Now that the stock market — for 10 years the savior of prodigal Baby Boomers — has suddenly turned fickle, more Americans may be coming to a painful realization: They need substantial help with their finances.
The strategy of saving for retirement by buying the latest hot mutual fund or technology stock is failing many people this year, and millions are discovering that creating a secure retirement nest egg may be a more complicated and time-consuming business than they thought.
When it comes to straightening out your finances, there are two ways to go: alone or with hired help.
Doing it yourself is labor-intensive. If you hire, the problem is finding the right professional. Traditional brokerage firms increasingly offer comprehensive financial management services that go beyond basic investment planning to include such things as retirement planning, estate planning and coordinating insurance coverage.
For many people, especially those who have a long-standing relationship with a broker they know and trust, a brokerage firm could be a viable option. It can be particularly helpful if you need help picking stocks, which is the firms’ traditional area of expertise.
However, for those who prefer to avoid dealing directly with someone whose main job is selling stocks, hiring a financial planner is probably the best alternative. How do you find someone who can do what you want at a price you can afford? Here’s a guide:
– Consider your needs. Many people think they need help with everything, but their main issues usually boil down to one or two things. You may be great at budgeting, for instance, but not know how to invest. Or you may have invested a lot, but now need tax or estate-planning advice. Consider whether your profession or family circumstances make your situation unusual. This is pivotal for two reasons. First, planners specialize. If you need estate planning advice, you need an expert in wills, trusts and tax issues. You may need a tax accountant or attorney rather than a financial planner.
If your main concern is budgeting, you may be able to get free or low-cost help from a nonprofit credit counseling service or a book.
Second, if you tell a planner you want it all, be ready to pay a lot.
– Decide how — and how much — to pay. There are three ways financial planners are paid: fees, commissions or a combination of the two.
The fee-only approach eliminates obvious conflicts of interest. It’s likely to be the best option for people who have considerably more money than time to evaluate their choices. However, conflict-free advice comes with an up-front price tag — often $1,000 to $2,000.
Debra McLamb, a 38-year-old lab technologist from North Carolina, is hoping that a fee-only planner will help her save money on insurance products and find investments that will perform well enough to make up for the expense.
“The thing you worry about is whether you’ll get your money’s worth,” she said. “I’d hate to pay $1,000 and have them say, `You’re doing a good job. Keep it up.’ “
Commission-based planners, meanwhile, charge nothing up front but recommend products that give them a cut. If the advice proves sound, this method can be the best value for people with modest incomes. But because these planners don’t eat if you don’t buy something, you may not get much help in areas that don’t generate fees.
If you’re somewhere in the middle — say, a family able to meet current obligations but uncertain about whether you’re saving enough to address long-term goals — you may be best served by the hybrid: planners who are paid through a combination of fees and commissions.
– Know the potential conflicts involved. Before you choose a type of planner, evaluate your ability to spot advice that’s in the planner’s interest rather than your own.
“It’s not about how you are paid, it’s about putting the client first,” said Janet Briaud, a fee-only planner with Briaud Financial Planning Inc. in Bryan, Texas. “There are some very competent people out there who are paid by commissions, or fees and commissions. You, the consumer, just have to realize that there can be conflicts.”
This process is a bit easier if you understand where the commissions, and thus the conflicts, are biggest. Here is a brief list of examples:
All insurance products carry commissions. Term insurance, the type that pays only a death benefit, pays the smallest commission, while cash-value insurance pays the biggest — as much as the entire premium payment for the first year.
A load mutual fund charges either an up-front or back-end fee, figured as a percentage of your investment. Generally, the bulk of that fee goes to the planner who recommended the fund. Brokerage and asset management services also can provide planners with commissions based on how much you trade or how much money you have the planner manage. There’s nothing wrong with paying a commission. However, you should know how much you’re paying and be able to evaluate whether you’re getting sufficient value for your money.
– Do some things yourself. In an ideal world, you’d hire a fee-only advisor to help you budget, do your investment plan, evaluate your need for life, health and disability insurance, structure your college savings account and help with tax and estate planning.
In the real world, money is finite and top-notch advice is expensive.
Consider whether you can afford to pay for advice on just your highest priorities, and address the less-important issues with research you do yourself, using newspapers, self-help books and Web sites.
– Call planner referral lines. There are a number of financial planner referral lines. These are largely automated and don’t let you request people who specialize in the services you need. However, when you follow up, be sure to ask about their areas of expertise. For fee-only planners, call the National Association of Personal Financial Advisors at 888-FEE-ONLY. If you are looking for fee-based and commission-based planners, call the Financial Planning Association at 800-282-PLAN. You can also get a list of local planners on the FPA Web site at www.fpanet.org.
– Interview prospective planners. Winnow your list to a few planners. Set up appointments and prepare. (Many planners do not charge for these initial interviews, but a few do. Make sure you know before you go.) Both the FPA and NAPFA offer free booklets that provide a series of suggested questions.
If the planner says he or she specializes in your area of interest, ask about common problems and how the planner solves them.
Ask about fees and how the planner likes to work. If the planner is paid through fees, are you charged by the hour or a flat fee? If payment is by commission, which products pay the most?
– Collect planners’ financial disclosure forms. All licensed financial advisors are required to file a form ADV with the Securities and Exchange Commission. They are required to give you a copy of the second part of this form, but most planners will give you both parts if you ask. One section tells you about your planner’s disciplinary history and another shows how the planner is paid.
– Double-check planners’ histories with the NASD. Also call the National Association of Securities Dealers’ public disclosure hotline at 800-289-9999 and get a copy of your broker or planner’s legal history.
– Trust your instincts — and plan to review performance regularly. When making a final decision, go with your gut. Is your prospective planner a good listener? Is this a person who will be willing to answer your questions? Is he or she willing and able to consult other experts on difficult issues?
