9 Risks of Working with a Financial Planner

by Kevin on September 13, 2011

Going it alone with your financial planning is most likely not the best idea. Even if you know a lot about personal finance, it still makes sense to have another set of qualified eyes take a look instead of sailing through choppy waters alone. Working with a financial planner is one of the smartest things you can do to come up with a long term financial plan, check your progress, and offer advice for difficult situations. However, there are some risks involved when working with a planner.

9 Risks of Working with a Financial Planner

Here are some things to consider before you decide which planner to start working with. Be aware of these as you talk with the planner, and remember your first consultation should almost always be free.

He Isn’t Certified

The best planners are Certified Financial Planner. There are more than a handful of planner certifications available, and not all are created equal. Instead of running through each and every one, I encourage you to do some research when your planner hands his card to you. Look up the designation online and see how many hours went into getting the certification and what it really stands for.

He’s Pushing Insurance on You

A red flag of a planner is if he instantly starts pulling you in the direction of insurance. Whole life insurance, variable annuity plans, and the like are all profitable products to sell. If he doesn’t sit down and come up with a long term plan aside from insurance, you need to move on. Recommending insurance is fine — like term life insurance — but it isn’t the whole part of the plan.

Company Protocol is to Churn Your Account

Many planners that work for large organizations are secretly told to churn your account as much as possible. So in year 1 they recommend a certain mutual fund with a high sales load, and in year 2 or 3 when the fund has underperformed, they convince you to move to a different fund… with another sales load. This is called churn, and you want to avoid it.

He Isn’t Recommending Index Funds

As part of avoiding churn, it makes a lot of sense to simply put your money into index mutual funds that have no sales load. Index funds should have very low expense ratios. You might need to move money around from time to time, but it doesn’t really cost you anything due to a lack of sales load.

He’s in it for the Money

I would be cautious if your planner is only about earning as much money as possible. This can be hard to determine at first glance. It is fine to want to earn a high income, but if you are only concerned with generating as much commission as possible he is going to put you into bad financial spots (most likely churn, see above).

He Has Complaints Against Him

The Securities and Exchange Commission maintains a website of formal complaints against planners. Check it out before signing up to use any planner.

He’s New and Has No Planning Experience

Being a financial advisor for a large institution is very difficult. Often times new hires are told to call the wealthiest 200 people they know and try selling to them and their networks. A lot of planners have to resort to cold calling to try and gain new clients. This leads to a lot of turnover in the industry, which means your planner may not know what he is really doing.

He Isn’t Fee-Only

A big red flag for me is if the planner isn’t fee-only. A fee-only planner charges you an hourly rate for his time. This helps him be unbiased in offering you recommendations. If he isn’t fee-only, he is making commission off of the products he is putting your money into. This puts his interests above yours.

He’s Selling More than Just His Time

To go along with the above, if he is selling more than just his time then he has a bias. You want to eliminate or minimize this bias if possible. Ask the planner if he has a fiduciary duty to you. Fiduciary duty is where the planner is obligated to put your interest above their own. If they don’t have a fiduciary duty, then you know where you stand in terms of priorities.

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