A financial planner is a professional who helps you organize your finances and projects the results of your savings and investments so you can see how well prepared you are for retirement. They also help you make decisions with your money that will help you reach your financial goals as efficiently as possible.1
The terms “financial planner” and “financial advisor” typically mean the same thing, but certainly, not all financial planners or financial advisors are alike.2 The level of education, training, and experience that a professional has will make a big difference in the quality of the advice you receive. Some people do their own financial planning, and others look for professional assistance. An experienced financial planner can usually help improve the quality of the financial decisions you make.
If you’re considering hiring professional help, you’ll need to know what to expect from a good financial planner, and how to tell the difference between a salesperson and someone who offers fiduciary financial planning advice and carries valid financial credentials or designation. Hiring the right professional planner starts by understanding what financial planning is and knowing what to expect of the person you might hire.
What Is Financial Planning?
Financial planning is the process of defining your financial goals, such as knowing when you will need to use your money and what you will be using it for, and then laying out a plan of action with specific steps you need to take to achieve those goals.
To give good advice, a financial planner must gather personal and financial data about you. They use this data to create projections that show you when and how you can accomplish your goals. These projections are based on a set of realistic assumptions about inflation, investment returns, how much you can save, and how much you will earn and spend.3
What a Good Financial Planner Does
A good financial planner will give advice as to all of the following:
- What you need to do differently
- How much you need to save
- What types of retirement accounts to use (IRA, Roth, 401(k), etc.)
- What type of mortgage you should have, if you should pay it off, or refinance
- What type and how much insurance you need (this would include life insurance, long-term care insurance, disability, and sometimes property, casualty, and health insurance)
- How much to keep in your emergency fund
- What changes might improve your tax situation
- What rate of return you will need to earn to achieve your goals over a given time frame
- Whether it makes sense for you to downsize later in life
- What level of investment risk is appropriate for different types of accounts you have3
Also, many financial planners provide estate planning advice and tax planning services.4 Ask a financial planner which of the above items they address and whether they’ll put their advice in writing. Getting recommendations in writing is always a good idea, as it leaves no question as to what course of action was recommended.
A good financial planner will not make recommendations until they understand your goals and have run a long-term financial plan for you. If you meet with someone who starts talking about a financial product right away, even if they call themselves a financial planner, they are more likely a financial salesperson.5 A good financial planner will want to gather account statements and data on all aspects of your financial life.
Financial Planners Fees
You’ll find that fee structures vary. Typically, financial planners charge fees in one of the following ways:
- An hourly rate6
- A flat fee to complete a specific project7
- A quarterly or annual retainer fee8
- A fee charged as a percentage of assets that they manage on your behalf (Typically anywhere between 0.5% per year to 2% per year. The more assets you have, the lower the fee usually is.)9
- Commissions from financial or insurance products you buy through them2
- A combination of fees and commissions1
Always ask a financial planner for a clear explanation of how they are compensated. If they work as a registered investment advisor, they must provide you with a disclosure document called an ADV, which consists of two parts. Part two will provide details on all fees and any potential conflicts of interest.10
Investment advice can range from a general recommendation as to what type of asset allocation model you should follow, to specific recommendations on which investments to buy and sell. Some financial planners also offer investment advice and investment management services in addition to financial planning.1 Ask a potential financial planner if they give specific investment advice or only offer planning services.