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You’ve heard the saying, “Listen to what I say, not what I do.” Well it turns out many financial planners are asking you to do just that – they hold themselves out as financial planners when in actuality what they do is different. Recent research from Cerulli Associates Inc. found that 59% of investment professionals call themselves financial planners, implying they offer comprehensive financial planning services. When matching what they actually spend their time doing, it was found that only 30% did comprehensive financial planning. Most advisors, 56%, actually did investment planning but only 22% identified themselves as investment planners. These days it is challenging enough to actually retire, put kids through college and save for other goals, but to find out the course you’ve been taking may have been incomplete is disconcerting. Not only did you have the wrong captain but you may have been on the wrong ship in the first place.
How do you determine if you are working with a financial planner and not an investment planner? Look at what they do rather than relying simply on what they say. It boils down to three basic things: how they get paid, how they spend their time, and whom they work for. Match their services with your needs to see if there is a fit. An investment advisor who spends most of their time researching the stock market, finding you the best money managers, and monitoring your investments may be exactly what you want. If they consistently beat the S&P 500 and that is what you are looking for, you have a great match. That isn’t financial planning but rather investment planning, and investment planning is a different kind of service. Find out the following information about your planner:
How is your advisor compensated? There are a wide variety of ways an advisor gets paid. Planners can be paid as fee-only, commission-only, or fee-based, which is a combination of fees and commissions. Fee-only arrangements can include a flat fee, hourly billing, or a fee based on a percentage of assets under management. Comprehensive planners will tend to be fee-only or fee-based. This way they are paid to do more comprehensive analysis, which may include integrating your employee benefits such as retiree medical or group long-term care insurance offered by your employer. A commission-based planner doesn’t have a strong incentive to do so.
How does your advisor spend the majority of their time? This is the question that tripped up the planners in the Cerulli study because most of their time was spent in investment allocation not financial planning. If you work with a Registered Investment Advisor, they will supply you with a form ADV, where they disclose annually how they spend their time and where their revenue comes from. This is a form that financial planning firms use to register with the Securities and Exchange Commission and state regulatory agencies. It is not an easy read by any means but it provides valuable information, including how they actually spend their time. This form discloses who the firm is, what they do, how they charge for services, and any potential conflicts of interest they may have. You can learn a lot about a firm by reading it, including how much time they spend working on comprehensive financial planning or investment analysis. Asking your planner their area of expertise is important, but finding out how they actually spend their time will show you.
In Malcolm Gladwell’s book Outliers, he mentions that it takes 10,000 hours for someone to become an expert. This would take about five years of full-time practice to become proficient in your field or three hours a day of study to become an expert in ten years. Planners who earn the Certified Financial Planner™ (CFP®) designation have taken comprehensive exams in broad financial planning subject areas. Planners who earn the Chartered Life Underwriter® (CLU) designation are experts in insurance strategies for protecting, accumulating, and preserving wealth. Determine where your advisor focuses most of their time and where their expertise lies to see if it is a match for your needs.
Who does your advisor work for? The parent firm affiliation has a distinct influence on the type of work a planner performs. This may seem obvious at first glance, but understand that cultural influences run deep. If your planner’s firm is owned by a bank or brokerage firm, there is going to be a tendency for them to be investment focused. If their firm is owned by an insurance company, the strategies they are trained on are going to be insurance related. I’ve seen this first hand during my 25-year career. When working for a bank-owned brokerage firm, the continuing education and on-going training we received was solely investment focused with little emphasis on helping clients integrate insurance into their financial plans. When my broker dealer was owned by an insurance company, training we received started first and foremost with integrating insurance in a financial plan for clients. By contrast, an independent brokerage firm or broker dealer fosters independence in their planners. The firm has a significant influence on the planner’s practice.
If you need heart surgery, you don’t go to a podiatrist even though they are a licensed medical practitioner. If you want comprehensive financial planning, find someone who is an expert at just that.
Here are some resources that include how to find a planner, what questions to ask them, and a sample form ADV:
How to Choose a Financial Planner
10 Questions to Ask When Choosing a Financial Planner – CFP Board
List of Types of Financial Professionals
Working with a Fee-Only Advisor
Nancy L. Anderson, CFP ® is Think Tank Director and Resident Financial Planner at Financial Finesse, the leading provider of unbiased financial education for employers nationwide, delivered by on-staff Certified Financial Planner™ professionals. For additional financial tips and insights, follow Financial Finesse on Twitter and become a fan on Facebook.
