Financial Planners – Good Ones Earn Their Pay

Financial planners are more than just stock brokers – they are trained professionals who have a fiduciary duty to put their client’s interests ahead of their own.

Unfortunately, a minority of financial planners have given the whole profession a bad name, mostly by recommending investment products based more on the commission that the planner receives than their appropriateness for individual clients.

The ease with which one can trade online and the abundance of free investment information available on the internet have caused some people to feel that they don’t need financial planners, but while hiring a financial planner may not be the right move for every investor, a good financial planner can be worth far more than you ever pay him or her.

The key is finding the right financial planner.

What is a Financial Planner?

Typically, a financial planner (also sometimes known as a “financial advisor”) is someone who is licensed to sell stocks and other securities (bonds, mutual funds, etc.), as well as insurance products. Some financial planners may even be able to give tax or legal advice.

One major distinction among financial planners is how they’re paid. There are fee-based financial planners and commission-based financial planners. For high-net worth investors, fee-based planners are probably the best fit.

This is because you’ll never have to worry about your planner steering you into an investment solely to line his pockets with a fat commission check – he is paid to give you advice, not based on what you actually buy or sell.

If your financial planner’s advice doesn’t pan out over the long run, you’re unlikely to stay with him.

This doesn’t mean that commission-based planners are all bad. Few financial planners are able to build a fee-based clientele directly out of college – they have to earn their stripes, as it is said.

The best commission-based planners usually graduate to fee-based advisory, but in doing so, they may be pressured by management to leave their lower net-worth clients behind. Truly professional financial planners will always do whatever they can to accommodate the needs of their existing clients, even if their assets are modest.

After all, financial planners, like doctors and lawyers, have a duty to those whom they serve, not to their employers. When you are the client of a financial planner, you are his or her real boss.

Evaluating Client Needs – The Foundation of Financial Planning

Perhaps the greatest benefit of hiring a professional planner is that he or she has experience evaluating the needs of various types of investors. It’s sometimes hard for us to sit back and evaluate ourselves – and, of course, we may not know all of the investment products and tax strategies that a trained financial professional works with on a daily basis.

Financial planners can take a look at their clients’ financial well-being, goals, and risk tolerance, in order to develop a truly comprehensive financial plan, that goes well beyond “buy, sell, or hold.”

For starters, your financial planner may recommend a given asset allocation. Financial advisors tend to recommend that younger people have a greater percentage of their portfolios in equities (stocks), whereas older folks concentrate more on fixed-income securities (bonds).

The logic behind this is that young people can afford to take more risks – over the long term, the stock market generally outperforms the bond market. But for older people, what if the stock market crashes the day before they’re set to retire?

They don’t have the time for the market to “correct itself” that younger people do, so this is why financial planners generally recommend that people begin slowly moving out of stocks and into bonds as they age.

But this is just a simplified case. Perhaps your needs are a little out of the ordinary. Perhaps you haven’t saved enough for retirement. A good planner will recognize this and recommend that you’re aggressive with your investments, even in older age.

Maybe you’re young, but you have an incredibly weak stomach. You like to play it by the book, and everything you read says you should be heavily in stocks, but a good financial planner will steer you toward big cap blue chips with a healthy dose of fixed-income, and your stomach will thank him for it.

The key is that experienced financial planners have seen other clients in similar situations, and yet they are able to zero in on your unique needs. This type of financial professional is worth every penny that you pay him, because he measures his success by your success.

William Smith