What are "financial planners", and what do they do?

Great question.

Good financial planners help you clarify for yourself what your values and goals are. They will actually look comprehensively at all areas of your finances to create a plan and advise you on the best courses of action. A comprehensive approach is important, because each financial decision in your life is best made when considered in the context of all your other goals and decisions!

Over time, a good financial planner will help you adjust your plan as your goals and needs change.

Also, financial planners who truly care about helping people will reduce conflicts of interest as much as possible so that they can be objective in their advice.

What do you mean by "conflicts of interest"?

Conflicts of interest are anything that threaten to impair a financial professional's judgment in giving advice. Perhaps the biggest conflict of interest is based in how a financial advisor is compensated, specifically whether a financial advisor is commissions-based, fee-based (commissions AND fees), or fee-only. The conflicts of interest that come with how an advisor is paid is a really big deal - I even had the chance to speak to Forbes about it.

When commissions are involved, there is an incentive for financial advisors to recommend what will make them more money. This incentive can overpower their ability to give objective advice. And that bothers me tremendously.

It doesn't bother me! If I can trust them, that's what matters, isn't it?

You may not feel the same, and that's fine. But what if the person you're willing to trust doesn't even have an awareness of their own ethical conflicts or how incomplete or biased their financial knowledge is? 

If you haven't looked closely at their compensation method or qualifications, you're at a knowledge disadvantage. When there's a knowledge gap between you and the person you're talking to, it's easy for you to make a lapse in judgment of who you can trust.

My personal concern is that commissions-based advisors are too strongly incentivized to make recommendations that involve the products they sell. Furthermore, my fear is that they are trained, unknowingly, in a company culture that teaches biased financial strategies that promotes sales profits above client service.

Just remember that the #1 principle taught in sales is to get the customer to trust you, because that's when a customer stops looking out for themselves.

Nothing's worse than when I hear about someone who trusted a financial advisor who they were "close" to, and then got burned. They lose a bunch of money on a bad insurance product or investment and can't figure out why their college buddy/cousin/uncle/friend-turned-"financial advisor" told them it was best. (Forgive them. That's what they were trained to say and they didn't know any better).

What makes you speak so frankly about these things?

These concerns comes from my own past experiences of sitting in the client's seat, speaking with other consumers, and from former commissions-based advisors themselves.

So are you saying all commissions-based financial advisors are bad?

No way José! I have several friends and colleagues who work in the commissions-based financial advising world. In the end, an honest person will do an honest job, a dishonest person will do a dishonest job, and in an ideal world it wouldn't matter how they are compensated.

However, on a more realistic level, the culture and environment of a commissions-based job in an industry as lucrative as financial sales invites powerful psychological forces that can make good people do bad things. And it becomes really difficult for people in those positions to see the ethical conflicts in what they do.

It sounds like you think all salesman are evil, man.

Definitely not true. Here is the difference: sales jobs for consumer products, generally speaking, don't carry the same weight on a person's life.

If you buy a TV you can't afford, a vacuum you don't need, or get roped into a bad security system contract - sorry, you have to be a smarter shopper. You know what sales reps are trying to do.

But these types of sales are completely different from things like health or money that have a massive impact on our lives and well-being. Health and money are complex areas of knowledge and take a high-level of expertise to truly understand.

Therefore, professionals that are helping people with these things should be

  1. Adequately qualified, and
  2. Not have any strong incentives that would cause them to act outside the best interests of a client.

Unfortunately, the financial industry requires neither!

Really? So anyone can call themselves a "financial advisor" and they don't have to act in my best interest when they recommend something?

Yup. That's exactly what I'm saying.

The term "financial advisor" or "financial planner" is NOT regulated. Anyone can pass a simple life insurance or mutual fund exam and be licensed to sell those things, but then call themselves a "financial advisor". To a consumer, it's easy to assume that such a person has good, high-level training in comprehensive financial planning. But very few actually do.

So consumers are left thinking that their advisor, like their doctor or lawyer, is legally obligated to recommend what's best for them, when in fact,  they're only held to a "suitability" standard if they are commissions-based.

Commissions-based advisors only have to recommend something that's "suitable"?

As licensed agents, advisors on commission have a legal duty to represent the interests of the company they sell for. By law, they only need to recommend products that are "suitable". To me, it seems like you can make a case for any product being "suitable", and that's a far cry from someone's best interest. Some commissions-based advisors may actually do financial planning and want to have your best interests at heart, but they'll always have the conflicts of interest that I spoke of above.

There should not be any wiggle room in ethics or conflicts of interest when it comes down to a professionally advising people on their money. That's my personal belief. That's why I chose to be a fee-only, fiduciary financial planner.

Do you make a commission or sell products?

NO. I'm a fee-only financial planner.

I hope you're telling the truth. One time an advisor told me they were fee-only but they actually did sell products. How can you tell?

I'm sorry, I've seen that happen. Part of this is trying to confuse you by using the term "fee-based", which is not the same as fee-only.

If you ever want to know for sure, look up the legal document about their business called an "ADV Part 2" by going to the Investment Advisor Public Disclosure search. This is where they have to legally disclose exactly how they're compensated.

You can find my ADV Part 2 document by typing in my name at the link above (Justin Chidester), or my firm's name, "Wealth Mode Financial Planning."

What's the difference between commissions, fee-based, and fee-only?

Advisors on commissions only make money by selling products. "Fee-based" advisors sell products for commission and charge fees. Fee-only advisors are compensated with fees paid directly by their clients, and do NOT sell products for a company to earn a commission. So, their loyalty is to the client's best interests.

Fee-only financial planners do have a few different ways they might charge, however. More on that down below.

How can I pick a good financial advisor?

I spoke to Forbes about that, as I mentioned before. But here's a summary.

First of all, look at their qualifications. If they think it's important to obtain high-level financial training before holding themselves out as a real financial expert, then they will have obtained a professional certification or designation. The most widely accepted credential is a Certified Financial Planner™, or "CFP®." To become a CFP professional you have to earn a bachelors degree, take six or more graduate-level classes in financial planning curriculum, pass a 6-hour comprehensive exam and get 3 years of experience (I've done all except the last one - currently at 2 years and counting). It's no walk in the park. Possibly as few as 25% of all financial advisors are CFP®'s. 

Second, ask if they are a fiduciary. 

"Fiduciary"?

A fiduciary is someone who acts in your best interest. Like I explained above, not all “financial advisors” have your best interests at heart, or even have to legally. I’ve signed a fiduciary oath, which someone under a suitability standard can't do. 

Okay, so I might need a financial planner. But it's my money...can’t I figure out planning my finances on my own?

Yes.

Then do I need help planning my finances?

Maybe not.

Aren't you supposed to be convincing me that I need a financial planner?

I don't need to sell you on financial planning services. There's enough research out there to back up the value of using a financial planner, and any consumer who is serious about their finances will consider the benefits with an open mind. You just need your questions about it answered so you can see if you think there's enough value for you. That's what I'm aiming to do when I invite people to a zero pressure "Let's Meet" appointment.

Tell me more - why do I need a financial advisor?

There are several reasons, but the most important ones are:

  1. You don't know what you don't know. What you don't know can hurt you if you make a decision that appears to be right in some ways but is really detrimental or ineffective in the context of your entire financial picture. Do you really understand the tax implications of a large investment decision, the nuances of the different mortgage loans you're being quoted, or if you're spending too much (or too little) on insurance coverage?
     
  2. Even with what you do know, you may not be executing or implementing it as well as you know you should. Getting a financial planner who can also be your money coach is like having a fitness trainer or nutritionist if you're serious about your health. Can you buy a gym pass and plan to go five times a week for an hour on your own accord? Yes. Will you actually do that? Depends on you right? But for most people, probably not. And when you do, will your workouts be as effective as if you had a personal trainer there watching you? Again, probably not. The same goes for your finances. You know you need to budget, or pay off debt, or research your investments better...but you're not getting around to it. If you're serious about reaching financial goals, you might consider hiring a fee-only financial planner.
     
  3. Even though you could figure it out on your own, you know it will take a ton of your time. It takes way longer to DIY anything than it does to outsource to an expert. And time is money. Save the limited time in your life for what you do best and what makes you happiest, not wasting an excessive amount away managing your money because you're not willing to get help from someone who can do it more accurately and efficiently.

Do all fee-only financial planners charge the same?

Nope. Most fee-only planners charge you via a method called "Assets Under Management", or AUM (remember - if it's a fee based advisor, they may charge you AUM in addition to selling you commissions-based products).

In an AUM arrangement, the advisor's fee is based on a percentage of the assets, or investments, that he/she manages for you. AUM fees tend to range around 1%. So if the advisor manages $200,000 for you and takes a 1% fee, they'll get $2,000 annually (and more as your investments grow).

A lot of advisors say they have an "account minimum". What's that?

Advisors who charge just by AUM often have a minimum amount of assets you can invest with them before they'll work for you, to justify getting a reasonable fee. Common minimums are $100,000 or $250,000. If they don't have a minimum, 99% of the time it's because they can make (a lot of) money by selling you a product (you may not need).

What's the account minimum at Wealth Mode Financial Planning?

$0. That's right, nada. I have flexible pricing models that makes things possible and affordable for anyone to get sound financial planning advice (I have a passion for helping middle-income families, not wealthy retirees). Some people want to pay for a one-time consultation on an important decision, but most clients want an ongoing financial planner and wealth guide at a monthly cost that's affordable. See my Services page for details. 

How are you different from other financial planners?

  1. I work with younger clients, mainly those in their 20's and 30's
  2. I have a fee structure that works for them.
  3. I've actually received high-level education in financial planning, not just passed an easy license exam to sell life insurance or mutual funds. 
  4. I don’t sell financial products for commission.
  5. I have no account minimums.
  6. I'm open and transparent about conflicts of interest.
  7. I'm extremely honest about how much you need - or if you need - a financial planner.
  8. I’m 100% fiduciary - legally obligated to act in your best interest, all the time.
  9. I believe that finding a good financial planner should be like dating. We should have at least a couple meetings (always free) completely free of any sales-pitchy-ness, before a long-term commitment.
  10. I'm not stuffy, boring, old, impersonal, intimidating, or wanting clients who are those things.

Is that enough? ;)

How did you become a financial planner?

I formally studied Family Finance and Personal Financial Planning in college (a little beyond just reading some popular personal finance books). I looked for job opportunities in my area (Utah) but couldn't find any financial advising opportunities that didn't involve my employer pushing me to sell expensive life insurance policies or investment products to friends and family. Or, a fee-only job that didn't involve only working with old or rich people.

So I took a job at an excellent nonprofit community organization to provide financial counseling and planning education to hundreds of clients per year.

So what are your credentials?

Meanwhile, I became an Accredited Financial Counselor (AFC®) and passed the Certified Financial Planner™ exam. I became licensed as an Investment Adviser Representative and opened up Wealth Mode Financial Planning. I am also a member of a national group of financial planners who specialize in working with people in Generations X and Y. We're called the XY Planning Network, and we're creating a movement. We collaborate and give support and feedback to each other so that we can give the best advice to our clients.

What’s it like to be a financial planning client of Wealth Mode? 

Oh, it’s awesome (did you think I’d say anything else?). We’re going to have some great conversations about your life and what you want to achieve. We'll use interactive technology to create a customized financial plan, keep in contact, and make managing your finances efficient and convenient. Most of all, we'll seek to find your personal balance of enjoying the present and setting up your future so you'll live in Wealth Mode now AND later.

I've heard financial advice is expensive - why?

Warren Buffett, the most famous investor of our day, famously states: "Price is what you pay; value is what you get."

"Expensive" is a relative term. Something is only deemed expensive when you compare its price to something else ("an airplane ticket for a trip is expensive compared to four tanks of gas"), or when the price is deemed to be excessive for the value received ("I spent way too much at that restaurant for such poor food"). No one complains about something being expensive if the satisfaction, or value, derived from it meets or exceeds expectations.

With financial advice, the value you receive can sometimes be measured in objective numbers. You might compare the amount you spent on professional advice to the money you save or gain because of the advice. This might be through a smart tax choice or a wise investment decision. When measured this way, you'll often find incredible value in working with a good financial planner. Especially over the long-term. There is a multitude of research that supports this.

At other times, the value of financial advice isn't as easily quantified. How much peace of mind do you have in knowing that you're not relying on just your own knowledge, but that of an expert? Isn't that what you want the most when you take your car to a mechanic, or see a doctor about symptoms you're experiencing? You just want to be sure that your car or your health is being taken care of for sure. If you have a financial planner, how much time and stress do you save not having to research everything yourself?

My clients often tell me that the most valuable part of what I do is simply the reassurance of a professional watching over their decisions, and having someone making sure they're implementing what they're supposed to. Sometimes, accountability is everything.

If you are interested in learning more about financial planning, let's meet. I don't need to sell you on financial planning services. You just need your questions about it answered so you can see if there's enough value for you. 


One last question everyone asks...

What's your philosophy on investing?

Loaded question!

I believe what the research says - the research done by academia and objective third parties, not the biased conclusions that come from research done by Wall Street. 

A passive, globally diversified, tax-efficient, low-cost portfolio should be a major part, if not the very core, of a wealth-building strategy. I do believe that good opportunities outside the stock market do exist, though they should be chosen only after much thought and deliberation based on your personal circumstances. These would be things like starting your own business, rental properties, short-term bridge loans, and peer-to-peer lending. 

Most of all, I believe that when you are in the first half of your working career, asset accumulation is more important than asset allocation. People get really caught up in finding the secret investment with magically high rates of return. They take on way too much risk hoping to "make bank" on a hot stock or their cousin's start-up. But a good investment strategy doesn't work like that. It doesn't matter what you're invested in if you don't save enough money. That's why I take a strong approach to discovering your values to make the right cash flow decisions from early on in your life, when it matters most.

 

Don't procrastinate your financial plan any longer!