Things to Watch out for When Working With Financial Planners

One undisclosed financial planner offers an inside look into the profession, and points out some things to look out for when working with a financial adviser. First, be aware of how many different qualifications there are and that not all of the letters after a name or the titles require the same amount of work or study – some titles or prestigious labels can even be bought for a certain amount of money.

Second, financial planners are in business to make money, and they make that money off of you. There are three ways planners typically charge: by commission, by charging an asset-based fee, or by charging hourly. It is important to know how your planner charges because it can explain the motivation behind some of their suggestions.

Financial planners who charge by commission might charge from 1 to 10 percent for certain annuities. These planners will obviously want to sell you products that will yield the highest commission. Those products usually include: load-carrying mutual funds, hedge funds, private investments, and a range of insurance investments.

Planners on a fee-based plan are less likely to have a conflict of interest in theory because their fee is attached to the growth of your portfolio. The conflict, however, is that fee-based planners will try to capture as much of your money as they can. For example, it is not likely that a fee-based planner would tell you to pay off your mortgage over investing that money because using assets to discharge a loan could cost them potential fees.  Some planners utilize the fee-model and charge commission.

Charging hourly is a rare model. A list of some hourly planners can be found through the Garrett Planning Network. Even these planners are not immune to conflicts, as they could rack up billable hours that might not be necessary to the client. The main idea is that you should be aware that no model is conflict-free.

Another important piece of advice that the financial planner shares is that you should never sign any document agreeing to services, or otherwise, with a financial planner within your first meeting with a financial planner, because they are doing everything that they can to sell you on their services by appealing to your emotions. The planner does not mean to discourage the use of a planner or indicate that all of them are deceiving you or out to take advantage of you. The planner just wants you to be aware of the ways planners could manipulate your emotions, and certain conflicts that could arise, so that you go into the planning process with your eyes open.

See Allan Roth, How to Choose a Financial Planner, AARP, Mar. 23, 2012.