CINCINNATI BUSINESS COURIER
June 6-12 1988
INVESTMENTS
Charles D. Vaughan
Choosing A Financial Planner, Eenie, Meenie, Minie, Moe…
For many people that is the ultimate selection method for choosing a financial planner.
Since anyone can presently declare himself to be a “financial planner,” this method is fraught with hazards, but some help is on the way. The Securities and Exchange Commission has continued to broaden the definition of those who must register under the Investment Advisers Act of 1940 (as amended). Now anyone who receives compensation for giving investment advice or holds themselves out to be a financial planner must become a “Registered Investment Adviser.” This has recently been held to include some who were previously exempt such as accountants, lawyers and stockbrokers.
The greatest advantage this has to the consumer is that such registration requires that the financial planner provide certain specific information on background, education, tees and possible conflicts of interest. Since financial planning can have different meanings for each consumer, this makes it possible for the selection process to include finding those with the specific skills needed for the specific plan.
There are three basic compensation arrangements under which financial planners work: commission only, fee only and fee based.
The commission only planner is in reality a stockbroker or insurance agent who prepares plans and relies solely upon the client’s willingness to execute those plans for an income. The question always looms of whether or not unbiased recommendations can be made under these circumstances and if only “proprietary” investment products will be recommended.
The more idealistic believe that only the fee only planner can be truly objective and they have a valid argument. Since they charge an hourly rate or fixed fee for services they can be 100 percent objective. However, some argue that the cost of such plans is more than people want to pay. A more important issue for most is that of execution and followup of recommendations. No matter how well designed a financial plan might be, it is worthless without proper execution. A plan that is costing a client hundreds or even thousands of dollars still leaves him or her with the problem of how to make it work. Without a connection inside the brokerage business most planners do not have an awareness of all the currently available products. Even when they do, the client still has to select a broker who can understand the plan and still has to pay commissions to that person.
The majority of the financial planners in the country are fee based. For a modest fee most provide a service that covers all or any part of the six basic areas of financial planning: savings, protection, retirement plan, investments, tax plan and estate plan. Since they receive a fee, the plan is as objective as the planner is objective. The client is then free to go anywhere to execute the plan.
If the client needs further assistance in selection of investments and implementation of the plan, he or she can choose to utilize the planner’s services as a broker or agent. Since the law requires full disclosure, any possible conflicts and all commission compensation must be fully disclosed to the client. If the client chooses to try to do better elsewhere, he or she is free to do so. This does not resolve every issue, but seems to offer the best balance between affordable counseling and objectivity for most people.
A dishonest planner can pad fees as easily as another can charge excessive commissions. The real key is not how compensation is levied, but whether the planner performs the desired services for the benefit of the client.
Each financial planner brings his or her own background and biases along. CPAs tend toward emphasis on taxation, attorneys toward estate planning and brokers and insurance agents their obvious areas of expertise. Good planners recognize that they cannot do it all alone. So, an important selection criterion is the planner’s willingness to work with other experts to meet the client’s need.
Most professional financial planners belong to one or more organizations, which require subscribing to a Code of Ethics and some minimum degree of continuing education. In selecting a financial planner it is worth asking about such memberships.
The government has said that if someone claims to be a financial planner they must be registered and must provide a disclosure statement. Your best defense against borderline or inappropriate service is to ask to see such documents.
Or you could try one potato, two potato, three potato, four. . .