14 Oct I need a financial planner. How can I decide which kind?

Q. I have about $1.5 million in IRAs and 401(k) plans. I think I want to start using a financial planner. How can I decide if I should use someone who invests for me as assets under management or if I should just get a fee-only planner and invest on my own?
— Investor

A. Hiring a financial planner to help with your investments is a great investment.

But we understand there are so many different kinds of services — and ways that advisors get paid — that there’s a lot to take in.

There are several important considerations to keep in mind when selecting a financial planner, said Jeanne Kane, a certified financial planner with OneDigital in Boonton.

First, she said, you want to make sure you select a fiduciary.

“A fiduciary is legally required to act in your best interest when providing advice and investment recommendations, not their own,” Kane said. “The fiduciary is held to a higher standard of care and integrity than other advisors.”

Then you want to look at what kind of experience and education the financial planner has.
Kane said there are many designations that financial planners can earn in addition to security licenses to manage investments. She called the certified financial planner (CFP) designation “the gold standard.”

“These planners have had to take extensive training on all aspects of financial planning including retirement planning, estate planning, tax planning, investments, and insurance planning,” she said. “There is also a requirement that a CFP complete 6,000 hours of professional experience related to the financial planning process or 4,000 hours of apprenticeship experience that meets additional requirements.”

Kane said you should review the designations that a potential financial planner holds, noting that there are some that don’t require training as extensive as the CFP designation.

Next, look at the planner’s fee structure.

You mentioned a fee-based model.

“These planners charge a percentage based on the assets that they manage also known as assets under management (AUM),” she said. “The fee is typically around 1% of the total assets under management.”

But you should note that a fee-based planner can also sell you products that charge a commission. For example, Kane said, if you need life insurance, long term care insurance or an annuity, a planner earns a commission for selling you this product.

There is also a “fee-only” model.

“These planners charge by the hour, by the project, or charge a percentage of AUM if they manage your investments,” Kane said.

These types of planners may:

• Charge a flat fee to create a financial plan;
• Charge an hourly rate to create a financial plan;
• Charge an hourly rate to meet with you;
• Charge a percentage of assets under management, where they manage your investments and provide comprehensive financial planning.

“The main difference between this type of financial planner and a fee-based one is that the fee-only advisor won’t earn a commission selling you a product,” she said.

Kane said advisors that use an AUM model often provide comprehensive services including financial planning, tax planning and investment management.

“These are all important to consider as you approach retirement and having one place that can help manage and coordinate these provides a valuable service,” she said.

She also said that fee-only advisors that charge an hourly or flat fee to create a financial plan may not focus on investment management. They may or may not meet with you on a regular basis, and said, and they may create a plan and provide no additional services for the initial fee. Additional support will cost more.

It’s important to focus on determining what you want from a financial planner. Ask yourself some question:

• Do you want someone to provide a plan that you implement on your own? Or do you want an ongoing relationship and someone to help ensure that the developed plan is implemented?
• Are you comfortable with managing your own investments? Do you want to do it on your own?
• If so, do you know if your asset allocation is appropriate for you based on your timing and risk tolerance?
• Do you want a financial planner to help determine an overall investment strategy and diversified portfolio that is appropriate for asset allocation?
• If you’re nearing retirement, are you comfortable creating an income strategy?
• Do you understand the minimum distribution rules and tax implications of withdrawing money from your qualified retirement investments (eg. IRA and 401k)?

Kane noted a comprehensive study by Vanguard on the value of a financial advisor, which showed that advisors can add up to or even exceed 3% in net returns by providing relationship-oriented services such as wealth management, including financial planning, discipline, and guidance, rather than by trying to outperform the market.

“It’s important to determine what you’re looking for prior to meeting with a potential financial planner,” she said. “This will enable you to decide if the services that they provide match with what you want and need.”

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This story was originally published in October 2024.

NJMoneyHelp.com presents certain general financial planning principles and advice, but should never be viewed as a substitute for obtaining advice from a personal professional advisor who understands your unique individual circumstances.