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How to Choose a Financial Planner

Beware the good adviser who does bad things with your money

But there are still conflicts. It encourages us to capture as much of your money as we can. That’s why few of us will ever tell you to pay off your mortgage: Using $100,000 to discharge a loan rather than investing it could cost us $1,000 a year in fees.

The fee model also limits where we advise you to invest, since we’ll favor putting you in products set up to pay us automatically each quarter. Few planners will tell you about, say, a higher-paying certificate of deposit at a bank, because banks don’t pay planners. You’ll have to find such investments yourself. ( and both let you compare yields for accounts at banks and credit unions.)

Some of us make money from both commissions and fees. One CFP whose work I reviewed made a huge commission when he sold his client an annuity, then charged 1.6 percent annually to “manage” it. Between the commission, planner’s fees and ongoing costs of the annuity, the client was handing over a whopping 5.29 percent annual fee. Still, the CFP Board did not publicly discipline the planner.

The compensation model I follow is comparatively rare: charging by the hour. I chose it because I didn’t trust myself to be nobler than my colleagues at resisting the financial incentives of the other two models. That said, the hourly model isn’t the best choice for everyone.

It’s not cheap: I charge up to $350 an hour. Other hourly planners can be found through the Garrett Planning Network, a group of more than 300 planners who generally charge $180 to $240 an hour. (I am not a member of this network.)

Hourly planners aren’t immune to conflicts, either. I could rack up billable hours, for example, by telling you I have to actively manage your portfolio. Richard Salmen, past FPA national president, has other caveats. For example, he thinks the hourly model might discourage a client from seeking advice. “It would be like seeing the dentist only when you are in pain,” he says.

The FPA is “revenue neutral,” meaning it takes no position on which fee model is the best. Be aware that no model is conflict-free.

How we sell you

All planners know that the quickest way to your money is through your emotions. To get you to sign up, many follow a five-step system. We invite you to talk about your values and get you excited by discussing your goals. We might ask you to describe your “perfect day,” then help you understand the amount of money you’d need to make your future one long string of perfect days.

Finally, we’ll try to close the deal, which means you commit to hiring the planner and promise to implement the planner’s advice. “I can get you to your dreams of spending time with your grandkids if you let me handle your money now,” the planner might say. “Sign here and I’ll get to work!”

Next: A final word of advice. »

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