Practically anybody can open up shop and call himself a financial planner. There's no exam or specific training required. To protect yourself and your money, prepare to spend anywhere from a few weeks to a couple of months scouting for prospects and checking them out.
1. Ask for recommendations.
Poll friends and colleagues whose financial lives are similar to yours. Ask your lawyer or accountant for recommendations. Or get a list of financial planners in your area from national trade associations. The National Association of Personal Financial Advisors provides lists of fee-only planners and the types of clients they work with. (One planner I picked named "beginning investors" as a specialty.) The database of the Financial Planning Association (FPA) has a wider range of planners (access the "planner search" through the site index) but currently provides only names and phone numbers. For a big city like New York, the list is overwhelming— I found 206 names. But starting in late October, the FPA's planner listings will also include areas of specialty and minimum-investment requirements.
If your insurance agent, accountant, or stockbroker offers to manage your overall finances as well, add him to your list, but check him out, too. The planner I found through a referral turned out not to have the credentials I was looking for, nor was he registered with the state as an investment adviser.
2. Check their merits.
No credential guarantees a planner is reputable, but it's an added vote of confidence. The certified financial planner (CFP) designation is the most recognized. To be certified, an adviser must meet education requirements, pass a 10-hour exam, and have at least three years of experience. You can check the CFP Board of Standards' website to see if a planner is in good standing.
Financial advisers with backgrounds in insurance or tax planning may have different credentials. A chartered financial consultant, or ChFC (a designation granted by The American College; 610-526-1000), has experience and training in insurance. A personal financial specialist, or PFS (accredited by the American Institute of Certified Public Accountants; 888-777-7077), has special training as an accountant. Verify a person's status with the designating organization.
3. Visit the top three contenders.
Most advisers won't charge for an initial consultation, which can last from 30 minutes to an hour and a half. (Bring your spouse or partner along if you're seeking advice as a couple.)
Pay attention to how well the planners listen to you and how comfortable you feel talking to them. Ask for details about their education and experience, what services they offer, how they are compensated, and how much they charge. (For a list of other questions to ask, go to the website of the Certified Financial Planner Board of Standards.) You may also want to ask to see samples of financial plans.
Our meetings convinced us that we don't need to hire a planner right now. The consensus: For a couple in our early 30s without kids or a house, who've been saving through a 401(k) plan at work, and with sufficient insurance, we're in good shape. We should draw up basic wills and make sure we have enough disability insurance, but all three planners candidly admitted we didn't need a professional to do so. All three advised us to do a budget (two offered to provide worksheets) and have a portion of our paychecks automatically transferred to a money-market mutual fund (one planner named his favorites). Even better than the free advice— after all, we kind of knew what we should be doing— was talking aloud about our finances in a way that we had never done before. It motivated us to act. Two weeks later, we had ordered prospectuses for three money-market funds and started looking into the wills. Our next task: working on a budget.
4. Verify claims.
During the interview, ask to see a copy of the planner's Form ADV, Parts I and II. All financial planners who dole out investment advice must submit this form to the state securities regulator or, if they manage more than $25 million in assets, to the U.S. Securities and Exchange Commission. If they're registered, they must show you the information from Part II of the ADV. It describes the adviser's training and experience and discloses how he is compensated. Schedule F explains how an adviser is paid in detail (you'll have to sort through legalese). Part I records any disciplinary history. This can be a deal breaker. If a planner won't show you both parts, cross that person off your list. If a planner tells you he doesn't have an ADV, it's a sign that giving financial advice is not his primary service. Keep looking.
Contact the state securities regulator (the North American Securities Administrators Association's website can direct you to the appropriate office in your state) or the SEC to see if any disciplinary actions have been filed against your leading candidates or their firms.
5. Get it in writing.
Once you find a planner you're comfortable with, get a written agreement (often called a letter of engagement) summarizing the services you'll receive, the cost, and how you will be charged.
