What to look for in a financial planner

How do you find a competent financial planner? The question seems simple, but in that job title is a vast puzzle of what the words mean, who does what and what the work is worth.

There are 213 professional designations that have something to do with financial planning, according to the Financial Industry Regulatory Authority, FINRA for short, formerly called the National Association of Securities Dealers. The list begins with “3-dimensional wealth practitioner,” rambles on to “fraternal insurance counsellor fellow,” and ends with “wealth management specialist.” The most common references for planning are certified financial planner (CFP) and registered financial planner (RFP), both of which are used in Canada. They are widely and often used on business cards and wall plaques.

The quest for a genuine financial planner in Canada should start with the plaque on the wall. Two designations are widely understood to attest to a level of competence. The basic designation of certified financial planner, which requires a course of study, passing tests and traditionally involves some sort of apprenticeship and a national accreditation examination. The next level, registered financial planner, requires all of that plus additional training to provide more detailed and comprehensive financial plans, says Don Forbes, who is based in Carberry, Man., and is both certified and registered. “Getting these accreditations is a demanding educational process,” he explains.

For developing a financial plan, RFP- and CFP-qualified persons are appropriate, explains Caroline Nalbantoglu, a planner who is head of CNal Financial Planning in Montreal. In all provinces, RFP and CFP are basic qualifications, she notes.

The purpose of titles and authorizations is to separate trained planners from wannabes. Lots of people are attracted to the business of selling financial products such as mutual funds. Fat upfront commissions, charges on fixed annual rate accounts as well as trailer fees that can shift money from the client to the planner for as long as the client owns the fund are common.

Paul Edmond is a CFP based in Winnipeg. His company, the Edmond Financial Group, is well established and respected. His company lists nearly two dozen questions to ask anyone eager to take your money for planning.

Top of the list is qualifications, that is, a certificate or more on the wall attesting to training. Next is accessibility — is there someone to answer questions even if the planner is on holiday? Then, how do you pay the planner? Is it hourly, by commission on products sold, by specific task, or by time spent on a file or issue? Also, philosophy — does the planner fancy value stocks that are cheap by some standards, stocks growing value rapidly, mutual funds or exchange traded funds with blends of various kinds of stocks and bonds.

Another important question is how is the planner paid, by job done or by a percentage of assets under management? Planners on the payrolls of banks and credit unions are paid to sell products. Their advice may be good, but it is not disinterested. There is also the matter of putting money in.

“We never take money from anyone for Edmond Financial Group,” Edmond explains. “It is always a cheque or debit for our trustee or the back office company.” With large banks selling mutual funds, outright fraud is too unlikely to worry about. But individual planners have been convicted of a lot of it. The rule is, never write a cheque to an individual. If you are asked to do it, make sure the doorknob doesn’t hit you on the way out.

The list of planners and investors who have stolen from clients includes, of course, the late Bernie Madoff, the biggest master of schemes in history. Also, Allen Stanford, an American once on the Forbes list and supposedly worth $2.2 billion at one time, was on it. Canadian Henry Cole, who diverted money from a major bank to his personal numbered company, made the list. There is a moral — avoid anyone who offers a tax evasion scheme packaged with an investment.

What is planning worth?

The glib answer is whatever it makes you in returns above the average for your markets. If a planner’s advice beats the Dow Jones Industrial Average or the S&P/TSX for a few years, you might think he or she is gifted. Not necessarily. Planners and investment advice providers can make a lot of risky bets in various portfolios.

The winning portfolios get advertised, the losers languish in darkness or have their assets merged with the winners. This is called “survivor bias” and it cannot be tracked or measured. After all, what is the performance of a fund no longer traded that was put to death a few years ago? It may have been a winner for a decade, but an awful flop in its last two years. Failure to track risky funds can and does cost some investors their fortunes. Ensure you are getting persistent returns above relevant indices. That’s what you are paying for, after all.

What can you do to ensure the advisor who wants your business is legitimate? Ask about who employs him or her. If a chartered bank, the planner will be watched by supervisors. His advice may be mediocre, but if the funds are in the accounts of a major bank, outright theft is too remote a possibility to worry about.

Does the planner, especially if independent, have errors and omission insurance? If yes, then there is an outside entity, an insurance company, that has been satisfied the advisory or planning business is at least what it says it is. Who employs the planner and what is the hierarchy of those responsible?

Does the planner have an easily understood menu of charges? If yes, read it. If not, ask why not. Get a written estimate or contract for work to be done and what it will cost.

Moreover, what is the investment reporting process? Will there be monthly or quarterly reports? Reports on the status of financial plans? Reports showing how recommended investments, for example, are doing compared to category averages? Are you going to pay a fee outside of the fund, for example, a monthly or quarterly bill, or will charges just be deducted from your portfolio? If the latter, charges can trigger asset sales and perhaps taxes on capital gains.

Finally, and this is the most effective protection of all, study financial markets, funds and stocks on your own. There are abundant books, online reporting services for funds, such as Morningstar, access to bond raters like S&P (though you don’t get in-depth reports without paying hefty fees), and simple questions — do you have major corporate clients you can name (big planners will do it proudly). And, are your own manager’s financial statements available? Check the footnotes. Any litigation will probably be listed.

Due diligence has its rewards.

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