When hiring a financial planner

Most people would never dream of trying to fix a broken arm or smashed-up car themselves, but deciding when to call in professional help and who to turn to isn’t so clear cut when it comes to dealing with a financial plan that has been mangled by the economy.

With things like low-fee online brokerage, tax-free savings accounts and exchange-traded funds, do-it-yourselfers have never had more investing choices. But the array of options comes with potential pitfalls and unexpected tax considerations that can undermine financial plans, so it has also never been easier for novices to get themselves into trouble.

The problem for consumers is that there are many different kinds of financial advisers, and they offer a range of services at a range of prices.

And not all of them act entirely in your best interests.

There’s no magic formula when choosing a financial planner, but two designations that specialize in developing broad financial plans are certified financial planner (CFP) and registered financial planner (RFP). That’s not to say that other designations such as CFA or TEP aren’t as knowledgeable, but their expertise is typically geared towards very specific aspects of one’s financial life.

Generally, financial planners get paid in one of two ways. Some earn commissions on the products you end up buying. Others work on a fee-based model where the customer pays an hourly rate for unbiased opinions, and the planner has no financial incentive to steer them one way or the other.

Certified financial planners

The Certified Financial Planner Board of Standards Inc. owns the rights to use the CFP designation in Canada. It offers a helpful checklist on its website that lists some questions to ask before signing up with a planner. It suggests asking about the person’s experience, their qualifications, how they get paid, and whether they’ve ever been disciplined for malfeasance.

In the meantime, it’s prudent to take a buyer beware approach to financial planning and advice by doing your homework before choosing who to deal with.

Financial planning checklist

Here are five basic things that can help you evaluate a potential financial adviser.

  1. Plan ahead:The first step is often to decide what sort of financial strategy you need. Are you a saver? A buy and hold investor? Are you willing to take risks, small or large? Picking an adviser who is among the best in long-term thinking might not be ideally suited for your day trading needs, for example. So figure out what your ultimate goal is, and work with someone who can demonstrate that they’ve got the expertise to help you reach that goal.
  2. Ask around:Friends and family can be a great first step to finding a reliable source of financial advice. Ask around and see if anyone in your circle has an adviser they’d recommend, or tips to share. Hearing about a bad experience and what went wrong can hone your decision-making skills and help you figure out what questions to ask a potential adviser when sounding them out.
  3. Get personal:Whatever you do, make sure you meet with the person face to face before making any sort of arrangement. Remember, the adviser is going to need to have very intimate knowledge of your finances, personal activities and goals, and you must be comfortable providing them with that information.
  4. Follow the money:There are a number of ways that advisers get paid. The most common is the commission-based model where the adviser gets paid a fee by the financial companies that make the products they sell. That’s great in principle (since the customer never has to pay directly for the service), but critics point out that it poses an inherent conflict of interest. Certain financial products pay higher commissions than others, which gives the adviser a higher incentive to move you in that direction – whether it’s a good idea for your financial plan or not.

Higher net worth clients often like the asset-based model, where you pay an adviser a certain percentage of your entire portfolio, so the payment grows as the portfolio grows. That gives both parties an incentive to make the portfolio increase in value.

Smaller investors might like a simple fee-based planner that charges by the hour. The cost shouldn’t be much more than about $100 or so an hour, and less and less time will likely be needed once the financial plan has been worked out and set up — perhaps nothing more than a checkup here and there throughout the year.

  1. Beware the acronym game: From CIM, to CFA, to TEP and even RHU, there’s a dizzying array of letters signifying credentials for financial professionals. But experts say the two types that most consumers should look for are either CFP or RFP. Those stand for certified financial planner and registered financial planner. The latter is generally for more advanced investors, but they share the common trait of not actually selling any financial products. A good financial planner’s role is to guide your savings and investment strategy, not sell you individual products.

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