If you need professional help with your finances, we've long recommended using a fee-only financial planner to avoid conflicts of interest. If an adviser is paid through sales commissions, it's hard to be sure he or she is choosing financial products that are best for you. Paying a fee that's not tied to a sale can reduce potential conflicts.
But some fee-only advisers don't want your business unless you've got a lot of money. When we recently searched for fee-only planners within 20 miles of our Yonkers, N.Y., headquarters on www.fpanet.org, a national database, we found 20 who would be willing to take clients with $100,000 or less, vs. 35 who'd take clients with assets of $500,000 or more.
If you want a mountain of advice but have a molehill to invest, you have a few options. You can take the do-it-yourself approach. You can pay a planner an annual fee for comprehensive planning and ongoing guidance. Or you can pay for a one-time consultation or specific service at a flat or hourly rate.
Before you embark on a relationship with a planner that could last months or years, it's good to know what to expect. Below, we outline what services planners will and won't provide, along with advice on how to do those tasks yourself.
The Financial Industry Regulatory Authority (FINRA), the self-regulating arm of the securities industry, lists more than 90 different adviser or planner designations on its website, including the concrete Certified Financial Planner and the curious "3 Dimensional Wealth Practitioner." But Sheryl Garrett, CFP, president of Garrett Planning Network, a group of fee-only planners, says you really only need to understand four credentials:
A planner with one or more of these bona fides is likely to have the expertise you'll need. But regardless of credentials, no planner will do all the work for you. Here's what planners will and won't do.
Yes and no. You could pay a planner to get down in the weeds with you to work out a budget, but it's not cost-effective for you or the planner. "You may be paying $200 an hour for a $15-an-hour job," Garrett says. In fact, some planners we spoke with don't think everyone needs a budget. Garrett says she looks at overall cash flow—what's coming into the checking account and what's going out—and recommends cutting back overall by a small percentage and gradually trimming more if needed.
Do-it-yourself: Use financial software like Quicken; an online service such as Yodlee MoneyCenter (yodlee.com) or Mint (www.mint.com); a downloadable spreadsheet from Google docs (www.google.com/google-d-s/spreadsheets/); or just a paper and pencil. The more detailed you are, the more ways you'll find to save money.
No. Planners typically will not help you work with creditors to cut your debt payments. John Graziano, CPA, CFP, PFS, in Bayonne, N.J., says he would refer such clients to a debt counselor or a bankruptcy attorney.
Do-it-yourself: Contact the National Foundation for Credit Counseling (www.nfcc.org), a not-for-profit organization with more than 100 member agencies and nearly 850 offices nationwide.
Yes. Establishing the total amount of a client's assets—including retirement and savings accounts, real estate and other property, minus loans and other debt—is a key aspect of financial planning. You can't plan what to do until you know what you have. But much of what financial planners do is analyze the data you've collected yourself.
Do-it-yourself: You'll need current bank and brokerage statements and a current home valuation. You can plug those figures into the net-worth calculators of the software products mentioned above. Mint and Yodlee help you value your home through automated online real-estate evaluators, but for a more precise estimate, we recommend consulting a local real-estate agent or a professional appraiser.
Yes. A planner should consider all your assets and expected income—employer-based retirement accounts, IRAs, savings, real estate, pensions, and Social Security, for instance—and help you establish savings goals. That could include advice on how to allocate the investments within your 401(k) to coordinate with your other investments. Ask if the planner will charge an advisory fee based on the value of those assets. Keep in mind that even with that expert advice, you may be the one actually moving around the money.
Do-it-yourself: Financial Engines (www.financialengines.com) is an online retirement-planning program that your employer might offer free. Your 401(k) plan sponsor also might offer access to such guidance.
Yes. Investment advice is a core activity of planners. Ideally that's done in a tax-efficient way. A CPA with a tax background who's trained as a personal financial specialist might be the most capable in minimizing taxes, though most planners should be able to do this.
Do-it-yourself: You can use Morningstar (www.morningstar.com) to identify mutual funds and individual stocks for your portfolio. It can also help you search for investments considered tax-efficient.
Yes. A planner can evaluate your life-insurance needs and advise you on finding the lowest-cost coverage. A good planner should also be able to walk you through long-term-care insurance options and analyze whether such coverage is necessary, and review your auto, disability, homeowners, and umbrella coverage. Planners with the Chartered Financial Consultant (ChFC) designation have their roots in insurance. An adviser without a state insurance license must refer you to a licensed agent who can actually sell the coverage.
Do-it-yourself: Read as much as you can about insurance. That's where we can help. In the last year or so, this newsletter has covered disability insurance (August 2010); homeowners policies (May 2010); life insurance (February 2010); and long-term-care policies (February 2011). In October 2010, Consumer Reports featured Ratings of car insurers (available to subscribers) and shopping advice.
Yes. Planners can run the numbers and tell you if you're on track. If you aren't, they can help you explore other options, such as working longer, working part-time in retirement, moving somewhere less expensive, or otherwise changing your lifestyle. A planner can also help determine the cost over time of meeting other goals, such as going back to school, moving near the grandchildren, or traveling.
Do-it-yourself: For this you'll need to know your net worth and your potential income sources, including Social Security (go to www.ssa.gov/estimator/). Use online tools such as Financial Engines, mentioned above; T. Rowe Price's Retirement Income Calculator (www.troweprice.com/ric); or Analyze Now's Free Retirement Planner (www.analyzenow.com).
Yes. Planners can help you determine when to collect from pensions, traditional IRAs, Roth IRAs, Social Security, and other income sources, and how much to take. The process, when done right, should help minimize income, capital gains, estate, and other types of tax. "That's what drives the bus, it's what most people are interested in," says Benjamin Tobias, CFP, a fee-only financial planner in Plantation, Fla.
Do-it-yourself: New mutual funds, such as managed-payout funds that promise to provide a stream of income, might make that job easier for people to handle themselves. But unless your retirement income consists entirely of Social Security and a pension, you probably could benefit from a planner's help.
Yes. A planner can help you determine if you'll have enough to finance a child's education and suggest ways to invest and find funding.
Yes and no. A planner can help you figure out how to get your money where you want it to go after your death in the most tax-efficient way. But unless he or she is also a lawyer, get an estate-planning attorney to draw up wills, trusts, and end-of-life documents.
Do-it-yourself: We'll review estate-planning software later this year. In general, though, it's wise to have an attorney review self-prepared documents.
This article appeared in Consumer Reports Money Adviser.