Top 5 Things to Look for in a Financial Planner

Jul 22, 2011

WARNING: Please do not read this blog post before you go to bed, it may keep you up all night with sheer excitement and enjoyment.  I recommend reading this out loud to a large audience at a party or social gathering.  Instant friends and joyful applause when applied.  I dare someone to do this and send me the video...please, it will make my day. Okay, here we go...

If there’s one thing you want to know about your financial planner, it’s this: Is he or she qualified? This isn’t necessarily something you can find out from surfing the Web. Here are five things you’ll want to know when you’re selecting a financial planner.

  1. Is your financial planner licensed? If you have an illness or physical injury, you ask to see a licensed medical professional—an M.D. or a surgeon. So, if you’re asking for financial guidance wouldn’t it make sense to seek out a licensed financial planner? I recommend a Certified Financial Planner™ or Charter Financial Analyst.

  2. How is your financial planner compensated? There are two compensation models in the financial industry—commission-based and percentage or fee-based. The commission-based advisor receives a commission based on the investments he recommends. This model has built-in potential for conflict-of-interest. An advisor might recommend one investment over another simply because it earns him more money. Then, he’s out of there! The percentage-based advisor receives a percentage of your total assets under management. He sits on the same side of the table as you do, and he’s in it for the long haul. With this model, you can be confident that your financial professional is working in your best interest.

    To get a better idea of how big an impact the compensation model can have, let’s go back to our medical example. Say your doctor diagnoses you with a severe illness for which there are two potential medications—Medication A, which has a 90-percent cure rate and a 25-percent commission or Medication B, which has a 65-percent cure rate, and a 40-percent commission. If your doctor operates under a commission-based model, which medication will he recommend? Hopefully, he would recommend Medication A, but do you really want to take the chance? Financial health is just as important as physical health. Your financial planner should be thought of as a financial doctor. You should be able to trust his or her advice.

  3. Does your financial planner actually do financial planning?! Some financial planners only deal with your investments, and not your overall financial picture.  You should always make sure to ask your potential planner if they do comprehensive financial planning on topics that are important to your unique financial situation.  Some of these topics include; education funding, retirement planning, estate planning, income tax planning, insurance needs, etc.  A true financial planner should have the knowledge base to be able to adapt to different life stages of their clients.

  4. How knowledgeable is your planner about all types of investment options? Some planners focus on specific investment products. This may have a large negative impact on your long-term portfolio returns. Don’t sell your financial future short. To have a properly diversified portfolio, it takes an investment manager with a wide range of investment knowledge.

  5. Has your financial planner ever been sued? It’s an obvious question, but one worth mentioning. Some financial professionals have been sued for inappropriate management. If your financial planner is a CFP® or CFA, you can go to or and do your own background check. This is definitely not going to show up on your financial planner’s Web site!

When it comes to selecting a financial planner, doing a little legwork now can reap significant rewards in the future!

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