The motivation to find a financial planner seems to be pretty prevalent in the twenty-something crowd. I’m not quite sure why that is, and frankly, I’m a little bit concerned and irritated by it. It is something that I never considered doing, so I’m not quite sure what motives are behind the urgency, but my theory is that those who are now gainfully employed for the first time generally don’t have much financial background and feel like they better get an expert on their side quickly before they blow it all.
Granted, if you’re not willing to put the time and effort into learning a thing or two about personal finance, you may want to find a financial planner. I’ve learned that when it comes to personal finance, people often times do not budge when they get an idea in their head, even if it goes against common sense. Getting a financial planner because it is the ‘thing to do’, is one of those cases.. If you do go with an planner, I would recommend limiting any conflicts of interest that may exist.
How to Avoid Conflict of Interest with your Financial Planner or Advisor
1. Pay for your Financial Planner by the hour or flat fee
Planners get paid in one of four ways: hourly, flat fee, commission from products sold to you, or by % of your assets managed. You do not want to get into a situation where you are paying a percentage of your managed assets to a financial adviser. If they manage your assets, you are prisoner to their ‘long-term strategy’, and poor results.
Also, you should avoid working with a planner that lives off of the commissions that they make from getting you into certain investments. When paying by the hour or a flat fee for a set number of appointments, both you and the adviser knows that the only thing keeping you coming back from one appointment to the next is the outstanding value and education that they are providing you.
Starting in April of 2017, financial advisers must follow the fiduciary standard, requiring them to act in your best interests for retirement accounts. Ask them to put it in writing that they are in fact doing so.
2. You pick the investments – Test your CFP
In your first meeting with your planner, ask them what sectors they think you should be investing in at the moment. Then go and do your research and pick out the one or two best funds within that sector. Take your picks back to your planner and see what they say. If they try to steer you away from those investments into something else, the odds are that they are probably getting paid a higher commission from that particular fund company, and you’re going to get stuck with a dud.
3. Hire a Financial Planner with No Previous Connections to you
Maybe the biggest fault people make when picking a planner is going with a family member, friend, or referral from a friend. This can create a situation where you feel guilted into following bad advice because you don’t want to hurt someone’s feelings or burn any bridges. This type of conflict of interest can lead to accepting poor advice passively.
4. Ask the right questions of your Potential CFP
Imagine starting a business and hiring a chief financial officer to run it. More than any other person in your company, your company’s profitability and your prosperity are largely dependent upon the skills that your CFP has. You would interview a number of people with some very tough questions and a background check for this position, would you not? So why should your standards be any less stringent when hiring someone to manage your personal finances? The Certified Financial Planner board has a list of 10 questions you should ask your financial planner interviewees. Also, check out my tips on how to choose a certified financial planner.
5. Be your own Financial Planner
If you have the time and motivation to learn a little here and there about personal finance, you can probably do without a financial adviser pretty easily. Educate your self on personal budgeting, investing in low cost mutual and index funds, saving for retirement in a 401K and Roth IRA, and paying off your debt, and you will be better off than most and can avoid all financial planner associated fees and conflicts of interest.
Don’t forget, always make sure your CFP is certified.
Have you ever worked with a financial planner? What have your experiences with conflict of interest been, if any?