Before you entrust your finances to a professional planner
Boston — Financial planning, as a profession, has something of an identity problem. As Christopher Croft found out when he met a former high school friend for the first time in years. ''What are you doing now?'' the friend asked.
''I've become a financial planner,'' replied Mr. Croft, executive vice-president at Bailard, Biehl & Kaiser Inc., of San Mateo, Calif.
''So have I,'' said the friend; ''I'm selling insurance.''
For a lot of people ''financial planning'' sounds like a fancy term for coming to grips with their bank statement, or for going onto a rigorous savings program that is the budgetary equivalent of the dry-toast-and-grapefruit diet. And at its worst, ''financial planning'' is seen as a euphemism for a high-powered sales pitch.
Trendiness has confused the issue further. As Thomas McFarland of the New England Financial Planning Group in Burlington, Mass., puts it, ''Two years ago, people would say, 'A financial planner? What's that?'
''Now they say, 'I don't know what a financial planner is, but I think I need one.' ''
Strictly speaking, financial planning is a very specific process whereby the planner analyzes the client's resources, helps him or her articulate goals, and then hammers out a strategy whereby the resources will be used to reach those goals. Financial planning should be long term and comprehensive. Although the planner may not be directly involved in executing those plans, they do get pretty specific. A client may be told to put $10,000 into growth-oriented mutual funds, for example, or to set up a Clifford trust for the children's education.
Financial planning considers the client's earnings (current and aspired to), tax situation, insurance coverage, investments, retirement plans, and estate planning. The planner is a generalist rather than a specialist, and usually has a background in a specific area of the financial industry - accounting, insurance, securities, tax law, or banking - but is conversant with the other specialties.
And most planners recommend a team approach including an expert in each of these fields, with the planner himself as the quarterback.
''Beware the 'Lone Ranger' - the one who tries to do it all by himself,'' says W. Thomas Porter, partner in the Seattle office of Touche Ross & Co., and national director of their personal financial planning service. Whether these fields of expertise are represented from within the planner's own firm or from outside depends generally on the size of the firm.
The ranks of planners range from those who specialize in millionaires down to those with annual household incomes of $25,000 to $40,000; few people below this level have enough discretionary income, assets, and tax liability to need or to benefit from the services of a financial planner.
As you talk with planners, suggests Philip N. Gainsborough, president of Associated Planners Securities Corporation in Los Angeles, you should ask:
* How long have you been at this?
* What are your professional affiliations? Are you a member of the International Association for Financial Planning (IAFP) or the Institute of Certified Financial Planners? Are you on the Registry of Financial Planning Practitioners?
* Do you specialize in certain market segments? The IAFP (5775 Peachtree Dunwoody Road NE, Suite 120-C, Atlanta, Ga. 30342) can put you in touch with a local chapter in your area which can suggest planners serving your income group. The IAFP will also send you names of planners near you listed in the Registry (not all of them IAFP members).
Another group is the National Association of Professional Financial Advisers (8140 Knue Road, Suite 110, Indianapolis, Ind. 46250), whose members work only for fees, not commissions.
* Do you have the CFP - certified financial planner - designation? Or the ChFC - chartered financial consultant? These are not college degrees, and lots of good planners don't have them, but it can still be comforting to see those letters after someone's name.
* What references can you give - of satisfied clients and of other professionals in the community?
Mr. Gainsborough further suggests asking prospective planners for examples of plans they have worked out for clients. ''Walk around the office. Check things out. Ask him, 'What civic organizations do you belong to?' 'Who's your broker-dealer?' ''
Anyone can hang out a shingle as a financial planner. But any planner you consider should be a registered (with the Securities and Exchange Commission) investment adviser, required to publish a brochure (comparable to a prospectus), which you should ask for and scrutinize for in-depth information on the background of the planner and his or her colleagues.
Picking a planner is also a matter of personal rapport; people have all kinds of ways of determining this. ''I've had people call me up and ask, 'How old are you?' '' says Mr. Porter.
Some prospective clients, says Mr. Croft, are ''numbers crunchers'' who need help seeing the larger issues of financial planning; others see the ''big picture'' easily but need help translating that picture into an action plan, with all the blanks filled in.
You should also consider:
* Does the planner earn a living from fees, commissions, or, like the majority of planners, a combination of both?
* Is the planner ''product oriented'' - i.e., employed by a firm with investments, annuities, insurance policies to sell?
* If the planner does indeed wear a salesman's hat as well, is he part of a captive sales force, selling only one company's products? Or does he have access to a broad range of investments?
* How can the planner help you carry out your plan? There's no point in paying for financial advice if you don't act on it. On the other hand, you don't want to be guided - or pushed - into the wrong investments just because your planner wants to make a commission.
Every individual will find his or her own right answers to these questions. In the abstract, at least, the right answers are those indicating a planner who is not a salesman and who is as independent of ''product'' as possible.
But independence has its price - easily several thousand dollars for a basic financial plan, for example - which may be simply too high to be cost effective for the low end of the market. So the best solution for these people may be to go to a product-based planner with both eyes wide open and remember they are likely to do better with long-term planning reflecting a certain bias than with no planning at all.
Jeffrey R. Secord CFP of Integrated Resources Equity Corporation in Encino, Calif., says, ''Clients should be concerned with the motivations of the people they deal with. But you have to figure out where you want to go. People set up obstacles for themselves worrying about commissions instead of the return on the investment.''
Al Jeanfreau, a CFP in Portland, Ore., charges fees and commissions and maintains that 95 percent of his clients come to him for his investment track record. But he adds, ''I'm looking forward to the day when commissions come down to the point where we can just charge a straight fee.''
Sam Marinella, president of Torchmark Financial Services Inc. of Boston, makes a strong case for product-based firms. Torchmark's financial planning unit , Waddell & Reed in Kansas City, serves a middle-American clientele: ''We can work with almost any level of income, as long as they've got life insurance and an IRA,'' he says.
Waddell & Reed charges no planning fees but sells, on commission, products developed by other Torchmark units.
Mr. Marinella defends the product sales as essential to ensuring the plans get implemented - ''I'd rather have even a poor financial plan and have it implemented than a beautiful plan that sits on a shelf.'' He also maintains that the customer is better off with a planner selling a few in-house products the planner knows well than with an independent planner who must track vast constellations of mutual funds, limited partnerships, and other investments.
On the other hand, Mr. Porter points out that the solution to a financial-planning problem is not always a product. A client wanting to reduce taxable income, for example, could do so by investing in a real estate partnership - but it might be more appropriate to defer income under a 401(k) program, with perhaps the additional advantage of an employer match.
Once you've picked a planner, just what should you expect to get?
Mr. McFarland says you should expect a financial planner to provide you with tax projections, a cash flow analysis, budgeting help, and a balance sheet showing your net worth. He advises getting a financial planning contract.
Your planner should tell you what to bring to your initial data-gathering interview, if you haven't already discussed this matter as part of the get-acquainted process. The amount of detail the planner expects might be another indication of whether you're on the same wavelength. Mr. Gainsborough, for example, asks clients to bring insurance policies, data from wills and trusts, checkbook stubs, statements of corporate perquisites, brokerage statements, and other relevant documents. All this gets spelled out in a form letter to new clients ''which even tells them where to park,'' he adds.