Doing Business with a Financial Planner
By: Source: AARP.org Date Posted: 2003-09-08 14:19:00-04:00
Before giving you any advice, a good financial planner will review your total financial picture. He or she will talk to you about your goals and objectives, and assess your tolerance for risk. Only then will the planner offer advice that fits your unique personal situation.
Your job is to be as open and honest as possible. Ask questions when you don't understand something. Take full advantage of all the services that the planner offers.
What You Should Know
Choosing a financial planner may appear to be a daunting task, especially when you don't know the qualities that make a good financial planner. But there is help, because there are some signs that indicate you are working with a quality financial planner. You should expect a financial planner to perform the following tasks.
Examine your financial history thoroughly. This includes your tax returns, investments, outstanding debts, retirement documents, wills, and insurance policies. Based on this analysis, the planner should:
- Develop an accurate balance sheet and income statement for you and your family.
- Obtain a complete understanding of you and your family's personal goals and priorities.
- Analyze your employee benefits, insurance, investments, wills, and trusts.
- Review your net worth statement.
- Suggest ways you could consolidate, pay off, or refinance your debts.
Help you develop an individualized financial plan. The financial planner should put this plan in writing. Don't sign off on the plan until you fully understand and agree with it.
Identify areas where you may need help. A financial planner should be able to tell you if you need to:
- Build up your retirement nest egg.
- Improve your investment returns.
- Buy or sell an insurance policy.
- Reduce your tax payments.
Help you implement your financial program. The financial planner should be prepared to refer you to specialists, like lawyers or accountants, who provide services that he or she cannot.
Review your financial plan periodically. The planner should also suggest changes in your program when needed.
Practices That Should Make You Nervous
Be wary of financial planners who make recommendations that reflect how they get paid. For example, let's say a planner makes most of his or her money through commissions on investments. Be cautious if this planner spends most of his or her time recommending places where you can invest your money, especially if investing is not your only priority. Likewise, be cautious if a planner with an insurance background spends most of his or her time talking to you about insurance and annuities.
Be wary of a financial planner who encourages you to "buy on margin." If you buy investments in this way, you'll be borrowing money from the planner in order to buy stocks that he or she recommends. High interest rates should discourage you from this practice. In addition, when you buy on margin you can lose money that's not your own.
Think twice before giving "discretionary authority" to a financial planner. This gives your planner the power to make trades for you without your express permission. Planners with this power may buy and sell stocks for you more often than you would choose. This practice will cause your transaction fees to rise.
For More Information
National Association of Personal Financial Advisors (NAPFA)
NAPFA publishes "Working with a Financial Adviser," a brochure that provides criteria to consider when shopping for a financial adviser, along with some details about what you can expect from the client/adviser relationship. It is available online at the NAPFA Web site. From the association's home page, click on "Consumer Services" and then follow the links.
URL: http://www.napfa.org
Certified Financial Planner Board of Standards
The Certified Financial Planner Board of Standards publishes "What You Should Know About Financial Planning," a brochure that explains financial planning and its benefits. It highlights the important role that consumers must play in their own financial planning process.
URL: http://www.cfp.net/default.asp
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