A longtime reader of The (San Jose, Calif.) Mercury News wants to know: “What should someone look for when shopping for a financial planner?” In this column, let me set the foundation. In the next one, I’ll help you shop.
J.M. and her husband are in their 60s, are living on Social Security and are “asset rich but income poor like many seniors.” Previously, they had a good experience with a financial planner who is now retired.
While I have written about the financial services industry and how different “advisers” are regulated, I have not addressed how to choose a “financial planner.”
A key reason deals with how financial planners are regulated â or not regulated. It is a complicated subject, and as someone who got her start on Wall Street as a lawyer and who is currently the principal of a money management firm regulated by the U.S. Securities and Exchange Commission, I feel this is the most important piece of the puzzle. How a planner is regulated will set the stage for the planner’s service offerings.
First, quoting FINRA (the regulator of the brokerage industry), “the financial planning profession does not have its own regulator. Instead, individuals who call themselves financial planners may be regulated in relation to other services they provide” (http://www.finra.org/investors/financial-planners).
For example, a financial planner who sells investments is regulated by FINRA as a broker. Someone who sells immediate annuities or life insurance would be regulated under state insurance laws. A financial planner who acts as an investment adviser is regulated by either the SEC (large firms) or by the state where the adviser does business (smaller firms).
There are financial planning services that are not regulated, such as the creation of a financial plan or bill paying, for example. That is why it is essential to understand the scope of services desired.
Second, quoting the CFP Board (a nonprofit organization that seeks to foster professional standards in personal financial planning): “Any person may hold himself or herself out as a ‘financial planner’ without being required to meet basic competency or ethical standards.” However, there are some planners who earn credentials that do require adherence to standards, such as the Certified Financial Planner, a designation conferred by the CFP Board of Standards Inc. To earn that designation, the planner has to show experience, complete the CFP course, pass a test and keep up with continuing education requirements.
A planner having initials behind his or her name is not enough, of course. “Some financial planners might use designations that require little experience, study or continuing education — or which lack processes for verifying if the person actually holds the credential or for filing complaints,” according to FINRA.
Third, you’ll want to check out the person’s background.
Fourth, because there are so many ways financial planning services can be delivered, it’s important to understand the actual service being offered.
“If planners or their business associates sell financial products, their recommendations typically will correspond with the products or services they sell,” according to FINRA. “For example, an insurance agent will tell you about insurance products (such as life insurance and annuities), but likely won’t discuss other investment choices (such as stocks, bonds or mutual funds).”
You can see why the regulatory structure is so important. We’ll talk more about it next week.