Choosing a Financial Advisor, Part 4

When shopping for a financial advisor, just how do you ensure that he or she has the “right” experience and training?

A recent article in Money Magazine, Don’t Judge an Adviser by His Title, by Walter Updegrave, warns that “you should be on guard” against “unscrupulous salespeople posing as trustworthy advisers” who are using “dubious retirement credentials.”

Earlier this year, state insurance and securities regulators approved model regulations that will prevent advisers from implying they have expertise about retirement planning that they don’t actually have.

The new regs will make it illegal for advisers to tout made-up or self-conferred designations, or credentials that are real but granted by organizations that don’t set rigorous standards.

That said, it may take well into 2009 before most states adopt them. And no regulations can totally eliminate abuses. You still have to exercise caution when you seek retirement advice. Here’s how.

Don’t be awed by a string of initials.

Given the dozens of official-sounding titles floating around, it’s virtually impossible to know which are marketing gimmicks, which are legitimate and which fall in between. I’d view any credential that contains words like senior or retirement with skepticism.

Earlier this year, a reader e-mailed me to say he’d met with an adviser with a Wharton Certificate in Retirement Planning. How much credence should he give it?

What I found is that the certificate is available only to advisers affiliated with the insurer AXA who attend a five-day program at the Wharton School. There’s no final exam, no grade. I don’t want to suggest that the program is a sham. It is taught by Wharton professors, and AXA sends only experienced advisers. Then again, it’s not exactly a Wharton M.B.A.

When a designation does connote a special skill, consider how relevant that expertise is. The Certified Senior Advisor designation, while legit, is largely meaningless as a gauge of retirement planning proficiency.

Why? Its purpose is to increase awareness of the aging process. It requires no special financial training.

Do a background check.

Even if an adviser’s credentials are beyond reproach, his or her integrity may not be. Before signing on with an adviser, check with your state securities commission (nasaa.org) and state insurance department (naic.org) to see if he or she has a history of disciplinary problems or consumer complaints.

Plus, don’t attend free-lunch seminars that target retirees – they are often nothing more than a way for sales-people to peddle high-fee investments. Instead, screen for a planner who concentrates on retirement at the Financial Planning Association’s site (fpanet.org).

Be wary of safety claims.

Older investors are understandably worried about retirement today. Unfortunately, advisers who misrepresent themselves with misleading credentials may also see this as a perfect opportunity to prey on those fears.

Insurance commissioners in several states have recently warned that some advisers are using concerns about the health of insurer AIG to persuade annuity owners to switch into a new annuity.

Such a move can be a great deal for the adviser, who earns a fat commission. But it may not be a wise decision for the investor, since a transfer may trigger early-withdrawal penalties, not to mention start the clock on a new set of surrender charges.

It’s during uncertain times like these that you’re most likely to seek financial advice. Just make sure you end up with a real adviser, not a salesman with a fancy title posing as one.

Conclusion

This article is useful regarding what to avoid in looking for a financial planner, but you need more information to be successful in finding the right person for you.

I have written before about the importance of having a financial advisor who puts your interests first, i.e. a fiduciary. Fee-only planners, who are members of NAPFA, all agree to act as fiduciaries and sign a fiduciary oath.

Aside from the very important issue of the manner in which your financial advisor is compensated, keep in mind that different planners have different areas of expertise. Knowing this may help you choose the individual who best suits your needs. To a large extent, the best financial advisor for you will largely depend on the kind of advice you are seeking. A brief rundown of the alphabet soup of designations, which follow the name of a financial advisor, will help you sort it out.

Designations

The following designations have rigorous standards and are widely recognized and respected. One could debate whether the course requirements are comprehensive enough and just how difficult the tests are.

Nevertheless, if you are working with someone who has one or more of these designations, you know that the planner is serious enough about the craft of financial planning to meet the requirements. It’s not an ironclad guarantee of competence, but it is a good indicator.  In all cases, there are continuing education requirements.

Certified Financial Planner (CFP®) – The CFP® designation requires a minimum of three years of experience and the passing of a rigorous two-day exam. Certified Financial Planners should be able to provide a broad range of financial advice.

Certified Public Accountant (CPA) – A CPA is an experienced accountant who has met strict education and licensing requirements. A CPA is a good choice for tax issues.

Personal Financial Specialist (PFS) – CPAs, who undergo additional financial planning education and pass an exam, can use the PFS designation.

Chartered Financial Consultant (ChFC) – Insurance professionals, who specialize in some aspects of financial planning by meeting additional education requirements in economics and investments, can use the ChFC designation.

To be continued …