Have you ever walked into a meeting and felt like you were being sold something? Unfortunately, this has happened to almost everybody. In the financial services industry, there are a lot of salespeople that call themselves financial planners. So, how do you know if you are meeting with a salesperson or a financial planner? This article will breakdown what to look for and why some of the “obvious choices” might not be the best choices.

What should you look for in a financial planner?

When you sit down and meet with somebody it is imperative to know that they have your best interests in mind. You don’t want to walk out of a meeting with buyer’s remorse. So, what should you look for when choosing a financial planner? Let’s first break down some industry jargon. Some people call themselves financial planners, some call themselves financial advisors. What’s the difference? There isn’t one. These terms are used interchangeably throughout the industry (and even in this article). Don’t let a title fool you one way or another. In addition to titles, the following are some other important things to consider when deciding who you want to work with including who they work for, compensation method, whether they are a true fiduciary, industry credentials, and connection. Let’s begin with who they work for.

Who do they work for?

Do they work for a large/national company or are they local? Are they independent or are they affiliated with a subsidiary of a larger firm? Is the firm they work for in the advice business or are they in the product manufacturing business as well? For example, does their company also manufacture annuities, mutual funds, etc.?

Why does this matter? Most large firms are in the business of manufacturing products, and this is where they earn most of their revenue as a company. They hire a salesforce to distribute their product, but often call their salesforce “financial advisors”, “financial representatives”, or “financial planners”.

This is often why people feel awkward sales pressure when they sit down with a “financial planner”, because they are really just sitting down with a salesperson in disguise.

With that being said, just because someone works for a small local company does not mean he or she will provide advice in your best interest. The next thing you need to figure out is how they get paid.

Understand their compensation method.

How is your financial planner getting paid? Traditionally, there are 3 main types of compensation in the financial services industry: commission-based, fee-based, and flat-fee.

• Commission-Based: This means the professional’s income is earned via commissions from the products they sell to you.
  
  • Think of the old-school wall street broker movies: Gordon Gekko (Wall Street), or Jordan Belfort (The Wolf of Wall Street). They sling products to clients and collect a commission on every trade. This might not be in your best interest because it creates an environment where your financial advisor is not getting paid unless if they sell you something, even if you don’t need it. This mentally is slowly fading out of the industry but there are still stockbrokers out there who claim to be financial planners.
    
  • Also, life insurance salespeople fall under this category. They receive a commission when they sell you a product, but they usually receive this commission only once. This creates a dilemma. Let’s say this insurance agent did do some financial planning for you, and maybe they even helped you learn some new things and get some of your financial affairs in order. The issue with a commission-based compensation model is this: what is the incentive to make sure the financial plan stays on track next year, and the year after that? Unless if there is another insurance sale to be had, this person might have to work for free if he/she does what is right and continues to help you with your planning moving forward. Just like in most industries, people rarely work for free. Therefore, you might be under the assumption that you have an active financial planner looking after your best interests, but in reality, you are being ignored.

• Fee-Based: This means you are paying your financial planner/advisor a percentage of the assets he/she manages for you.
  
  • The goal of this compensation model is to reduce conflicts of interest. In the commissionable world, one investment might pay your advisor more than a different one. This creates a conflict of interest because he/she is motivated to “sell” you what he/she will make the most commission off of. However, with a fee-based arrangement, if your assets grow, your financial planner makes more money. If your assets shrink, your financial planner makes less money. This compensation method aligns your best interests with your financial planner’s best interests by directly relating their compensation to the growth of your assets. Therefore, financial planners under a fee-based compensation model are highly motivated to proactively monitor your financial position at all times and are not tempted to put you in products that are not in your best interest.
    
• Flat-Fee: This means a fee is agreed upon ahead of time and re-evaluated on an ongoing basis (quarterly/yearly/etc.).
  
  • This structure is often used for ultra-high-net-worth individuals where the scope of services is so broad the only way to put a value on it is to have a retainer fee, similar to an attorney. Because this compensation is not aligned with pushing certain products, a flat-fee system also avoids the conflict of interest problem that is experienced with the commission-based system.

Know who is a fiduciary and who is not.

A fiduciary is an individual or entity that has a legal obligation and is ethically bound to act in the best interest of his or her clients. The word fiduciary has been thrown around so much in the last couple of years that it seems like everybody claims to be a fiduciary these days. But that is not the case.

Many firms can only sell their proprietary products which means there is no way for its financial planners to do the proper due diligence to say that they have found the product that is best for you and your unique situation. Additionally, many other firms have sales goals/quotas that their “financial planners” must meet to qualify for promotions or to be included in the annual company trips for their top salespeople. These create conflicts of interest.

When you meet with a financial planner, typically they will ask you a lot of questions. But, it is important for you to ask them a lot of questions as well. If they claim to be a fiduciary, it might be a good idea to ask them for examples of how they have put client’s interest ahead of their own in the past.

Know the different industry credentials.

Most often, there are letters that come after the financial planner’s name on his/her business card. Don’t be fooled by these credentials. You have probably seen an advisor with six or seven credentials at the end of their name. Does that mean they are a smarter or better financial planner than one with only one credential? Absolutely not. Many of these credentials take a very short amount of time to obtain and are more of an accessory than an accomplishment. You should always research the credentials that a planner has, and that will most likely lead you to where their focus lies (e.g., planning, investments, insurance).

How they connect with you.

A good financial planner will be able to run the numbers and create a financial plan to help you achieve your goals. A great financial planner will also explain things to you in a way that you can understand.

Sound financial planning often entails developing strategies that you should embrace over a long period of time, and most of these strategies will run into short-term bumps in the road. If you do not have clarity around why you are doing something and you hit a short-term bump in the road, you might be more likely to abandon the strategy, which might be detrimental to your long-term financial success.

Most people can agree that you want your financial planner to be smart, but you also want them to be able to educate you in a way that empowers you.

Do your research.

Like any other major decision, you should do your research before choosing a financial planner. I encourage you to learn about the company they work for, the way they are paid, the types of experiences they have had working with clients, their credentials, and  consider your connection. Your financial wellbeing is an important part of your life and I hope these considerations help you feel more confident in choosing a “real” financial planner who is right for you.

Gregg Brant, CFP®, APMA®, MBA

Family Wealth Advisor | Contributor

Gregg is a financial planner who is passionate about helping first responders and their families navigate their financial lives with confidence. Having a spouse who is a professor in the State University System, Gregg has worked with the Florida Retirement System first-hand for his own personal financial planning.

Now Gregg is on a mission to take this knowledge and disseminate it to the people who deserve it most; our first responders.