Be sure the planner has experience helping people with backgrounds similar to yours, advises Irene Leech, a consumer studies professor at Virginia Tech and a NAPFA consumer representative. Ask the planner to describe a typical client. Find out how long the person has worked as a planner. And ask if he or she is a fiduciary and will put that in writing. In doing so, the planner agrees to always put your interests first.
In general, an adviser should have the certified financial planner designation, which is awarded by the nonprofit, Denver-based Certified Financial Planner Board of Standards. The title indicates the individual has met CFP education, examination, and experience requirements and has agreed to adhere to the organization's code of ethics. A CFP also is independently registered as an investment adviser with his or her state or with the Securities and Exchange Commission.
3. Understand how the planner is paid. The most common types of arrangements are fee-only, fee-based, and commission-based. Fee-only planners do not take commissions on investments they recommend to you but instead charge either a fixed fee or an asset-based fee, typically 1 to 2 percent of the assets under management. For many people, paying by the hour for planning advice can be more cost-effective. Fees can range from $120 to $300 an hour.
Fee-based planners can earn commissions on investments they sell you while also charging a fee. If a planner receives commissions, that can pose a conflict of interest, Garrett warns. If the planner won't provide full disclosure about pay, move on.
Ask for a written agreement detailing the total compensation and services that will be provided. Will the planner review your total financial picture, from retirement accounts to taxes, or just part of it? Be clear on how often the adviser will be available to you.
4. Do a background check. Shift into gumshoe mode. Ask to see the planner's ADV Form, Part II. This is a form that a planner files with the SEC; state agencies require similar filings. It contains information about the adviser's background, services, and fees. Next, check with the adviser's state securities regulator to make sure the individual is licensed and to check for complaints. State-by-state contact information is available at NASAA's Senior Investor Resource Center. The Certified Financial Planner Board of Standards investigates complaints filed against CFPs and lists any disciplinary actions on its website. If the investment adviser in question was a broker/dealer registered with the Financial Industry Regulatory Authority, formerly NASD, the adviser may have been subject to disciplinary action. Do a broker check at finra.org.
5. Ask tough questions. After your sleuthing, schedule a face-to-face interview with your top three picks. Why wait? Simple psychology. If you meet beforehand, a persuasive sales pitch might sweep you away. Don't be afraid to ask questions until you're satisfied. "You're in the driver's seat," says Garrett. "Think of it as a job interview. But remember, this time you're the employer interviewing them for the job."
You should feel you are getting straightforward answers to your questions. There is nothing wrong with asking a prospective adviser how he or she defines success with a client. Is it a certain rate of return for a portfolio? Or helping a client save or make a certain amount of money? Regardless of how at ease you are with the planner, ask for references from one or more current clients or, better yet, a professional reference—and be sure to call them.