Here’s an in-depth conversation around what you need to know about working with a financial planner, including the questions you didn’t even know you need to ask.
A true financial planner will not jump to selling you a product or investment, but will want to clarify what is important to you. I like to ask, "how would your life go if you could choose the ideal path?"
A sign of a true advisor is that they will 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!
A good financial planner will help you adjust your plan over time as your life 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.
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.
I still would be weary. What if the person you're willing to trust doesn't even have an awareness of their own ethical conflicts? What if they don't even understand how incomplete or biased their financial knowledge is?
If you haven't looked closely at an advisor’s compensation method or their 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 give advice that will lead to the products they sell - making them more money - rather than what is best for the client. Furthermore, my fear is that they are trained, unknowingly, in a company culture that teaches biased financial strategies that promotes profit 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).
These concerns come from my own past experiences of sitting in the client's seat with a commissions-based advisor, speaking with other consumers, and from former commissions-based advisors themselves.
Not at all. 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.
NO! Here is why sales and financial advice don’t mix: 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. Buyer beware.
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
Unfortunately, the financial industry requires neither!
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 is legally obligated to recommend what's best for them - like their doctor or lawyer are - when in fact, they're only held to a "suitability" standard if they are commissions-based.
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.
Part of the confusion around this for consumers is that many advisors will try 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."
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 college-level classes in financial planning curriculum, pass a 6-hour comprehensive exam and get 3 years of experience. It's no walk in the park. Possibly as few as 25% of all financial advisors are CFP® professionals.
Second, ask if they are a fiduciary.
A fiduciary is someone who is legally obligated to act in your best interest. That is a big deal. 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.
And please be careful - with so much information being given to consumers to look only for "fiduciary" advisors, non-fiduciary advisors are starting to still answer "Yes" when a prospects asks them if they are a fiduciary. It's not good enough to ask them that. You've got to get it in writing that they are a fiduciary 100% of the time, and state explicitly when and in what situations they are not a fiduciary. Get it in writing, or understand their compensation and position well enough to figure it out yourself.
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 Free Appointment.
There are several reasons, but the most important ones are:
Nope. Most fee-only planners charge you via a method called "Assets Under Management", or AUM (remember - if it's a fee based advisor, it is different from fee only and 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).
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).
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.
No. I'm a fee-only financial planner.
$0. I have flexible pricing models that makes things possible and affordable for anyone to get sound financial planning advice. 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.
Is that enough?
I formally studied Family Finance and Personal Financial Planning for my bachelors degree. You could say it was well 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 first I took a job at an excellent nonprofit community organization to provide financial education and one-on-one financial coaching to hundreds of households per year.
I am a CERTIFIED FINANCIAL PLANNER™ (CFP®) professional. This is the closest thing to a “CPA” in the financial planning world. To become a CFP® professional you have to go through a CFP® educational program (which I completed in college), complete a 6-hour comprehensive exam (brutal), get 3 years of full-time experience in the field, and agree to a code of ethics to serve the public’s best interest.
I am also an Accredited Financial Counselor (AFC®), which gives me a unique view of how we think and feel about money as individuals, and how those beliefs and attitudes influence our financial choices. Most importantly, I can help you figure out how to change your behavior around money and feel better about your decisions.
I am also a proud 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’re trying to bring financial advice in an affordable, unbiased way to more people, rather than just to older people who already have a lot of wealth. We collaborate and give support and feedback to each other on our clients’ situations so that we can give the best advice to our clients.
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 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.
Please go to my Investment Philosophy page to read the strategy and core principles of investing that I stand by.
While people get very hung up on the right investment strategy, I have to offer this food-for-thought: 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 or strategy 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.