a series of first dates. You need to find one that clicks. Trustworthiness and the ability to deliver personalized advice rather than cookie-cutter financial solutions rank as the top two traits that investors seek in a financial adviser, according to a recent New York Life Investment Management survey. Investors also say they want advisers to communicate with them on a regular basis.

When you do find a comfortable fit, you'll want to ask about the level of resources and personal service you can expect. Ask, too, whether you will be working personally with the professional or with an assistant, and whether you will communicate largely by e-mail.

Make sure you and your potential adviser are in agreement on your investment expectations. If you think hiring an adviser could double your returns right away, you're asking the impossible. Set a target, and make it reasonable. If earning 8% annually with low risk is to your taste, say so.

Finally, be patient. Most advisers will take some time -- maybe several weeks, perhaps longer -- to present you with a personalized investment plan. Here's where you can take charge of the search by asking the adviser to explain the recommendations, tell you about the selections, and show you the likelihood that the plan will get you to a certain goal at a certain age.

9 Questions to ask before you hire a planner

Financial pros will ask you questions, such as your expectations for returns and tolerance for risk. But because you're doing the hiring, you should also do some interviewing. Greg and Michelle Anderson developed their own list of queries. Some of the best:

1. What process do you follow to identify goals and evaluate performance?

2. What are your sources of research and information?

3. How often will you hold formal reviews with us?

4. Are you available for informal meetings?

5. What's the fee structure?

6. How are you compensated?

7. If I have a complaint, where do I take it?

8. Does your firm have a formal dispute-resolution process?

9. Can you show representative portfolios or actual client case studies?

The answers won't tell you everything. References will be self-selected. Even clients' overall portfolio returns are of limited value because of timing differences. What's helpful is the actual performance of the funds or accounts an adviser proposes for you -- which you should ask for. But your real goal is to smoke out bluster and get a sense if someone is candid and intelligent. That takes face time.