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The Truth About Choosing A Financial Planner (Part 1)


The industry is going to hate this article. As such I fully expect to be attacked in every way possible in the comments below. My editor loves the idea as controversy means clicks, and clicks mean more money. That has nothing to do with the content of this article. This is written from my experience as a Financial Planner and the thousands of mistake laden plans I have had to fix. The industry has ruined a once proud profession for the sake of pushing products and growing fear among investors. A good financial plan is well thought out, meticulously calculated, and is a reflection of the wants and desires of the client who lives with it. The industry has spent the last decade supplying investors with crap. An eight page summary of why you should buy my proprietary mutual fund, made by a five minute software planner is crap, I'm sorry if that hurts, but you had it coming. So lets get on with the truth.

Designations are Meaningless
CFP, ChFC, CLU, ABCDEFG.....All crap. What they really mean are we took industry designed tests and passed them to regurgitate what Wall Street wants you to believe. So lets ignore the content for a moment and look at the designations themselves. For years the CFP (Certified Financial Planner) has been the gold standard among financial professionals. In fact, nearly every article I read for researching this article listed a CFP as a must for your financial planner. (Author's note: All were written by CFP holders) Here is the issue I take with the CFP. They let non-fiduciaries, and people who work on commission use the designation AND claim to be "fee-only". What?!?

Your financial planner needs to have only one interest, yours. By allowing conflicts of interest the CFP Board has sold you the investor, out to the Wall Street machine. Imagine if you had a bad heart and your cardiologist told you to eat all the fatty foods you wanted, because he makes a lot of money on bypass surgeries. You'd want his medical license revoked! The CFP Board would use him to market to prospective planners as to how "CFP® professionals with less than ten years of industry experience are twice as likely to earn more than $215,000 annually" If you view their website you will find it difficult to find the benefits to the investors.

That's not to say that designations are bad. They are not. It just means that a person has had some formal training, which if they have a license means they have also had some formal training. My point is: Ignore the designation unless it specifically applies to you. For example, I hold a ChFEBC(sm) designation. It stands for Chartered Federal Benefits Consultant and is issued by Snowe Seminars to work with Federal Employees. Federal employees and military personnel have unique benefit plans and I have been trained to understand how they work and advise on them. That's it. Very specific. So if you're an active duty soldier looking for financial planning, you will want to talk to me. If you are a firefighter, and want to talk about disability insurance, I'm going to refer you to someone with a DIA (Disability Insurance Associate) because firefighters are at an extremely high risk for disability, and you need an expert. In the world of designations generalities are worthless.

Licenses are Meaningful
What most people don't understand is that anyone can call himself a financial planner. The term is generic and not licensed, so please ignore that term beyond the noun/verb combo. I can clean a toilet, it doesn't make me a plumber. In the Financial world there are really only a handful of licenses that effect who can legally work with the public. Let's start with the most basic.

  • Insurance Producer - My first license to work with the public allowed me to sell them life insurance, Fixed and indexed annuities, disability insurance, long-term care insurance, group insurance plans, and even health insurance for a commission. Often called "Agents" these guys dabble in the investment world with a Series 6 & 63 and are focused on one thing, selling you lots of insurance. They cannot charge a fee for their work so they only get paid if you buy. There is an old adage in the financial world that "Insurance is sold, not bought", and for the most part that is a true statement. Online life insurance sales are dismal and insurance companies could dump these guys they would. They are expensive and a liability, but they have allowed insurance companies to be amazingly profitable for the last 150+ years in America. Many are wonderful, knowledgeable, caring people who are a credit to their industry. But, if there is a company name on their business card, you are probably working with a "captured agent", which means he's only selling what his company has to offer. This conflict of interest in inherent, and must be considered before choosing this person as your planner. Consider an independent agent if you must go this route.
  • Series 6 & 63 - Allows Insurance Producers to sell Mutual Funds for a commission (also called a load), approved by their insurance company, now referred to a broker/dealer (a whole nother issue).You can't be independent with this license.
  • Securities Broker (AKA Series 7 & 66) - The Stockbroker License. This gives an individual the ability to buy and sell securities for a commission. The broker can also sell Mutual Funds, and most anything under the sun other than commodities futures (That's a Series 3 and we don't have time for that). Just like the Insurance Producer, Stockbrokers have a master broker/dealer that tells them what they can and can't sell. Think of this like buying a house. The real estate agent is your broker. If you want to buy a house your agent shows you all the houses in her inventory first, then goes to the open market if nothing there interests you. Now imagine the boys back at the home office trading the house back and forth to pump up the value before you buy it. Welcome to the world of the broker dealer. Sales by brokers do not have to be in your best interest (that's called fiduciary responsibility and the B/Ds have been fighting it for years), they only have to be suitable. Meaning he can't take a person looking for a 3 bedroom home and sell him 3 pop up trailers ,or a skyscraper with fire damage. A two bedroom home with a busted septic is close enough to pass suitability.
  • Registered Investment Advisor/ Investment Advisor Rep. Series 65 - A quick primer: the RIA is the firm, the IAR is the person who works at the firm, the Series 65 is the test. Now that that's settled, the IAR is what you traditionally consider a financial planner. They are the only ones allowed to charge a fee for financial advice. They work on a fee-only basis and usually don't care what you buy. There is no conflict of interest because IARs are paid a fee for developing a financial plan and a percentage of your assets they manage (usually between 1% - 2%). Therefor if you earn more money, the IAR earns more money, if you lose money, the IAR loses money. That also means no commissions.
  • Hybrids - The problem in the financial industry for the public is that they are never sure who they are sitting across from at the table. Many financial professionals have all of the above licenses and are never clear when they are wearing which hat. Since you will sign your name to 20 pages with 50 initals you will probably never know, so you need to ask! Be straight-forward and ask which roll your advisor is playing at which moment. If they dance around the subject, or want to know why you are asking, get up and leave and never go back. You can't afford to work with someone who is deceptive.

Be sure to read more in Part 2.

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