Personal Finance

Choose a financial planner with care

Kids’ college tuition, around-the-world vacations in retirement and the potential for long-term health care are all major undertakings.

Regardless of how well you manage your money, it can be easy to get in over your head. That’s why enlisting the help of a financial planner or investment adviser can be a smart money move.

But with thousands of finance pros to choose from in the Kansas City area, picking the right adviser can be a daunting task. To find the best fit, experts say, it’s important to gain a clear understanding of personal financial goals and objectives. Another component is to do the homework in terms of understanding a financial expert’s qualifications and how the planner is paid for services.

Additionally, phone calls to regulators to determine whether a planner has a history of complaints are a worthwhile investment of time. After all, why buy trouble?

Dan Mathews is a certified financial planner with Overland Park-based Stepp & Rothwell Inc. He’s also media relations director for the Financial Planning Association of Greater Kansas City as well as an ambassador with the Certified Financial Planning Board. Mathews’ CFP designation indicates coursework and experience as a financial planner.

Mathews describes financial planning as a “boutique industry.” As each client situation is unique in terms of financial position, needs and goals, there is no one-size model. Because of this, it’s well worth the effort to seek out a financial planner with experience in working with clients in similar situations or in putting together portfolio strategies that meet particular goals, Mathews said.

For example, planners who typically works with high net-worth clients provide a vastly different skill set than planners who work with individuals with more modest incomes and issues. In the first case, client goals might be centered on asset allocation to minimize the tax bill. In the second case, the goal might be savings and investments in state-sponsored 529 college accounts to help with down-the-road tuition expenses for a child.

Whatever your financial stripes, it’s hard to pick a planner unless you first have a clear understanding of your goals and objectives. Forgoing this step is the equivalent of a shopper going to a department store without a clear understanding of what item to buy, only to get home and realize the purchase was exactly what wasn’t wanted.

Once an investor can clearly describe primary a financial goals, a planner can find appropriate investments and savings strategies.

Clarity on how financial planners are paid is another way to flesh out comfort level with a planner.

Fee-only planners have a set price for services with clients paying a predetermined amount for advice. Fee-only advisers can arrange pricing on an hourly basis, or clients can pay a monthly retainer to allow for ongoing guidance. Fee-only advisers can pick and choose products based on specific client needs.

Planners selling specific set of brokerage products earn commissions on their sales. Commission-only planners are limited in offerings as earnings are based solely on products sold.

The third compensation method is known as fee-based, with a combination of fees and commissions going to the adviser.

Mathews has been a financial planner since 1996. Since then he has been through two economy-wide stalls — one after the Sept. 11, 2001, terrorist attacks, and the second starting with the financial industry meltdown in the fall of 2008.

With each one, client portfolios took enough of a hit that distress and anger were common themes among the phone calls he received during those periods. A “collective freakout” is Mathews’ term.

But those anomalies — what Mathews calls “black swan events” — are indicative of one of the primary tenets of the financial planning industry. That is, the relationship between planners and clients is “more relational than transactional in many respects,” Mathews said. This is because strategies behind portfolio allocations don’t become invalid when the market takes a down turn.

Many of the clients Mathews sees find themselves suddenly thrown into the role of handling finances. Often in the case of death or divorce, it was the other person who typically took care of the money end of things.

Other clients are those who have done either no financial planning at all or those who have entered disjointed ventures with no comprehensive alignment to investments.

And in many cases, retirement is the driver bringing new clients through the door.

Ideally, however, a retirement plan is already in place before the retirement date arrives. Mere ownership of a “401(k) doesn’t make a retirement plan,” he said.

Retirement age is also a sweet spot for scammers. According to Certified Financial Board of Standards Inc. based in Washington, D.C., financial schemes aimed at seniors typically come in several forms. They include free-meal seminars; unsolicited pitches for financial products and services; promises of low-risk and no-risk investments with high yields; prize-winning schemes; and power of attorney and guardian abuse.

Specific violations against seniors include the sale of unsuitable financial products, misrepresentations or omission of material facts about financial products, and negligence and lack of follow-up.

“Seniors are definitely targets,” said Kansas Securities Commissioner Aaron Jack. “It’s not because they’re senior citizens. It’s because they’re the ones with all the money.”

Jack, who’s been on the job since January 2011, said that residents should take full advantage of all background resources available to them.

It goes without saying that you should ask questions. What’s the risk? What are the fees? What if I want out of the investment? It’s human nature to “not want to look like we don’t know what we’re talking about,” Jack said. But if you don’t understand something, keep asking until it is clearly explained. If the adviser can’t pass this test, it’s probably a sign to find someone else.

State securities regulators can also help. After the 2010 adoption of the Dodd-Frank Wall Street Reform and Consumer Protection Act, financial regulation of securities of up to $100 million was moved out of the Securities and Exchange Commission domain to the states.

Outside Washington, state regulators have authority over financial firms based in the state or doing business within the state. The commission’s role is to balance investor protection with capital formation.

For investors, the arrangement means state securities offices become resources in determining the legitimacy of financial advisors.

“We can’t tell you if it’s a good investment or if it’s a bad investment,” said Jack, “but we can tell you if it’s legal.”