The 1-2-3 Money Plan Part 22

Choosing a Financial Adviser, 1-2-3.

1. Interview three fee-only planners.

2. Ask questions and listen to your gut.

3. Never agree to an investment you don't understand.

The t.i.tle "financial adviser" is not regulated. No government body dictates who can call themselves one. So, anybody can print up business cards and call himself or herself a financial adviser. It's up to you to weed out bad advisers from good. To do that, you'll need to know the insider secrets of the financial planning industry.

The first thing to know is that you shouldn't abdicate responsibility and turn over your financial life to someone else, no matter how good the adviser is. Hiring a financial adviser is not like hiring a lawn service to cut your gra.s.s. In that case, you're hiring the lawn service to perform a specific task so you don't have to. A financial adviser should be different. It's like asking a landscaper for advice on how best to cut your gra.s.s. He might pull-start the mower for you and walk alongside. But ultimately, you'll guide the mower and navigate around the yard. And you'll have to live with the result.

So, hiring an adviser should be a partnership or coaching relationship, rather than work-for-hire. A good adviser will help identify problems, set goals, suggest strategies, and provide objective opinions.

1. Interview Three Fee-Only Planners.

The biggest problem with most financial advisers is they have divided loyalties. On one hand, they might truly want to help you achieve your goals and get you the best returns on investments. However, that can be in direct conflict with other goals, which are to keep their job, feed their own family, and provide themselves a good income. That brings us to this unfortunate fact: Financial advisers make more money if they put you in bad investments.

Why? Because many get commissions-call them kickbacks, if you like-from the investment companies where they put your money. Sometimes, the worst investments offer the biggest kickbacks. Advisers at insurers and brokerages might be good and decent people, but their first and foremost job is to sell you financial products.

A similar conflict would be going to a doctor who doesn't charge for office visits but is paid by drug companies for selling you pills. Any chance his prescription pad would be a little busier, whether you really needed drugs or not?

The solution? Use a fee-only planner.

A fee-only planner is paid only by you, not financial companies. Beware that the term "fee-based" is entirely different. That means the adviser is compensated by both fees and commissions. Fee-only advisers often charge by the hour or by a percentage of your a.s.sets that the adviser manages. Ideally, you would pay for advice and implement the recommendations yourself. But if the adviser will manage your money, a management fee amounting to 1 percent of your a.s.sets is reasonable, while 2.5 percent is too much. Either way, be sure the planner is using the right tools-our good friends, no-load index funds.

Two good online sources for finding fee-only planners are NAPFA.org and GarrettPlanningNetwork.com. Each of these Web sites has a "find-a-planner" option to help you locate an adviser near you.

This is important: All that said, there are many good commission-based financial advisers that would do a fantastic job for you. I just think the built-in conflict of interest is too important to overlook. Conversely, just because an adviser is fee-only doesn't mean he or she is any good.

Once you have a short list of fee-only advisers, schedule an in-person interview, which should be free of charge. That might seem time consuming, but it's worthwhile. Come prepared with your financial information, such as how much income you have and all your investment balances.

As you set out to choose an adviser, think about what specific help you need. Do you feel helpless in choosing mutual funds? Don't know what to do with stock options you received at work? Are you worried you don't have the right insurances or financial doc.u.ments, such as a will, living will, and medical power of attorney? Do you need advice on spending an inheritance? Do you want a comprehensive plan to cover all aspects of your money life?

Before setting up the interview, make sure the planner hasn't been in trouble. Find out about disciplinary actions by going to the U.S. Securities and Exchange Commission Web site at www.sec.gov or calling 1-800-SEC-0330. Look for a link like "Check Out Brokers & Advisers." You can also contact your state agency that oversees investment advisers. For advisers who sell investments, otherwise known as stockbrokers, you can conduct a BrokerCheck at the FINRA Web site, brokercheck.finra.org, or call 1-800-289-9999.

2. Ask Questions and Listen to Your Gut.

Choosing the right adviser breaks down into three basic tasks: a.s.sessing the adviser's technical competence, trustworthiness, and compatibility with you. Here are six questions that will help you judge an adviser, whether they are fee-only or not: * How are you paid? This might be an uncomfortable question to ask. But it is fundamental and important. If you're using a fee-only planner, the answers should be straightforward. Ask the planner for his or her Form ADV, a doc.u.ment that describes the fee structure.

* What are your qualifications? Choose a planner who has been in the business for several years and has a certification, such as Certified Financial Planner or CFP. (See sidebar for other certifications.) Ask about work history.

ABCs of Financial Certifications.

The financial services industry has an alphabet soup of acronyms that represent certifications for financial advisers. Unfortunately, none a.s.sures you of a competent or ethical adviser. Designations are awarded by private organizations that don't answer to government regulators. However, an official designation after an adviser's name at least signals he or she probably pa.s.sed a test of basic financial concepts and is staying current on changes. The following are a few of the more meaningful certifications: * CFP: Certified Financial Planner. Among the most popular of financial planning certifications, CFPs must have at least five years of planning experience or a bachelor's degree plus three years of financial planning experience. They must also complete a five-course program, pa.s.s a 10-hour comprehensive exam, complete 30 hours of continuing education every two years, and adhere to ethics standards.

* ChFC: Chartered Financial Consultant. ChFCs must complete three more courses than the CFPs but only have to pa.s.s individual topic exams, not a comprehensive exam. They must have three years of experience in the financial services industry and adhere to ethical standards. They must also complete 30 hours of continuing education every two years.

* CFA: Chartered Financial a.n.a.lyst. A designation geared more toward the specialty of investing and portfolio management than broader areas of personal finance. CFAs must pa.s.s three rigorous exams covering economics, financial accounting, portfolio management, securities a.n.a.lysis, and ethics, and have approved work experience.

* CPA-PFS: Certified Public Accountant-Personal Financial Specialist. The PFS designation is awarded to CPAs who have a minimum of 1,400 hours of financial planning business experience, completed continuing education within the last five years, pa.s.sed an exam, and adhere to a code of ethics.

For brief information on other designations, go online to Finra.org and click "Investor Information," then "Professional Designations."

* What is your financial planning philosophy? Here, you're fishing for a comfort level. The adviser should talk about his or her planning process and not about hot stocks or unusual investments. If a prospective financial adviser says he or she can beat the market and promises big investment returns, end the meeting. n.o.body can predict market movements. The adviser is either a fool or a liar, and probably a cheat. A good financial adviser will make sure you're well-diversified, so you can limit risk and maximize returns.

As the adviser explains his or her philosophy, ask yourself: Are you being coached or sold to? And get a feel for how rushed the adviser is. If he or she doesn't have time to attract you as a client, the adviser might not have time for you after you become one. Finally, note the words and tone the adviser uses. Is he or she speaking in financial jargon, knowing you won't understand? It actually takes greater skill and knowledge to explain things simply. Is the tone condescending or supportive?

* What services do you offer? If you need a broad spectrum of advice, make sure the planner can help with insurance, tax planning, investments, estate planning, and retirement planning. This is the time to ask whether the adviser will be the only person you deal with, or whether you'll be shuffled off to a junior a.s.sociate. And ask about how the adviser will communicate, by e-mail or phone, for example. Will you receive regular reports and periodic reviews about your financial status?

* Tell me about your typical client. You want an adviser accustomed to working with people like you. If the adviser typically works with multimillionaires and you have total a.s.sets of $100,000, how much attention do you think you'll get? You should also ask for a sample financial plan for a client in similar circ.u.mstances to yours-with the client's name removed, of course.

* Can I contact referrals? Granted, an adviser is only going to refer you to his happy clients. Ask the client, "If you had to do it again, would you pick this planner?" and "What is the downside of working with this planner?"

You want to gather factual information, but trust your gut, too. That doesn't mean you should judge whether you like the adviser as a person or whether you hit it off in idle chitchat. That's irrelevant. This is a business relationship, not a personal one.

Although some people are more gullible than others, your gut should guide you, especially if you go into the meeting with a bit of skepticism. It will tell you if the adviser is being evasive or is snowing you.

3. Never Agree to an Investment You Don't Understand.

If you can't explain it to your teenager or your elderly mother, don't do it.

This is a great rule because it can keep you out of harm's way. For example, there are few average Americans who can thoroughly and accurately explain what a variable annuity is. They're wildly complicated. And that works out fine. They're not good investments for most people anyway.

That's not to say you shouldn't endeavor to learn more about finance basics. You shouldn't shy away from stock mutual funds because you're not quite certain what they are.

There are many good resources for investing basics, including books and Web sites. One free resource is at the Los Angeles Times newspaper Web site. It has a "Money Library" with a host of finance topics, including investing. It's at www.latimes.com.

All this due diligence in hiring a financial planner might seem daunting, but don't let it deter you from getting the help you need. Starting on the right financial track, even using a mediocre but ethical planner, is better than doing nothing. And remember, you can always switch financial advisers later.

Endnotes.

1. On October 3, 2008, Congress temporarily increased FDIC deposit insurance from $100,000 to $250,000 per depositor through December 31, 2009. As of this writing, it is uncertain whether the raised limit will become permanent. Learn more at www.fdic.gov.

Chapter 8.

Putting It All Together.

Succeeding with Money.

In the introduction of this book, I promised to help you navigate the world of spending and saving money. I said this book would be like a GPS device that helps you with driving directions. I wanted to get you from here to there safely and with the fewest ha.s.sles.

I've touched on the vast majority of money issues that you will probably encounter in your life. Did I cover every detail of every money topic? No. Few books do. And I didn't even try.

What I wanted to do is to make money simple. I did that by breaking down common money topics to their three most-important tasks. I gave you very specific advice. And granted, it might not be the absolute best advice you could possibly receive. But it's darned fine advice for almost everybody. It nudges you toward money decisions that are "good enough." That allows you to make money decisions and get on with your life. You can take comfort in the fact that you're doing smart things with your hard-earned cash.

We even had some fun along the way. What other personal finance book tells you how to make razor blades last longer, how to get the best deals on video cables, and how to spend $20 a year on phone service?

I hope you'll go through the topics in this book and methodically address each area of your money life-after all, each contains just three steps.

Throughout this book, I used a 1-2-3 format, which defined tasks for each money topic. But what if I were to give you just one more 1-2-3 list? This would be a superCliff Notes version. It would be three steps to succeeding with money.

If you did nothing else in this whole book, doing these three things will give you a shot at being a financial winner.

Based on my knowledge of money topics and based on feedback from literally thousands of readers over the years, that list would look like the following:

Succeeding with Money, 1-2-3.

1. Never buy a new car until you're a millionaire.

2. Buy a home that you can afford.

3. Care about spending.

I briefly mentioned cars and houses in other chapters. They are the largest single purchases most people will make in their lifetimes. Financing for these two purchases often ranks at the top of most people's monthly expenditures. For that reason, they are important.

But you already know that. You probably already take great pains to be a smart consumer about vehicles and houses. Whether you succeed is a different matter.

What you might not have contemplated is the vast difference between buying a car and buying a house. They impact your money life in dramatically different ways. They are different for two fundamental reasons. The reasons are: * The value of your vehicle is guaranteed to plummet. (That's bad.) * The value of your house almost always rises. (That's good.) These might seem like terribly elementary observations. But from a bird's-eye view overlooking the span of your money life, there is profound wisdom in recognizing these truths. Is the money you're spending working for you or against you?

1. Never Buy a New Car Until You're a Millionaire.

Get-out-of-debt guru Dave Ramsey often says this. He has a flair for dramatic statements, and I agree with this one, so I stole it.

If a new car costs $30,000 and it loses the standard 30 percent of its value in its first year, that depreciation costs $9,000.

Is $9,000 a lot of money in your world? If so, you should always buy one-year-old or older cars. In other words, don't buy a new car until you're a millionaire. It doesn't get much more complicated than that.

But car-buying isn't that easy, is it? Confusion sets in when you start talking about your dream car or how low the monthly payments are or how unreliable a used car might be. Somehow new-car smell warps our brains and clouds the issue.

Vehicles today are more reliable than ever. Even a three-year-old car is still a pup. Some of the reliable family sedans with minimal maintenance go 150,000 miles without a hiccup. See Chapter 7, "How to Save Money," for details on setting up a car fund to save enough to pay cash for your next vehicle.

QUICK TIP:.

Need to ease into the buying-used-cars thing? Try a certified preowned car with a warranty from the manufacturer, not the dealer or a third party. Certified cars are more expensive than noncertified, but this might give you the peace of mind you need to move from buying new to buying used. By the way, isn't "preowned" a silly way to describe a used car? Preowned literally means "before it's owned," or new.

2. Buy a Home That You Can Afford.