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How to Choose a Financial Planner

Today, a guest post from Ryan.

A few months ago we talked about the benefits of DIY investing vs. hiring a financial planner. There are definitely reasons to go both routes. Maybe you thought that the DIY approach was your best option but after six months of trying to go it alone (albeit with the help of sites like 1Wealth Trading to help you master the basics) you’ve decided you’d feel safer hiring a financial planner to help you get your portfolio (and financial future!) on track.

So how do you do that?

1. Beware the Commission

Before you even meet with a financial advisor or planner, find out whether or not that person is working on salary or commission. It is always better to work with someone on salary. Why? Because commission based financial planners and advisors only make money on what they sell you for your portfolio. This makes it harder for them to resist taking risks with your investments. You don’t want to have to worry about your planner’s motivation.

Note: Obviously not every commissioned financial planner is going to sell bad stuff to make a commission! Most commissioned advisers and planners are highly honorable people. But do you really want to have to wonder about the person’s motivation?

2. Look for the CFP Certification

Believe it or not, most financial planners only have to pass two tests to be considered “qualified” to sell investments and insurance. From there, they can go on to purchase a lot of other certifications to help them add credibility to their reputations. Sorting through all of the certification initials after a planner’s name can be difficult and confusing. The certification you want to see the most is CFP®. In order to obtain this certification, the planner is required to go through extensive training, testing, pass a background test and have three years of full time experience to their names.

3. Experience Matters

CFP certification requires a minimum of three years experience, but it’s good to go with a planner who has been on the job for a while. The lengthier your potential planner’s history, the more experience he or she has with finance as an industry. The “greener” your planner or advisor, the more likely it is that he or she is relying on sales training than any sort of practically built financial experience. A good rule of thumb is ten years. Ten years is the average length of a market cycle.

4. References Matter

Always always always check a potential planner or advisor’s references. Get these references from multiple sources as well. You don’t want to rely solely on the references given to you by the planner you’re interviewing. Ask around to see who your friends and colleagues choose to work with. Run your potential advisor or planner’s name up the proverbial flagpole to see if your friends or colleagues have heard of him or her before and to find out what sort of impression they got. Do an actual background and reputation check on every potential candidate. This includes double checking certifications, checking with the BBB, etc. It’s better to be safe than sorry. After all, it’s your money, right?

Finding and choosing the right financial planner or advisor isn’t something you can do with a quick Google search. This isn’t online dating (though it can feel that way sometimes). You need to actually spend time with and thoroughly vet every potential candidate before you trust anybody with your money and your financial future.

  • Simon @ Modest Money August 29, 2013, 7:57 am

    If one can can plan their own finances by themselves, by all means that might be a good option. But if you want to really take your finances to the next level, by all means hire a CFP. And I couldn’t agree more…references matter a lot, before you sign the dotted line, its good to know you are opening your finances to a person of integrity who has helped others significantly in achieving finindependence.

    If the live what they preach/advice, the better!

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