Frequently Asked Questions about Financial Planning
1. What is the difference between a financial planner and a financial advisor?
This question is often debated in financial circles. Part of the problem is that these terms are used interchangeably and there are no federal regulations over the titles financial professionals can use like there are in other professions.
Generally, a financial planner is a professional who helps companies and individuals put together a plan to meet long-term financial goals. By way of example, a financial planner might help you put together a plan for retirement that helps to match your retirement goals with your income sources.
A financial advisor, on the other hand, is a broader title for a professional who helps you manage your money, including investments and other accounts. As such, a financial advisor might just help with managing your investments by putting together a portfolio for your taxable and tax-deferred accounts. Many financial advisors and financial planners do the same things for their clients. Please do your homework before hiring somebody to guide you as some self-labeled financial planners or advisors may be insurance agents or stockbrokers who do not operate pursuant to a fiduciary standard (discussed below).
To further illustrate the distinction (or similarity) between the two, every financial planner is also a type of financial advisor, but every financial advisor is not necessarily a financial planner. Since the prior sentence sounds kind of confusing if you don’t read it twice, you can kind of think of it this way, a financial advisor would be the genus and the financial planner would be the species (for you biology aficionados). Notably, the National Association of Personal Financial Advisors (NAPFA), publishes that there are more than 100 certifications available that a financial advisor might attain.
2. What is a personal financial planner?
A personal financial planner may have many roles, but primarily he/she is your planning partner. A financial planner will help you formulate your financial goals, assess your financial health, and develop a personalized plan to meet those goals with the resources you have. Your financial planner can meet with you periodically to evaluate your current situation and future goals and revise your plan accordingly.
A personal financial planner is also an educator. Part of the planner's task is to help you understand what is involved in meeting your future goals. The education process may include detailed help with financial topics. At the beginning of your relationship, those topics could be budgeting and saving. As you advance in your knowledge, your planner will assist you in understanding complex investment, insurance, and tax strategies.
3. What do financial advisors do for their clients?
Financial planners typically help their clients with
Investments
Emergency Funds
Cash flow modeling, including borrowing, spending and savings strategies
Risk management & insurance
Benefits coordination
Insurance assessments
Tax planning & strategy
Education planning
Saving for college
Annuity evaluation
Roth IRA conversions
Social Security planning
Retirement & distribution planning
Estate planning
Charitable & legacy planning
4. What is the difference between a registered independent financial advisor and a certified financial planner (CFP)?
A registered investment advisor (RIA) is a person or firm (such as Intelligent Investing, Inc.) that has registered with either the Securities and Exchange Commission (SEC) or their state’s securities administrators to act in a fiduciary capacity for its clients in the area of retirement planning, investing, and the financial markets. Clients should always seek a fiduciary, someone who is held to a higher legal and ethical standard than a representative of a bank or a brokerage firm who may only be held to a suitability standard. Notably, RIAs have a fiduciary duty to their clients, which means they have a fundamental obligation to provide investment advice that always acts in their clients' best interests.
Some RIAs advise high-net-worth individuals on investments and manage their portfolios. These RIAs earn their revenue through a management fee equal to a percentage of the assets managed for the client, typically 1% or more per year. Especially high-net-worth individuals can often negotiate a lower fee, sometimes as little as 0.35%.
Other RIAs, like Intelligent Investing, Inc., earn their revenue through an hourly fee or fee-only arrangement with their clients. These firms give clients an hourly rate up front and estimate the time it will take to construct a customized financial or investment management plan. Fee-only advisors must obtain a Series 65 license to practice in the U.S. The Series 65 exam and securities license is designed by the North American Securities Administrators Association (NASAA) and administered by the Financial Industry Regulatory Authority (FINRA). Formally known as the Uniform Investment Adviser Law Examination, it is required for individuals to act as an investment adviser in the U.S. The Series 65 exam covers laws, regulations, ethics, and various topics important to the role of a financial adviser. Sometimes the General Securities Representative Qualification Examination, Series 7 exam followed by the Uniform Combined State Law Series 66 exam are taken to avoid the more difficult Series 65 exam.
Meanwhile, a certified financial planner (CFP) has obtained formal recognition of additional studies and passage of an exam in the areas of financial planning, taxes, insurance, estate planning, and retirement (such as with 401Ks). The certification is owned and awarded by the Certified Financial Planner Board of Standards, Inc. The designation is awarded to individuals who successfully complete the CFP Board's initial exams, gain a minimum amount of relevant work experience, and meet continuing annual education requirements. Only in 2020 did the CFP Board begin to require all CFPs to act as fiduciaries with their clients when providing services beyond “financial planning.” Now, a CFP must act as a fiduciary when providing “financial advice” (a broader term than “financial planning”), similar to the fiduciary standard required of a registered investment advisor.
Typically, an attorney advises clients regarding their legal rights in criminal and/or civil matters. However, some attorneys (like myself) find themselves smitten with helping clients reach their financial goals. Attorneys must attend an accredited three (3) year law program after completing college and then pass a state’s written bar examination, which, in some cases, can last up to two (2) days. As an attorney licensed in the States of New Mexico and Virginia, I have taken courses and passed Bar Exams affirming knowledge in the fields of: Wills and Trusts, Estate Planning, Estate Gift and Taxation, Personal Taxation, Contracts, Family Law, Business Organizations, Real Property, and Wills and Estates Administration. Moreover, as an attorney, I have a fiduciary obligation to my clients as well, i.e., the duty to act with the utmost care, candor, loyalty, and good faith when acting on behalf of my Clients. I often refer to this as my fiduciary squared obligation because I not only act as a fiduciary as a registered investment advisor but also as an attorney.
A good comparison of the requirements for these different certification programs is given on Reddit.
5. What is a fiduciary?
Investopedia defines a fiduciary as “a person or organization that acts on behalf of another person or persons to manage assets.” A fiduciary owes to that other entity the duties of “good faith” and trust. Being a fiduciary requires being bound ethically and legally to act in the other party’s best interests. A fiduciary is required by law to put the client’s best interests above his/her own.
A fiduciary task typically involves finances -- managing the assets of another person or a group of people. Financial advisors, bankers, accountants, executors, board members, attorneys, corporate officers, and money managers can all have fiduciary responsibility.
When an advisor accepts the “fiduciary duty” on behalf of another party, they are required to act with a "prudent person standard of care," a standard that originally stems from an 1830 court ruling. This standard requires that a person acting as fiduciary is required to act first and foremost with the needs of beneficiaries in mind. Strict care must be taken to ensure that no conflict of interest arises between the fiduciary and their principal. A fiduciary cannot benefit personally from their management of someone else’s assets.
The Department of Labor (DOL) “Fiduciary Rule,” was proposed in 2015 to expand the “investment advice fiduciary” definition under the Employee Retirement Income Security Act of 1974 (ERISA). This rule would have extended the fiduciary requirement to all financial professionals who work with retirement plans or provide retirement planning advice. Individual investors with fully managed IRAs and 401(k) accounts would benefit the most from the Fiduciary Rule.
6. How to find a financial planner you can trust?
Initially, ask for referrals from your trusted inner circle of accountants, attorneys, or other advisors. Another good source for recommendations can be trusted family members, neighbors, and work associates. For more information about choosing a financial planner/advisor see also: Choosing an Investment Professional at FINRA.org. After acquiring a few recommendations, you can begin to vet these individuals by researching them at FINRA’s broker check, at the SEC’s Investment Advisor Public Disclosure website, or at your State’s securities regulator page. Also, don’t forget to check them out at the Better Business Bureau.
Next, you want to sit down with a few advisors/planners and interview them for fit. Are they trying to sell you something? Are they listening to what you want? Do you feel pressured? See if they pass the initial “smell” test, for lack of a better expression.
You certainly want to ask if your potential planner or advisor is a fiduciary. If they say they are not a fiduciary, ask why. They should offer a clear, concise and logical explanation. They should also clearly disclose what rules apply to the advice they give. Ask about their compensation structure. A complicated fee structure is a red flag. Think twice if the advisor earns most of their money from commissions on the products/investments they sell. It is your right to find the right financial advice for your situation.
7. How do I vet a financial advisor?
You should plan to interview several financial advisors to find one that meets your needs. Ask direct questions about their investment style, track record of returns, his/her fee structure, and any potential conflicts of interest. Ask the advisor for references and follow up with them to make sure the advisor is trustworthy.
8. How can I check the background of a financial advisor?
The Financial Industry Regulatory Authority (FINRA), the Securities and Exchange Commission (SEC), and the National Association of Securities Dealers (NASD) are good places to check and make sure the financial advisor has not had any disciplinary action taken.
Look up their Form ADV Part 2 on the adviserinfo.sec.gov website. This form requires investment advisors to describe in plain English the types of advisory services they offer, their fee schedule, disciplinary information, conflicts of interest, and the educational and business background of management and key advisory personnel of the advisor. This brochure is the primary disclosure document that investment advisors provide to their clients. When filed, the brochures are available to the public on adviserinfo.sec.gov. You can find our ADV Part 2 by clicking here.
Another source of information can be the advisor's past or current clients. A good advisor should not be afraid to hand out two or three solid references. If the advisor is a Certified Financial Planner, check the Certified Financial Planner Board of Standards.
9. Do I need investment management services?
Investment management is a financial service that involves taking over a client’s investments. The advisor suggests an investment strategy, buys and sells investments and manages the client’s overall investment portfolio. These services can cost 1% or more of assets under management (AUM). Online investment advisors are more cost-effective (starting at about 0.3% of AUM) and provide limited guidance from a team of financial advisors. Robo-advisors involve the use of sophisticated computer algorithms to determine the ideal investment mix of stocks, bonds, and cash for you based on your investment goals and risk tolerance. They are the most cost-effective service available and typical charge from 0.25% to 0.50% of AUM; however, one-on-one access with a financial planner or advisor to address issues specific to your needs can often come at an additional cost.
Our investment management services (charged only by the hour) include:
Risk Tolerance Assessment
Defining an Investment Strategy
Reducing Investment Costs
Asset Allocation Determination
Portfolio Diversification
Rebalancing Services
Portfolio Monitoring
Solo 401k Set-Up & Review
SEPIRA Set-Up & Review
Cash Balance Plans
Record Keeper Selection
Third Party Administrator Selection
10. When to use a financial advisor?
A. You have a major life event. Any major life event might require the help of a financial planner. Examples include having a baby, job changes, dramatic downsizing, new sources of income, or selling a business. A financial planner can walk you through all of the options and help you to make the most well-informed decision.
B. You get a substantial raise. If you all of a sudden have more money coming in, it might be time to put together a new financial plan. You could use that money to raise your short-term quality of life, or you could put it to work increasing your wealth and future financial position. A financial planner can help you decide what options you have, where to invest, and what might be the best way to increase your overall wealth.
C. You receive an inheritance. An inheritance might be one of the most important times to seek the help of a financial professional. You will likely have questions about how to take care of your family member’s final financial obligations and wishes. You will also want advice on how to best handle your inheritance going forward, e.g., Do I invest?, Should I buy down my debt?, etc.. A financial planner can answer all of these questions.
D. You get divorced. Divorces can take a major toll on your personal financial health because of shared finances. You will have questions like, “Who gets what?” “How do I protect myself?” “How are retirement accounts and/or benefits best separated?” “Where should I reallocate my assets?” All of these questions and concerns can be addressed by a financial professional.
E. You are at or close to retirement age. Some of your biggest money questions might arise when you are close to retirement. You will have questions like, “Will I have enough money?” “What are my options?” “When should I claim Social Security?” “Can we buy that second home?” “Can I afford to retire?” and “How can I save more money?” Financial planners are trained to help their clients navigate the challenges of retirement.
F. You are ready to take control of your financial situation. The desire to take control of your financial situation doesn’t require a major life event to happen. If you’re ready to make a plan, reach out to a financial planner. If you have an existing plan that you want to modify or validate, a good financial planner can help you identify any pitfalls and put you back on track for a comfortable retirement.
11. What is a robo-advisor, and is it safe?
A robo-advisor (a.k.a. robo-adviser or roboadvisor) is a digital platform that deploys a sophisticated algorithm-driven investment management service with little to no human supervision. The algorithms are based on Modern Portfolio Theory. It collects information from a client about their financial situation and future goals through an online survey. The answers are used to offer advice and automatically invest the client’s assets.
Robo-advisors typically use the same software as traditional advisors, but usually only offer portfolio management services. They do not get involved in the more personal aspects of wealth management, such as retirement planning, insurance analysis, Social Security planning, and/or estate planning. The best robo-advisors offer easy account setup, robust goal planning, account services, portfolio management, security features, attentive customer service, comprehensive education, and most importantly, low fees. However, many robo-advisors have fees that are similar, if not higher than, hourly fee face-to-face advisors over time.
12. What is the difference between asset allocation and diversification?
Asset allocation refers to the separation of your entire investment portfolio among different asset categories, such as stocks, bonds, cash, real estate, commodities, precious metal, etc. By utilizing these disparate asset categories, which typically exhibit non-correlated investment returns within a portfolio, an investor can help protect against significant market losses. Notably, one’s particular asset allocation should take into account their investment time horizon and their risk tolerance, among other things.
Diversification refers to the spreading out of your investments within each asset category, e.g., it is recommended to hold different types of investments within each asset class. At the macro level, diversification not only refers to holding international and domestic stocks simultaneously, for example, but also to holding large/mid/small capitalization stocks, as well as, stocks with growth and value orientations and from different sectors of the economy. Stated another way, you don’t want all of your eggs in one basket...see, Mom was right.
At a more granular level, for example, both 3M (MMM) and Waste Management (WM) are large capitalization equities in the Industrials sector. Being in the same sector, these two stocks can move up or down together. Coca-Cola, Co. (KO) is a large cap stock in the Consumer Staples/Defensive sector. Thus, it is less likely to move in the same direction as 3M or Waste Management if the Industrials sector were to fall out of favor. As such, in this example, owning both 3M and Coca-Cola within your portfolio could provide diversification within your stock or equity asset class. A well-diversified portfolio consists of diversification across multiple types of assets, not only equities, e.g., diversification applies to bonds as well.
13. Can I open a Roth IRA for my child?
Yes! Roth IRAs are ideal for kids for three reasons:
Children have decades for their contributions to grow tax-free.
Contributions to a Roth IRA can be withdrawn tax- and penalty-free at any time.
There are no age restrictions. Children are just required to have earned income.
The main requirement is that the child must have earned income. Earned income as defined by the IRS is taxable income and wages earned from a W-2 job, or from self-employment like baby-sitting, lawn-mowing or dog walking.
A parent or other adult must open a custodial Roth IRA for a child. Contributions are limited to the lesser of the child’s total earned income for the year or the current annual maximum Roth IRA contribution set by law. The child’s adjusted gross income must also be below the thresholds above which Roth IRAs are not allowed. Not all online brokerage firms or banks offer custodial IRAs, but several large firms do offer them.
14. When should I take Social Security?
You can take Social Security as early as age 62, but doing so will permanently reduce your monthly benefits by up to 30% The full retirement age for those born from 1943-1954 is age 66, and seniors can get up to an 8% bump in benefits for every year they delay their Social Security claim from age 66 up to age 70.
Those who plan to continue working full-time until their full retirement age should think twice about claiming Social Security benefits while still working. There is a benefits penalty of $1 for every $2 you earn above $17,640 in 2019 if you are younger than the full retirement age. Don’t worry too much, though. Your benefits will increase at your full retirement age to account for the benefits withheld due to these earlier earnings. Note, this increase does not apply to benefits received for care of minor or disabled children. Some people may worry about Social Security running out of money and take their benefits early for that reason. However, we are optimistic that the program isn't going bankrupt, and these concerns shouldn't drive the decision of when someone begins benefits.
15. How Do I Apply for Social Security Benefits?
There are three ways to apply for Social Security benefits.
Complete an online application through the Social Security Administration website.
Call 1-800-772-1213 to submit an application over the phone.
Visit a local Social Security Administration office and apply in person.