How to Find a Good Financial Planner or Financial Advisor
Question 8: If this financial planner was a referral from someone, ask if this is the same kind of thing they did for your friend. (Is this what Herb did?)
Another trick question. Financial planning comes with strict confidentiality rules. Technically the advisor should not even confirm that Herb is a client without his authorization. In the real world, chances are that the advisor asked Herb to give him some name and you were on the list so he probably has his permission. Still, he should not discuss the specifics with you. If he tells you about Herb, he'll tell Herb about you. The correct answer should actually include a statement about confidentiality and should explain to you why he cannot talk to you about Herb.
Question 9: How do you get paid?
No question gets more training in the financial advisor world than the question of how you get paid. Expect to hear some slick answers here. Truthfully there are only four answers:
- Commission Only
- Percentage Fee Only
- Dollar Amount Fee Only
- Commission and Fee
As you listen to their answer the keys are pretty simple to pick up. If they mention anything about the products or the companies paying them that is commission. If they say that you need to write them a check, that is dollar amount fee. If they say that you pay them out of your investments that is percentage fee. If they mention more than one, then it is the combination.
Say: "So that is it there is nothing else I pay for?" When they are done answering ask: "Do I pay an annual fee for an IRA account?" The reason you ask is that most firms charge and annual fee for small IRA accounts. Small IRA accounts take just as much reporting to the IRS as big IRA accounts, but they don't make as much money. You want to get two numbers. How much before it is free (ask if that is total or per account) and how much is the fee. For example, it might be $50 per account per year until the account is over $25,000. That is different than $50 per year per account until your total balance with the firm is $50,000.
Question 10: How much do you get paid?
If they get paid on commission the true answer is it depends. Let it go for now, I'll explain it later on better than they will explain it.
If it is dollar amount, get the figure. Is it per hour, per year, per plan? What happens if you have questions later? What happens if you want to add something later? The toughest part of dollar based payments is what happens after this time. If they tell you they can do your whole plan for $3,000 that is only part of the answer. What does that cover and for how long? If you call in five months to open a college savings account for a new nephew is that included or does it cost extra? Again, we aren't making judgements yet, just getting the numbers.
If it is percentage based, how much? Expect some "it depends" in the answer. Usually it depends on how much money you have. Get some examples. How much is it for $300,000, $500,000, $1million? You want a commitment now. If he says 1.2% write down 1.2% and say it out loud as you right it down. If he jumps in and says, well it might not be 1.2% make it clear you aren't coming back unless you get a number. If he says "Well it might be lower", then write down 1.2% but might be lower. (If you decide to go with this advisor when you call back you'll say something like: "I liked you, but I wouldn't be willing to pay more than 1.0%" and see what they say).
If it is a combo get the non-commission numbers using the same rules as above.
Page 6 - How to Find a Good Financial Planner
