By Stephen Hart
Learn more about Stephen at NerdWallet’s Ask an Advisor
After a long journey through the Land of Oz, Dorothy and Co. finally arrive before the great wizard. They find a giant head, a booming voice, lots of fire and smoke. Naturally, little Toto runs over and reveals the wizard is nothing more than a man behind a curtain, just pulling a few levers and knobs.
Does it ever seem like your financial planner is hiding behind a curtain, talking about big, important things, with flashy graphs and charts, and you’re left wondering: What’s going on back there?
It’s no secret that advisors have access to technology that has made financial planning and portfolio management easier, but it has also raised expectations. With the rise of so-called robo-advisors — which really should be called “robo index fund allocators,” since an advisor actually advises — there is now a great deal more onus on planners to prove their worth.
Let’s look at some important things you should know to make sure your financial planner is truly providing a valuable service and not just twiddling knobs.
Credentials do matter
You want a financial planner who is professionally trained, so make sure you seek out those who are qualified in the areas important to you.
The most widely known credential is certified financial planner, and it’s an important one when it comes to a financial planning relationship. Before people can take the CFP exam, they must fulfill education and experience requirements, which takes several years. After that, they must take an arduous daylong exam, pass a full background check and complete annual continuing-education courses including ethics and best practices.
Another well-known credential is certified public accountant. Generally, a CPA looks only at issues related to taxes, whether at an individual or business-owner level. However, a CPA can get an additional certification offered only to CPAs: the personal financial specialist. A CPA/PFS can give both individual tax advice and comprehensive financial planning advice. Some CPAs also get the CFP designation, as it’s more broadly recognized.
Other designations are designed to provide expertise in specific financial situations. While the CFP provides expertise in comprehensive planning, additional credentials may further an advisor’s knowledge in specific disciplines. Each comes with its own testing and education requirements. A few examples are:
- Chartered financial analyst (CFA): Specialty in investments and portfolios.
- Chartered financial consultant (ChFC): Similar to CFP but doesn’t require the exam.
- Chartered retirement planning counselor (CRPC): Focuses on retirement planning.
- Certified divorce financial analyst (CDFA): Specializes in the finances of divorces.
- Chartered life underwriter (CLU): Focuses on personal and business insurance.
Know what your goals are
“Financial planning” means different things to different people. I’ve seen some planners charge thousands of dollars for a few pages of high-level thoughts and recommendations, and others give out detailed financial advice for almost nothing. So it’s important to know exactly what your goals are before you find the right professional to help you.
If you’re looking for retirement and lifetime income planning, look for advisors who use a goals-based approach. This focuses on funding specific goals and often uses complex mathematical simulations to project likely outcomes based on certain investing assumptions. The goals-based approach is quickly becoming the norm in retirement planning. It’s the best way to get a holistic view of both your short- and long-term financial picture.
If you’re looking for advice related to a specific need, like financial planning for your child’s education, trusts for your estate or funding for a specific medical or long-term care need, it may be better to find an advisor who can use a cash-flow approach. Cash-flow planning will focus not only on your investment returns but on how often and how much you’ll be adding to reach your goal. It will also consider when you’ll have to begin drawing down your investments to fund the need itself. In this case, the focus is solely on a specific need, not your comprehensive financial picture.
Because the focus is on a singular item, there are far fewer factors to account for, unlike a more complex and comprehensive goals-based approach. Most goals-based planners can do a cash-flow analysis, but someone who mainly focuses on cash flow often won’t have the technology for goals-based work.
Know what you’re paying for
Are you paying an hourly fee for a one-time engagement, and the service is over once the advisor delivers the plan? Or are you paying to have your planner on retainer to consult with at any time? Are you paying for it as an additional fee, or is the fee rolled into an existing amount you’re already paying? What services are included in what you’re paying for?
These are important questions to have answered beforehand. Don’t be afraid to ask for specifics and to get them in writing.
Know how the plan is delivered
With new and better technologies available, more advisors are moving away from the thick binder and tree-killing mass of pages in the traditional financial plan. Most planning software now allows you to complete the bulk of the plan through an online portal and to have access to it after the fact.
So, back to the question at hand: What value does the planner bring in all this? If planning is now software-driven, do you even need a planner? Let’s look back to what happened with the Wizard of Oz. Despite his original focus on grandeur and pizzazz, he still had the answers. He had experience and knowledge to help solve the problems at hand. In fact, he helped Dorothy get back home to Kansas. She had the tools all along (the ruby slippers). She just needed someone who understood how to use them.
Your planner should have education and experience and should be staying on top of what’s happening in the industry. More importantly, he or she should be ready and willing to help you meet your financial goals. You may be wearing the ruby slippers that can get you where you want to go; you just need someone who knows how to help you use them. The ability to understand your current situation, where you want to be and how to get you there is the value your planner brings.