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Finding a trustworthy planner

Finding a trustworthy planner

Last reviewed: March 2011

If you think the best way to find a financial adviser is by asking friends or family, remember these words: Bernie Madoff. Many clients of the Ponzi schemer were personal references. Recommendations from people in circumstances similar to yours are a good starting point, but you should do more to find a financial adviser who is competent and legitimate.

If you don't have a recommendation, check industry trade groups like the Financial Planning Association (www.fpanet.org), the National Association of Personal Financial Advisors (www.napfa.org), and the American Institute of Certified Public Accountants (www.aicpa.org; click on "For the Public," and then "Personal Financial Specialists").

You can also find advisers through professional alliances such as the Alliance of Cambridge Advisors (www.acaplanners.org), whose members provide financial-planning services under several different fee arrangements, or the Garrett Planning Network (www.garrettplanningnetwork.com), whose fee-only members bill hourly.

Interview several planners, either over the phone or by e-mail. Many will offer a free consultation to a prospective client. Download interview questionnaires from the Certified Financial Planner Board of Standards (www.cfp.net/upload/publications/185.pdf) or from Garrett Planning Network (www.garrettplanningnetwork.com/content/view/33/1301). Ask up front how much money you need to be a client of the adviser.

Vetting the adviser

Two good guides to finding and vetting an adviser are free on the Web. On the Garrett site, you can download chapter 20, "Finding and Hiring the Right Advisor," from Sheryl Garrett's "Personal Finance Workbook for Dummies" (John Wiley & Sons, 2007). On the CFP Board of Standards site, check out the Consumer Guide to Financial Self-Defense (www.cfp.net/learn/financialselfdefense/), written by the board's consumer advocate, Eleanor Blayney. Here are some tips from both guides:

Understand the compensation

The planner should be up front about this. Commission-based planners are paid for the financial products they sell. Fee-only planners charge a flat fee for all services or a fixed advisory fee plus a percentage annual fee or flat retainer to manage your money. Most planners might charge a fee to develop a customized financial plan, then receive sales commissions from the products they sell you to implement the plan. Planners employed by a large, national firm might get a salary plus a bonus, which might be based on the profitability of what they've sold you. If you have an idea of what services you'll need, let the planner know so he or she can give you an estimate of what it will cost.

Ask for the adviser's Form ADV Part 2

This is the primary disclosure form required by the Securities and Exchange Commission. Starting this year, advisers must write their ADV Part 2s in plain English, including details about services offered, fee schedules, disciplinary actions, conflicts of interest, education, and relevant background information.

Ask about fiduciary duty

Ask specifically if the planner will provide services with the "duty of care of a fiduciary," meaning they're obliged to base their recommendations on your best interests and to fully disclose any conflicts of interest. If he or she can't answer affirmatively, find another planner.

Verify certifications, licensing, and violations

Ask which body licenses or supervises the adviser's actions. Brokers are regulated by the Financial Industry Regulatory Authority (FINRA) and state securities regulators; investment advisers by either the SEC or a state securities regulator; and insurance agents by your state insurance department. Check those authorities for disciplinary information, violations, and other red flags at www.cfp.net/search, www.finra.org/brokercheck, and www.adviserinfo.sec.gov.

This article appeared in Consumer Reports Money Adviser.

Posted: March 2011 — Consumer Reports Money Adviser issue: March 2011