How to Choose a Financial Planner

Sometimes, even confirmed do-it-yourselfers need investing help. Sifting through data from thousands of mutual funds can be time-consuming. Choosing between a traditional or a Roth IRA can be confusing. And tax issues add a layer of complexity to nearly every decision.

As tough as it may be to decide to seek professional help with your finances, it can be even tougher to pick the right planner. Too many people leave it to chance or whimsy. You probably spend more time selecting a car than you would a financial advisor.

But if you're going to get good financial advice, you need to take it seriously. Think of yourself as an employer. And you are now in search of the perfect employee.

How Do You Find Your Perfect Planner?

There's no simple answer. "Ask friends and advisers," recommends Bob Klosterman, president of the Institute of Certified Financial Planners in Denver. Ask your accountant or attorney. Talk to people you trust. Your "new employee" could turn up anywhere. I actually met a planner at the gym.

But if that doesn't work, try some of these Internet sites:

• The Institute of Certified Financial Planners site asks you to submit a small questionnaire. The institute will mail you a list of planners in or around your ZIP code. Come Jan. 1, results will be available instantaneously on the site.

• The International Association for Financial Planning site also has a listing of planners, though this group's members do not have to have the Certified Financial Planner designation. More on the importance of this later.

• A certified public accountant is not necessarily trained to give out financial-planning advice. But a CPA with a Personal Financial Specialist designation from the American Institute of Certified Public Accountants is qualified to be a planner. Check out the AICPA's site for a listing.

You should come up with at least two to three potential candidates. Then let the interviewing begin.

What Information Do You Need?

The goal of the interview is to judge whether you would feel comfortable working with your planner. This person will ask you many, many personal questions, not only about your money, but also about your family. So your interview should hopefully leave you with a warm, fuzzy feeling, or at least a small sense of comfort.

Some questions to ask:

What is your background?

Ask how long the planner has been in business, about his educational background and training and how he keeps up with the latest information. You can also ask whether he is a CFP.

To some, the CFP certificate is just another piece of paper. Anyone can take a test. But this test only has only a 70% pass rate. So it's not that simple.

CFPs also must subscribe to a code of ethics put out by the CFP board, so you can feel more comfortable they won't run off to Tahiti with your money. TSC Contributing Editor Vern Hayden wrote recently about certification requirements.

If a candidate does claim to be a CFP, you can go to the CFP Board Web site and confirm it. You also can check for any disciplinary actions taken against the planner.

Tell me about your practice and the type of people you work with.

Does the planner have all high-net-worth clients? If you are not in that league, will he devote enough time to your smaller portfolio? Are his clients' profiles similar to yours? If so, you know he has experience dealing with your issues. "You don't want to be the oddball in his practice," says Dee Lee, CFP and author of The Complete Idiot's Guide to 401(k)s.

Will I be working with you or with others in the firm?

This is key because after you spend all your time interviewing a planner, you don't want to be handed off to an assistant. If assistants will be handling your portfolio, ask to interview them.

How are you compensated?

Financial planners are paid either through fees from you or commissions from fund families or brokers.

Fee-only planners charge a flat fee, an hourly rate or a retainer based on the amount of assets under management. The hourly rate can run anywhere from $75 to $250, depending on the planner and your location, says Lee.

Fees for planners who charge a retainer can range anywhere from 0.5% to 1.5% of your total assets annually. That amount will be withdrawn from your account every quarter. To use these planners, you typically need at least $100,000 in assets.

Commission-based planners do not get fees from you. Instead they make commissions from the financial products they sell you. If you and your planner decide to invest in a fund with a load, or sales commission -- a Merrill Lynch fund, for example -- the planner would get a commission on that sale from Merrill.

Which is better, fee-only or commission? It depends on what you are comfortable with. Granted, an argument can be made that fee-only planners are more objective -- commission-based planners will steer you toward funds that pay the best commissions, the theory goes. But, by the time you pay fees and retainers, commission-based planners could end up being cheaper

What are your conflicts of interest?

Get full disclosure of all outside relationships. If an adviser handles funds from only a handful of fund families or brokerages, your options will be limited. If he handles no-load and load funds, will he push the load funds because they pay a commission?

The Bottom Line

Here's a question to ask yourself: Would you have coffee with this person? If you don't feel comfortable, you won't want to spend time with your planner, and your financial health will suffer.