8 things your financial planner won't tell you

By Liz Pulliam Weston

More people are flocking to financial planners these days, convinced they need professionals to help them navigate the market's stormy seas.

Unfortunately, not all planners are created equal. Some are thinly disguised investment salespeople, and many don't have the background or inclination to offer true, comprehensive financial advice.

So before you sign on with a planner, or implement the advice offered, make sure you know these secrets the planner may be keeping. Such as:

1. I have no qualifications for this job.

Anyone can claim to be a financial planner. There are no education, experience or ethical requirements and no government agency that regulates planners as planners.

Of the estimated 250,000 people calling themselves financial planners, only about 56,500 have earned the Certified Financial Planner mark -- the best-known financial planning designation. Fewer still are a Chartered Financial Consultant (ChFC) or Personal Financial Specialist (PFS), the financial planning designations offered by the insurance and accounting industries, respectively.

Even if your planner has one of these designations, you're not home free. It generally takes years of experience and ongoing education -- not to mention integrity and ethics -- to become a truly good planner.

Your best bet: Make sure that, at a minimum, your financial planner has one of the three leading designations. You can check on CFP status by consulting the Certified Financial Planner Board of Standards. For a PFS title, contact the American Institute of Certified Public Accountants' Personal Financial Planning Center. And to look into a ChFC designation, visit the Society of Financial Services Professionals.

2. I have no obligation to put your interests ahead of my own.

Real financial planners take seriously their duties as fiduciaries -- professionals who are trusted to think of their clients' needs first and foremost.

Most of those who call themselves planners, though, are really in the business of selling investments. As such, they may face scrutiny from various government agencies over their sales tactics. But instead of being obligated to create the best financial plan for you, they're only required by law not to sell you something that's utterly unsuitable.

Your best bet: Ask for, and read, a copy of any code of ethics with which your planner is required to comply (usually as part of his professional designation). It may be slow reading, but you'll get an idea of the standard by which your planner operates. The word "fiduciary," for example, does not appear in the Society of Financial Services Professionals' code of professional responsibility, but members of the fee-only National Association of Personal Financial Advisors are required to take a fiduciary oath promising "to act in good faith and in the best interests of the client."

3. I'm not being paid the way you think.

"Commissions" became a dirty word in the 1990s, when even the big brokerage houses like Merrill Lynch decided that people would rather pay fees than have advisers compensated by commissions for the investments they sold.

True fee-only financial planners are still a rare breed, however. The leading association for fee-only planners, NAPFA, has fewer than 800 members.

Most financial advisers still get some or most of their income from commissions, according to FPA. Many finesse the situation by calling themselves "fee-based" planners, or by simply avoiding the issue of how they get compensated.

Commissions aren't bad, per se. But they do create a built-in conflict of interest. Your planner should volunteer information about how she gets paid. If you have to ask, you should at least get a straight answer.

Your best bet: Ask -- and then do more research. If your planner is a registered investment adviser (RIA), ask for a copy of his form ADV, Parts I and II. This document, which must be filed with the Securities and Exchange Commission, outlines whether the adviser accepts fees, commissions or both. If the adviser's practice is too small to be regulated by the SEC, ask for the state equivalent of this form.

4. I'm looking at only one small portion of your overall finances.

A good financial planner looks at every aspect of his or her clients' financial situations, from their budgets to their estate plans. That's the only way to give truly customized, comprehensive planning advice.

Many of those calling themselves financial planners, however, focus on one narrow aspect of a client's monetary condition -- usually the area that corresponds with whatever financial training they've received.

Continued: Watch out for one-trick ponies

 1 | 2 | next >