How to Go About Choosing a Financial Planner

The financial planning business is booming--and changing--thanks to an increasingly complex investment environment, societal changes and worries about the long-term viability of the nation’s cornerstone retirement program.

Over the last decade, the business of financial planning has nearly tripled in size--roughly 28,000 individuals now boast the “certified financial planner” label, compared to fewer than 10,000 a decade ago. And where the industry was once dominated by small mom-and-pop shops, where the principals made their living by selling financial products on commission, today’s CFPs are just as likely to be working for a large law or accounting firm and billing by the hour.

For consumers looking for seasoned financial advice, the changes present both challenges and opportunities. With more choices than ever, it pays to know the score.

How do you choose a financial planner?

First, you need to understand a little bit about the business.

Financial planners can be divided into three basic categories, differentiated by the way the planner is paid.

* Some planners are paid solely through commissions. You pay nothing for their advice, but the planner is likely to recommend investments that pay him or her a commission, such as so-called load mutual funds, insurance and limited partnerships.

* Fee-only planners charge by the hour or, in some cases, by the job. As a result, you could pay $1,000 or more to have a fee-only adviser create a financial blueprint for you and your family.

* A third group is paid both through commissions and fees. These planners typically charge a lower rate to draw up a comprehensive plan, but they are also likely to recommend some commission-paying investments.

There is no one type of planner who’s best for all people. While some people prefer fee-only planners because they get conflict-free advice, others prefer commission-only planners because they don’t have to pay by the hour.

According to a 1994 study by the College of Financial Planning, 33% of the planners surveyed earned their living solely through commissions, 35% combined fees and commissions, and 18% worked on a fee-only basis. The remaining 14% earned a combination of salaries and commissions.

Second, you need to know what you’re looking for. Do you want someone to draw up a plan that will simply help you save for retirement or your children’s college expenses? Or do you want a comprehensive plan that details your short- and long-term goals, provides a blueprint for your investments, saves taxes and offers estate planning techniques?

Knowing the answer to that question will help you interview potential planners more effectively. You’ll know to ask whether the planner has expertise in the areas you’re most interested in. And you’ll be better able to compare price--yes, price comparisons are possible--because you’ll be making apples-to-apples comparisons.

The median cost of a comprehensive financial plan is $950, according to a 1993 survey by the College of Financial Planning. But planners prepare far more “abbreviated” plans than comprehensive ones. And the cost for an abbreviated plan is just $300, according to the survey.

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Once you know what you want, you should begin to get referrals and interview planners.

Ask friends and relatives for referrals. But if you’re not impressed with these, get a referral from a professional association.

The Institute of Certified Financial Planners ((800) 282-7526) will provide names, phone numbers and biographical sketches of three certified financial planners in your area. All you have to do is ask. CFPs must adhere to strict educational and ethical guidelines laid down by the ICFP.

If you specifically want a fee-only planner, you can get referrals by calling the National Assn. of Personal Financial Advisors ((800) 366-2732).

The final step is interviewing the planner. In addition to chatting about his or her background, education and specialties, you should find out if he or she is certified and will provide you with sample plans prepared for others in your circumstances, as well as a copy of the disclosure statement he or she provides to the Securities and Exchange Commission.

Look at the sample plans for two things: First, make sure the plans for different people are not close to identical, says Jack Blankinship, partner at Blankinship & Foster in Del Mar and president of the Certified Financial Planner Board of Standards. Good planners create plans that accommodate a client’s age, goals, family status and prospects. No two families are exactly alike. Their plans ought to be different too.

Second, see if the plan tells a story. Is it clear? Can you follow what was suggested and why?

The lengthy SEC disclosure form is even more revealing, Blankinship says. It describes how the planner is paid, his or her educational background, conflicts of interest and whether or not the planner has been upbraided by securities regulators.

The form is an official document that must be provided to the SEC each year by any planner who sells investments. If you read it and understand it, you’re far more likely to feel comfortable putting your financial affairs in a planner’s hands.