The financial world is full of confusing acronyms and titles, and it seems everyone touting financial advice has a myriad of bewildering designations after their name. One of the most widely used titles is financial adviser. This label is problematic because it is generic and entirely too broad.
Insurance agents, stock brokers, investment advisers, accountants, bankers, and even some attorneys often refer to themselves as financial advisers. The term is so expansive that it typically covers any area of financial assistance. Unfortunately, there is no regulatory guidance or rules for using such a title. So, when you hire a financial adviser, you should also ask about any areas of specialization. You might find that if you want to hire someone who charges a fee for financial advice, your insurance agent — who calls herself a financial adviser — will not be able to help you.
When people ask me what I do for a living, I say, “I am a financial planner.” They typically respond by saying something like, “Oh yes, my financial adviser is with XYZ Company.” This always makes me cringe a bit because I am not just a financial adviser, but I specialize in financial planning. While financial adviser is a broad category, a financial planner — specifically a Certified Financial Planner (CFP) — specializes in providing comprehensive financial planning services (Full disclosure: I am one). Granted, your financial planner may also offer financial products like insurance or investments, but the key difference is he prepares a comprehensive written financial plan.
There are primarily two reasons why hiring a financial planner is important.
1. It minimizes some conflicts of interest.
Several years ago, a potential client told me I was the third financial adviser he had interviewed. He said the first two said they would provide retirement projections for him at little or no cost. He wondered why I charged a fee for the plan I provide. I asked him one simple question: “How do you think they will be compensated for their time and expertise?” The answer was clear. They had to sell him something in addition to the plan to make the engagement worth their while.
You expect to pay your physician for his advice, and would never go to one who only is compensated if you fill the prescription that he writes. When I deliver a custom financial plan and am paid for my time and expertise, the plan stands on its own. I do not need to sell additional products or services. If the client decides to implement the plan with me, I can certainly help. If, however, he goes elsewhere, it was a fair and profitable engagement for me; I have already been paid for my advice and the client has a working plan.
2. A comprehensive written financial plan can uncover often overlooked but critical financial issues.
Imagine going to your physician with a complaint of chest pain. After the obligatory blood pressure and pulse readings, he places his stethoscope on your chest, listens to your heart and states, “Let’s schedule you for open-heart surgery tomorrow morning.” What would you think? Obviously, you would want some additional testing before jumping to the conclusion that you need open-heart surgery. Just as recommending surgery without a comprehensive medical exam would not be wise, providing investment advice without a full fiscal exam is equally imprudent.
Tax laws are complex, the investment landscape is volatile, and changes in one part of your plan could wreak havoc on another part. You should have a plan that covers all areas of your financial life and clearly shows how each area is impacted by your decisions to implement one or more financial strategies. Just completing a two-page investment questionnaire from your financial adviser is not enough to ensure high-quality financial advice.
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This story is an Op/Ed contribution to Credit.com and does not necessarily represent the views of the company or its partners.
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