Monday, October 6, 2008

Q&A: Choosing a financial planner and insurance agent

Our first Q&A is from the infamous and adorably pregnant Jonniker!

Hi Amanda!

First of all, I've been meaning to tell you how much I miss the Naked Ledger. I LOVED IT. Loved it loved it loved it. It was so helpful. Second, I was hoping to ask you two relatively simple questions about life insurance and choosing a financial planner. Since we're having our first baby in the spring, we're adding life insurance AND looking to add a financial planner to our life. Our biggest question/issue is, how do we choose the right financial planner? So many of them are scary, and we're pretty smart people (smart about our money, too), and a few I've met with haven't been NEARLY as impressive as you -- they ask basic questions like, do we have a 401K and are we saving? TO WHICH I FEEL LIKE SCREAMING NO SHIT! OF COURSE! DO YOU THINK WE'RE STUPID?

And insurance agents -- are they all the same?

I appreciate you even reading this. I trust you, and I don't know anyone in my actual life who is unbiased who can answer such questions. Sometimes it's easier to ask these things of a stranger, rather than your friends or family :)

Thanks, Amanda!


Great question! (And not just because it's a super easy one, although that never hurts.) There is BUT ONE way to chose a financial planner. Go here:

The National Association of Personal Financial Advisors (NAPFA) at Read around a bit (nothing but good info there!) then click on Consumer Information and then Find an Advisor. You have to fill out a little bit of info about yourself, but DO NOT HESITATE. You can either chose to have local advisors who meet your search criteria contact you (this used to be part of my job) or they will give you a list and you can contact them. Either way, this is THE WAY to pick a planner.

And here's why: OBJECTIVITY.

Objectivity is the MOST IMPORTANT factor in selecting your financial advisor. If you're smart about money, like I know Jonna is, then what you're looking for a planner who is not just qualified, but whose interests line up DIRECTLY with yours. The only way that can happen is if you pick someone who isn't selling any product other than their advce. NAPFA planners are all 100% fee-for-service ONLY. They generally get paid in one of three ways:

  • They charge a percentage of the assets they manage for you. The percentage usually ranges from 1-3%, depending on portfolio size (the smaller your portfolio, the larger the percentage) This is a good arrangement for people with large investment assets. 1% of a $1,000,000 portfolio is $10,000 per year, which is a very reasonable fee for financial planning on that level. At my last job, $10,000 a year was our firm's minimum fee. It was Silicon Valley! What can I say?!
  • Flat fee. This is probably my FAVORITE way to pay for a financial planner because it is truly THE most objective way to pay for your services. An annual contract for a certain amount that is determined and agreed upon in advance is PERFECT. The reason I prefer the flat fee over an assets-under-management fee is that even though the percentage fee is objective, as the portfolio grows, the planner makes more money, so he or she might be more biased toward growth. This might be perfect if you're a more aggressive investor, but not SO perfect if you tend to be more conservative. Also, when it comes to financial planning, an asset manager is going to want to manage as much of your assets as possible, which means they might be biased against other uses for your money, like paying off a mortgage or buying an investment property, etc. I'm not saying this happens often (I've never seen it first hand), but it COULD happen. With a flat fee, you're paying for the PLANNING and that's all.
  • Hourly fees. I LOVED working as a by-the-hour planner. I got paid for ONLY the time I spent and it was one of the least expensive ways for people to get financial advice, but there's always that moment where client would open their bill and think, "she spent 12 hours on THAT?!?!" I hated that part, but an experienced planner will give you a not-to-exceed estimate and that's always nice.
Whatever you do, make sure that you get at least one opportunity to interview the planner (for free!) before making your decision. Any good planner wants to make sure that the relationship fits for EVERYONE involved. I have turned potential clients away before and it was better in the long run for everyone. A good financial planner is a relationship that under the ideal circumstances lasts DECADES, so pick wisely. Pick with your heart AND your brain.

Never EVER chose a family member or a friend for your planner. I don't do planning for my family. It's a GLARING conflict of interest. Sure, I give my family advice, but I would never in a million years ever manage their assets.

Never chose anyone you couldn't fire immediately without personal repurcussions. While I have ADORED my clients over the years and felt very strongly like they were My People, the relationship was always professional. Planning was my JOB and they were my CLIENTS, not my friends. That was a line I never crossed.

That said, DO interview more than one planner. There is a HUGE variety out there. I loved my last job because we did more than just plan FINANCES, we did a lot of LIFE planning. We pushed a lot of clients out of their comfort zones and made them talk about what was REALLY important to them. Not all planners care that much and not all clients want to get that personal with their advisors. Some planners are attracted to the field because they love numbers (these are the planners who work best with engineers and scientists). Some planners are attracted to the field because they like the personal interaction and relationship building (like me).

As for the insurance agent question, chose your planner first and they will have EXCELLENT local resources for life insurance. Insurance planning is a HUGE factor in any good plan, so your objective, fee-only planner will guide you in the right direction.

If you want my take on life insurance (and want to know why you shouldn't own anything but term life insurance), you can read about it here:

CYA: Cover your ASSets


jonniker said...

Whoo! Thank you so much. I can't wait to get started on this (this week! I'm going to THIS WEEK, in fact!)

This is so helpful, and is precisely the kind of information I wanted -- it never dawned on me to look at the fee structure this critically, as I didn't know they HAD such varying fee structures.

Thank you so much.

Anonymous said...

I can't open the CYA link - I guess because Club Mom is down? Can you repost that?

Erm - my dh and I both have Whole Life policies (in addition to Terms) that we were talked into. I have heard so many conflicting things about them, but what it comes down to is we have a little bit of extra insurance because of them and we also have more money saved up than we would have saved otherwise. I know it isn't perfect, and the overwhelming message I hear is we made a mistake, but what can I say... The good news is, they haven't lost value the way my my 401-k has this year!

What WAS a huge mistake were the Whole Life policies we bought on our first two kids. We totally lost money on those when we realized we couldn't actually afford to keep paying in to them.

San Francisco Financial Planners said...

Great advice for finding the right financial planner. I'd also recommend that you Try to find a planner who is at about your same life stage so that they have a good understanding of where you are and where you want to be. For instance, I have two young children and my whole practice is geared towards new and expectant parents. I am highly tuned into the challenges that come with a growing family and can closely relate to my clients. On the other hand, I wouldn't take on a client who is nearing retirement, since I don't have as much insight to their goals and worries.