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What is a financial planner? Here's what they do

At a glance:

  • What is a financial planner?

  • What do financial planners do?

  • How are financial planners compensated?

  • Questions to ask your financial planner

  • Financial planner designations and professional associations

  • Summary of using financial planners

  • Practical ideas you can start with today

A good financial planner can help make the difference between meeting your financial goals and failure.

But before you run out to get all that great advice, you need to be aware of how the financial planning profession works. You should work with someone you feel you can trust.

You will need to understand what charges to expect and what you can expect from a qualified planner.

What is a financial planner?

A tax preparer helps a customer prepare their taxes at an H&R Block office in the Brooklyn borough of New York City. (Photo: Drew Angerer/Getty Images)
A tax preparer helps a customer prepare their taxes at an H&R Block office in the Brooklyn borough of New York City. (Photo: Drew Angerer/Getty Images)

The services planners provide depend on many factors, including their licenses and areas of expertise. Financial planners come from a wide variety of backgrounds.

Some may have degrees in accounting, but this is not necessary.

Finding out whether a financial planner has a certificate or license in financial planning can help you make a decision on which planner you wish to use.

Planners are regulated

Government bodies and self-regulatory organizations regulate financial services professionals according to the services they offer.

For example, someone who is licensed to sell stocks is regulated as a stockbroker. Insurance agents are regulated by state insurance commissioners. But, any provider of financial services can identify him or herself as a "financial planner."

However—and here is the distinction—regardless of their licensing, background or experience, no one can legally give investment advice for compensation without being properly registered as an investment adviser or an investment adviser representative by either the Securities and Exchange Commission (SEC) or the appropriate state securities agency of the state in which he or she does business. (The amount of assets under management by the adviser determines where he or she must be registered.)

What do financial planners do?

Set your goals

Once you decide on a planner and agree on how he or she will be paid, your financial planner will begin working on your financial plan. Before the financial plan can be made, your planner will look at your current financial status.

Come prepared to share all of your financial information with your planner. At this time, you will also set your financial goals and the timeframe for meeting these goals.

Recommending courses of action for you

Once the planner has reviewed and analyzed your current financial position, he or she will have a better idea as to what you must do to help reach your goals.

The planner will recommend financial strategies to help get you where you want to be. He or she will revise the recommendations based on your feedback.

Following up on your plan

The next part of the process is to decide how the planner's recommendations will be carried out. For example, if the planner recommends that you save 20% of your money in stocks, and has the proper licenses, he or she may carry out these services themselves, or help you coordinate with stockbrokers, insurance agents, etc.

The last part of the planning process is to regularly evaluate your plan. Monitoring the success of your plan might be the responsibility of your planner, you, or both you and your planner together. After evaluating your plan, new recommendations will be made by your planner if necessary.

You will get the most out of your financial planner if you understand his or her responsibilities and specialty areas, and if you come prepared with the information your planner will need to help you.

How are financial planners compensated?

Everyone knows there's no such thing as free advice.

An important factor in deciding which financial planner to use is how the financial planner charges for his or her services. There are several ways in which a financial planner might ask to be paid.

Fees

Many planners charge by fee only. They charge by the hour or by a fixed rate. For example, you might be charged $500 for a comprehensive financial plan, no matter how long it took to draw it up.

Commissions

Other financial planners may charge a commission. They receive money for financial products and services (such as stocks or insurance) you buy from them.

Commissions are usually a percentage of the amount you invest in a product. Planners who receive commissions may also charge fees, act as an insurance agent, or receive a salary from another company.

Percentage of assets or both fees and commissions

A planner who is in charge of your investments may charge you a percentage of assets. Finally, some planners may charge both set fees and commissions.

The fees are charged for the work done to create your financial plan, and commissions are charged on any products you buy to help meet your plan. Sometimes fees are reduced if you buy products or services that give the planner a commission.

Understanding how your financial planner is compensated will help you do comparison shopping, judge the value of your planner's services, and anticipate what you will pay for them.

Questions to ask your financial planner

Once you have located a financial planner, you will want to make sure the planner is right for you. Here are several questions you should ask any financial planner before you hire him or her.

Questions to ask

  • "What experience do you have?" Find out how long the planner has practiced and what areas he or she is an expert in. This will give you an indication of whether or not the planner's expertise matches your goals.

  • "What designations and licenses do you hold?" Find out whether the planner is registered with the state as an investment adviser or to sell securities or insurance. This lets you know whether you might need to work with other advisors in addition to your planner.

  • "What services do you offer?" This varies greatly depending on the planner. Some planners offer advice but don't sell products. Others may provide advice only in specific areas.

  • "How do you charge and do you sell financial products for an outside company?" Your planner will charge by fee only, commission only, or both fees and commissions.

  • "Describe your approach to financial planning." Make sure your planner's approach isn't either too cautious or aggressive for you.

  • "Will you provide references?" It is always important to get the scoop from other clients.

You can use sites such as http://brokercheck.finra.org/ or http://www.adviserinfo.sec.gov/IAPD/default.aspx. Doing your research now will help you avoid misunderstandings and disappointment down the road.

Your financial future may hinge on the advice of your financial planner; take the time to be sure you're hiring the right one for you.

Financial planner designations and professional associations

One way to seek out a financial planner is to look for an individual who holds a financial planning license or certificate.

You can help identify a planner by any of the following designations:

  • Certified Financial Planner (CFP®)

  • Chartered Financial Consultant (ChFC)

  • Chartered Financial Analyst (CFA)

  • Personal Financial Specialist (PFS)

Planners with these titles have generally completed several years of intensive study in financial planning, passed a comprehensive financial planning test, and have previous experience working in the financial planning field. A code of ethics is usually a part of each designation as well.

Financial planner professional associations

One resource for finding a financial planner is the various professional associations that serve them.

By identifying the various planning associations and understanding which professionals they serve, you can better locate a financial planner who is suited to your needs.

  • National Association of Personal Financial Advisors. The National Association of Personal Financial Advisors (NAPFA) is made up of financial planners who charge fees for their service rather than commissions on financial products they sell. Financial planners in NAPFA are not paid by any outside companies or agents to sell you specific products or services. They agree to be paid only by their clients.

  • Financial Planning Association. The Financial Planning Association serves all financial service professionals. The FPA welcomes all financial planners and other professionals involved in any of the particular disciplines of financial planning. Though all related professionals are welcomed, the FPA does promote the attainment of a Certified Financial Planner license by anyone who practices financial planning. They also promote this license to the public as the designation of choice for financial planners.

Each of these organizations will be happy to provide a referral to their members in your geographic area.

Finally…

A financial planner with one of these certifications may be a good fit for you. Within certain guidelines, brokers and insurance agents can also offer you financial guidance and are licensed by the states in which they sell securities or insurance products. They generally earn commissions on the products they sell you.

It is up to you to decide who is qualified to give you advice. After all, it's your money.

Summary of using financial planners

The more you put into your time with a financial planner, the more you will get out of it.

A financial planner is there to help you set and meet financial goals in various areas of your financial life.

Your planner will take a look at where your finances are now, what your financial goals are, and what steps you can take to help meet these goals.

If you understand what financial planners can do for you, how they charge for services, and the different licenses they carry, you may have a better financial planning experience.

Practical ideas you can start with today

  • Ask trusted sources for planner recommendations, review the planners' credentials, get references from them, and interview some.

  • Investigate whether your prospective planner has a disciplinary history with the appropriate professional organization.

  • Thoroughly discuss and document what services the planner will and will not perform.

  • Understand how your planner will be compensated. If compensation is based on product sales, understand any conflicts of interest.

This content was created in partnership with the Financial Fitness Group, a leading e-learning provider of FINRA compliant financial wellness solutions that help improve financial literacy.

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