Are there fake financial planners? You bet there are and they are extremely dangerous. Fake financial planners provide bogus financial plans that are designed to sell investment and insurance products. This deceptive sales tactic has worked for years. Financial planners know you do not question the recommendations of their plans because you assume the financial plans are based on your personal requirements.
The Best Financial Planners
There are financial planners who provide sophisticated plans that are not designed to sell products. They are designed to help you achieve your financial goals. Your challenge is to develop a process that evaluates financial planners and selects the best professional who provides real financial plans that are based on your financial circumstances and goals.
Determining financial planner quality starts with how they are compensated. This is tougher than it sounds because there are three primary compensations:
- A professional charges a fee for the financial plan and that is his only compensation.
- The professional may or may not charge a fee for the financial plan, but he is compensated with fees when you implement the plan’s recommendations.
- The professional provides free planning services and is compensated with commissions (sale of investment, insurance products) when you implement the plan’s recommendations.
There are also financial planners who charge fees and commissions.
All financial plans have an implementation phase. This occurs when you buy what the plan recommends – investment and insurance products. Investors rarely question these recommendations because they are part of their plan. Financial planners make most of their income from the implementation phase, which is why so few only offer planning services.
Conflicts of Interest
The financial planners’ compensation methods create potential conflicts of interest that impact the quality of the plan. The most dangerous planner is the third type who provides “free” planning services and is compensated with commissions. There is a major risk you will get a bad plan that recommends bad investment and insurance products that pay the biggest commissions. In other words, your plan is designed to maximize the planner’s compensation – a major conflict of interest.
Tips for Selecting the Right Financial Planners
Following are five tips that will help you select the best financial planner.
1. Do not put any value on the title financial planner. Anyone can claim to be a financial planner.
2. Select financial planners who are paid a fee for their plans. You get what you pay for.
3. Limit your selection of a financial planner to Registered Investment Advisors or Investment Advisor Representatives. These registrations permit them to provide financial advice and services for fees.
4. Make sure the planner acknowledges he is a financial fiduciary. Fiduciaries are required to always put your financial interests first. And, they are held to the highest ethical standards in the financial service industry.
5. Require the planner to disclose all of his compensation from all sources before you sign any agreements. Be extra cautious if the advisor provides vague responses or refuses to provide the numbers.