Choosing a Financial Planner: 5 Questions to Ask

So it’s the middle of the year and you suddenly realise something that makes your heart sink: you threw your new years resolution of being more financially responsible completely out the window. It might feel too late but the truth of the matter is there is never a wrong time to become more financially responsible.

However there are times when it is more difficult. This is usually when your finances are a little far gone or when you’re tryingnto plan something out of your expertise. For you this may be choosing investments, insurance and other financial products. It may also be retirement planning, college funding, estate planning and general investment analysis.

 Enter stage left your trusty financial plannerimage

This is where your financial planner comes in with a full briefcase and a head brimming with ideas that could potentially change your life. Or could they?

Six months and several hefty consultation fees later, your entire life savings are gone. You followed your planners advice to a T and invested in he companies they recommended. But now all your money has vanished and so has your planner. So what went wrong?

Sadly this situation is too common nowadays. Because of incompetent, ill-qualified and generally unsuitable financial planners giving haphazard advice, real people lose real money every day.

So what are your options?

You could draw a financial planners name out of a hat and hope they aren’t crook.  This option works perfectly fine if you don’t mind putting years of hard earned money on the line.

Or you could simply ask these five questions before hiring your financial planner. Trust me, these five simple questions can be the difference between a financial planner who will make use or just simply use your money.

1. What qualifications do you have?

Financial planning is quite similar to being a surgeon if you think about it. Both require years of intensive study. Financial planning requires technical knowledge about personal tax planning, insurance, investments, retirement planning and estate planning – and how a recommendation in one area can affect the others.

So imagine this: you agree to let a new surgeon remove a kidney stone. The nurse assured you this surgeon had fives years of experience at their previous hospital. Only after the surgery the surgeon whispers in your ear, “phew what a relief! I guess being a surgical director’s PA for five years taught me a thing or two!”

All I’m trying to say is experience is easy to fake. Your prospective planner has ten years experience at a respected agency? Good for them! But we’re thry pushing pens or pushing money?

Qualifications – and I mean proof of qualifications, are less easy to fake. Qualifications also show how long the planner has been in the real world dealing with real money instead of just textbook money.

2. What is your approach to financial planning?

If you put two financial planners in a room and give them a financial problem to solve, they may have the same answer but chances are their methods were quite different. Because of this, it is so important to learn about your prospective planner’s methods.

The Financial Planning Standards Council believes you should ideally work with a planner who considers your overall financial goals, values and attitudes even if they specialize in a specific area such as taxation, estate planning, insurance or investments.

3. How will you charge me?

Financial planners know a thing or two about making money. So naturally, some use their powers for evil to rip you off. So you need to be cautious about how your financial planner will charge you.

There are several ways a financial planner could charge you. It helps to know a bit about each so you can have an idea which one suits your unique situation best. Here are three of the most common methods:

 Price of product: Some planners receive their compensation directly from the product manufacturer when you purchase a product through the planner. For example, their compensation is part of the management fee of the fund. In this case no money is exchanged between the client and the planner. Rather, the cost to the client is embedded in the cost of the mutual fund.

Percentage of assets under management: Some planners charge a fee as a percentage of the assets they are managing or administering on your behalf.

Fee-for-service: Some planners charge an hourly or set fee for the service they provide.

4. Besides me, who else benefits from your recommendations?

As humans, we have a natural instictnt to assume a ‘what is isn it for me?’ attitude. The financial planner wants to get something from serving you – and sometimes it isn’t just your money.

Financial planners ma sometimes have third party clients and sometimes their interests interfere with yours. Take for example then big financial market crash of 2008. In this crash, many investment portfolios collapsed taking investors money. Seven years later and virtually no one has gotten all their money back.

It was later discovered that the planners recommending these portfolios were being paid to do so. So there is a chance that this behaviour is still going on today.

While this question is of utmost importance, it can also get you in tricky water.  Do you think a planner would be allowed to talk freely about third party contracts? Probably not!

So instead you can ask if they have a written professional obligation to put your interests ahead of their own. Some planners annually a test to a code of ethics that state hey must put your interests ahead of their own. Look out for this.

5. What is your track record?

The best way to learn about your financial planner is to do a little bit of risk analysis.  And anyone who knows basic Accounting101 knows you can only get this from past data.

So how can you get this data without asking for an extensive record of all their past clients per the last five years? Simply request a risk-adjusted performance record. It should go back at least five years. Also if possible get a list of client references and call them.

 

 

Jo Davis

I enjoy being a parent, cooking, and pretty much anything online, especially online businesses.

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