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Dig a Little Deeper When Choosing a Financial Planner

Dec. 19, 2014
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By J.R. Robinson

Learn more about J.R. on NerdWallet’s Ask an Advisor

“How do I choose a financial planner?” is among the most common queries in online advice forums. The standard riposte (particularly from certified financial planner respondents) is to seek out a fee-only certified financial planner (CFP) and to contact CFP Board of Standards (the owner of the CFP service mark and the primary promoter and lobbying organization for the moniker) for a list of CFPs in inquirer’s area. But is this really sound advice?

As the CFP Board states on its website, “The CFP® marks are not the equivalent of an educational degree, a professional designation, or a title. Instead, the marks represent that you have met the standards required by CFP Board, including completing the education and examination requirements.”

Before 2006, a college degree was not a prerequisite for CFP certification. Even today, no prior academic background in finance or economics is required to become a CFP. Further, contrary to the CFP Board’s recent “Let’s Make a Plan” national television campaign, there is no formal academic research to indicate that planners who hold he CFP designation are any more qualified, trustworthy, or ethical than any other financial professional. To the contrary, there are numerous high-profile examples of unscrupulous advisers who have used the CFP label to build trust in order to defraud investors.

None of this intended to suggest that CFP holders are inherently unqualified to provide financial planning guidance, merely that the designation itself does not automatically assure consumers that the advisor under consideration has the experience, educational background, professional skills, or integrity he or she is seeking in a financial planner.

So where can consumers turn to find objective, meaningful information to guide them in their search for a financial planner? The short answer is SEC Form ADV. All financial planning firms whose business models include investment guidance must file this form with the Securities and Exchange Commission. SEC Form ADV consists of two parts. Part 1 is intended to provide the applicable regulatory authorities and the public with basic background information about the firm, including its corporate structure, number of employees, number and types of clients, compensation models, assets under management, other business affiliations, and criminal/regulatory event history. Consumers may easily access Part 1 filing information for any given firm through the SEC’s Investment Adviser Public Disclosure website.

Form ADV Part 1 does not lend itself particularly well to consumer reading and interpretation, but SEC Form ADV Part 2 is the primary disclosure document that all registered investment advisers (including financial planners) are required to provide to their clients. Commonly referred to as the “Customer Brochure,” the SEC requires Form ADV Part 2 to be written in plain English and to provide detailed information on “the types of advisory services offered, the adviser’s fee schedule, disciplinary information, conflicts of interest, and the educational and business background of management and key advisory personnel of the firm.”

Part 2B of the customer brochure (called the “Supplement Brochure”) provides detailed information about the individual representative(s) of the firm who will be providing guidance to the consumer. In short, the customer brochure provides a trove of information that consumers should know before entering into a financial planning relationship.

Form ADV is required to be updated each year with the SEC, and an updated version of the customer brochure is required to be delivered to all clients of the financial planning firm at least once per year. For consumers who are seeking to enter a financial planning relationship, individual financial planners are required to provide the customer brochure (Parts 2A and 2B) to all prospective clients before or at the time of establishing an agreement for services.

In terms selecting a financial planner, if the person under consideration cannot produce a copy of his Part 2B supplement brochure, he is not legally permitted to provide financial planning services. Beyond that, the brochure may be useful in helping consumers determine if the planner and his firm are a good fit for their interests. For example, consumers frequently complain about entering into relationships with the expectation of receiving comprehensive financial planning services only to find that the guidance they receive is heavily investment centric. Such disappointments may be avoided through a careful reading of the customer brochure. Similarly, the customer brochure will also reveal the prospective financial planner’s academic background, professional experience, compensation models, and whether he has any prior customer complaints.

While one would think that a reading of the customer brochure would be a critical component of the due diligence process for all consumers who are seeking professional financial planning guidance, in practice, Form ADV is an underutilized resource. Lack of public awareness (neither the SEC nor the planning community have been proactive in promoting its use) and the imposing, bureaucratic- sounding name of the document are likely prime contributors to consumer underutilization. The information contained in the customer brochure cannot, of course, guarantee ethical behavior by the planner or assure a successful relationship, but in terms of the scope and objectivity of the information it contains, its value easily trumps the standard CFP mantra for how to choose a financial planner.