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A NEW APPROACH TO SELECTING A FINANCIAL
PLANNER
Selecting a financial planner has never been an easy task.
Yes, experts have long advised checking such things as a
person's experience and education, as well as their regulatory
record. But in recent years, selecting a planner has become
especially difficult given so many financial professionals,
including stockbrokers, insurance agents and bankers, often
provide similar services, such as comprehensive financial plans
and investment products.
Resolution of an upcoming court case involving the Financial
Planning Association® (FPA®) and the Securities and Exchange
Commission (SEC), may soon make it easier to tell the difference
between a financial planner and other types of financial and
investment representatives.
In the meantime, however, experts say there are a number of
ways to distinguish a financial planner from other types of
financial professionals.
Consumers should focus on the following issues: regulation,
fiduciary responsibility, disclosure and values. First, the
issue of regulation. The SEC regulates the actions of registered
investment advisors (RIAs), some of whom are financial planners
and some who are also investment advisers who do no financial
planning. By contrast, NASD regulates the actions of registered
representatives, or what are more commonly called stockbrokers,
and insurance agents who deal with securities and mutual funds.
The SEC regulates the actions of financial planners, who must
comply with the Investment Advisers Act of 1940. Under that Act,
financial planners must provide — and periodically update —
clients
and the SEC (or state securities regulators) with information
about themselves and their records; brokers are required to
provide much less information. Financial planners also perform
more comprehensive services for clients, including
recommendations of appropriate asset allocations. Brokers need
only recommend (and handle orders for) securities purchases and
sales, being careful to limit recommendations to those which
they consider "suitable."
In short, RIAs who are financial planners are obligated to
place the clients' interests above their own. Stockbrokers were
traditionally exempt from registering under the 1940 Act and
were exempt from fiduciary responsibility when buying and
selling securities on behalf of their clients, including
non-discretionary accounts. Therefore stockbrokers need not
place their clients' interests above their own but merely meet
the standard of "knowing their customer" and making
"suitable" recommendations. In many cases,
stockbrokers or insurance agents who provide a financial plan or
investment plan do so as an "incidental" service.
According to FPA, the current SEC rule presently allows
stockbrokers to avoid the fiduciary and disclosure standards of
the 1940 Act while being able to provide the same services as
financial planners. The SEC presently prohibits stockbrokers
from calling themselves financial planners, although it allows
them to use similar titles such as financial consultant and
financial advisor, and to provide fee-based advisory services
such as retirement planning under more lenient broker-dealer
sales regulations.
As for disclosure, financial planners who are registered as
RIAs with the SEC are required to disclose conflicts of interest
and their qualifications.
Of note, financial planners (and others) registered under the
Investment Advisers Act face the risks of higher liability for
violating fiduciary and disclosure standards; brokers registered
only under the Securities Exchange Act of 1934 are not
considered fiduciaries and do not have to disclose as much about
themselves and their businesses. Insurance agents who call
themselves financial advisers may face even less regulatory
oversight than brokers.
When searching for a financial planner, consumers might
consider asking whether the financial planner is legally
required to act in the client's best interest, and whether the
broker's recommendations are "solely incidental advice" or
not. This is especially important given that both financial planners
and stockbrokers may derive compensation from fees based on
percentages of assets managed and/or hours of consultation and
related services. Brokers offering fee-based advice must also
provide a consumer warning statement to new clients that the
account is a brokerage, and not an advisory account.
When searching for a planner, it's typically a good idea to
take advantage of resources that provide access to financial
planners. FPA's PlannerSearch, which can be found at www.fpanet.org/public, is one such service. In addition, FPA has
several consumer publications designed to help people choose the
right planner to meet their needs. FPA suggests that consumers
request a written disclosure document from the planner, such as
the Form ADV. Consumers can also review the NASD web site to
find disciplinary action taken against registered persons. The
Form ADV answers many questions, including those regarding a
planner's work, disciplinary actions, experience, compensation,
method of planning, areas of specialization, and business
relationships the planner has that might present a conflict of
interest. Consumers may also want to ask whether a potential
planner will provide an Agreement of Engagement Letter
documenting and describing all services to be provided and all
fees that will be paid by the client — and/or all compensation
to be received by the planner from "outside" sources.
Some further issues to consider when selecting a financial
planner:
- Experience with the client's
issues
- Credentials and education
- Price and methods of
compensation
- Investment philosophy
- Approach to financial planning
- Ask for at least 3 existing
client references
Since trust is at the heart of any working relationship with
a planner, it's important that the consumer work with someone
whose actions and words are consistent with the letter and
spirit of laws and rules related to financial planning.
April 2006 — This column is produced by the Financial
Planning Association, the membership organization for the
financial planning community, and is provided by Don McCarty of
Financial Decision Partners, a local member of the FPA.
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