Do You Need a Financial Planner?

I'm a do-it-myself investor, but that doesn't mean I am against people using professional financial planners. Some people do their own car repairs or home renovations; I have no problem delegating those tasks to a professional.

If you don't have the interest or the time needed to research and monitor your investments, by all means, use a professional. But choose wisely.

First of all, ask about credentials. Although things have gotten a little better since the financial crisis of 2008, the terms financial adviser, financial planner, etc., are still not well-regulated. You'll see names with a lot of important-looking initials after them—designations that can represent anything from a graduate degree to a certificate of completion for an online course or weekend seminar. When you interview an adviser, ask what those letters stand for, and what was required to earn them. (And then google the credential to verify.)

Next, ask how the person gets paid. "My adviser doesn't charge me any fees," a friend of mine told me. "It just comes out of the investments." Sounds great. But how much are you really paying?

Look around at the offices. Is there a secretary? A coffee maker and comfortable chairs? Assistants? None of this is free. Nor should it be.

There are three ways financial professionals get paid:

1. Fee only (an hourly rate, or set charge per service)
2. Commission (a bonus for buying and/or selling a financial product for your portfolio). "It just comes out of the investments."
3. Percentage (an annual percentage of the assets under management). Most of the quotes I've heard run about one percent; slightly less for larger portfolios, maybe slightly more for small ones.

It sounds counterintuitive to pay a fee for financial advice from a professional when you could get the service "free." But think about it: an adviser who sells you products in addition to giving you advice has a conflict of interest.

Certainly, ethical financial planners would not steer their clients toward inappropriate investments. But if the choice is between a five-star growth fund with a sales charge and a hefty commission for the broker who sells it and a five-star growth fund with no load and no sales commission, that the client could buy directly from the investment company, which one would you recommend if you were the broker? Both meet your client's financial objectives, but only one pays your electric bill. You haven't broken any laws or deceived your client, and maybe you truly believe the fund offering you the big sales commission is better. (And it has to be lots better to make up for its up-front sales charge.)

Next, find out who is really managing your money. Is it truly the friendly family man who wooed you with a free dinner and informational seminar at a nice restaurant, followed by a free consultation in his plush office? Or a team of "experts" at a "headquarters" in another city? (Another middle man on your payroll.)

Also, find out if your money will be invested in publicly traded financial products, or proprietary funds set up by your adviser's company. Not only will you be able to do independent research on the performance of the publicly traded funds you've invested in, but if you ever decide to change advisers or move your money to another institution, you most likely will be able to transfer the assets "in kind," whereas a proprietary fund would have to be cashed out. When you cash out, you may be forced to lock in losses during a down market or face unwanted tax consequences.

Finally, you should expect transparency and accountability from your financial adviser. Open your statements promptly and read them, just as you would a bill or an estimate for a repair job. Ask questions if something is unclear. No question you ask is too stupid, and you should not be made to feel otherwise. Keep asking until you truly understand; insist that the adviser clarify in simple terms.

Establish up front whether the adviser will have the authority to buy and/or sell assets on your behalf and if so, under what circumstances. Don't let anyone talk you into a transaction you're not comfortable with, or into buying a product you don't understand. Never lose sight of the fact that it is your money, and the adviser works for you.

What advice can you share about working with a financial planner? I would love to hear your comments.

Sharon Marchisello is the author of Live Cheaply, Be Happy, Grow Wealthy