10 Things You Need To Know: Hiring a Financial Planner

Here are the 10 things you need to know before hiring a financial planner:

1. What Do You Need: Depending on the complexity of your finances, you may need a one time review or ongoing support. Do you need help with one specific area of your finances like investment management? A one time review of your retirement plan or budget? Or someone who will tie your taxes, investments, insurance, estate, and retirement parts together? Make sure they offer all the services you need.

2. Your Best Interests, ALL THE TIME: Only some financial professionals have pledged to act in the client's best interests at all times. These types of advisors are called "fiduciaries." Advisors working for Registered Investment Advisor firms have a fiduciary standard all the time. 

Brokers have a lessor, more vague, standard where they are able to sell "suitable" products for your situation. Big brokers like Merrill Lynch, Morgan Stanley, and Edward Jones, and advisors at local banks go back and forth between the two standards to benefit their bottom line and not the clients. 

It comes down to loyalty. A fiduciary advisor is loyal to clients where a broker is loyal to the company its shareholders.

3. Background Check: Do your due diligence to avoid the "bad eggs" in the financial services industry. There are resources to see if disciplinary action has been taken against an advisor or broker. If you are considering a Registered Investment Advisor they must provide a brochure (Form ADV Part 2 A&B) disclosing information about the company and its representatives.

• Registered Investment Advisors: SEC Advisor Search
• Brokers: FINRA Broker Check

4. Some Are Pros, Some are Amateurs: Unlike other professions like a doctor or lawyer, anyone can say they are a financial planner. But, that doesn't mean they have any experience or credentials to provide you with quality financial planning. 

Again, check the person and or company at the SEC or FINRA websites. Credentials like the Certified Financial Planner (CFP®) are not easy to attain and show further expertise. Certified Financial Planners have years of experience; extensive knowledge and skill in all areas of financial planning; completed a background check; ongoing continuing education; and they adhere to ethical standards set by the governing body.

• CFP Lookup: CFP Certification

I attained my Certified Financial Planner designation after three years of working as an advisor, studied and passed six pre-tests and then a two-day 10 hour comprehensive exam. This rigorous testing prepared me and sharpened my knowledge to advise client's appropriately for many financial situations.

5. Avoid Fraud: To protect your money you should only work with someone who uses a Third Party Custodian. Companies like Charles Schwab, Scottrade, and Fidelity are examples of Third Party Custodians. They act as a check and balance for clients by keeping your money separate from the advisor and they provide independent statements to verify account balances.

6. A Financial Planner is NOT a Broker: This repeats some of the information above but it is important to emphasize the difference between the two. A true financial planner will provide unbiased advice that is in your best interest. They will look at all of your financial matters, understand what your goals are, work with you to create a plan to accomplish them and be by your side every step of the way. They will not sell you products or move you in and out of investments every month. 

Brokers are all about selling, selling, selling. They have corporate sales quotas, focus on gathering assets, earn big commissions on insurance products and other investments, don't disclose their compensation, and do not work in the clients best interests at all times.

7. How Are They Paid: There are three standard ways financial professionals are paid:

• Fee-Only: The only composition earned is directly from the client. It can be a flat dollar amount or a percentage of assets/net worth, or on an hourly basis. A Registered Investment Advisor firm has to disclose how they are paid, the amount or percentage and any conflicts up front. They can not receive commissions or kickbacks. This eliminates any incentive to sell products that are unnecessary or inappropriate for the client. Fee-only is the easiest to monitor and understand how much you are paying for the services you are receiving. Fee-only advisors adhere to the fiduciary standard.

• Commissions: This is a percentage charged on the amount of product sold. They more you sell the more you make. Variable annuities are notorious for high fees with up front commissions of  6% -7% and trailing annual fees of 3%. Load mutual funds like American Funds sold at Edward Jones can charge 5.75% commissions up front plus fees to the manager. That means you have to earn 7% or more to get back to even. And you don't receive any advice on other financial matters. They do not have to disclose any kick backs or revenue sharing agreements which provide incentive to sell one product over the other.

• Fee-Based: The term was deliberately created to seem better than the reality and it has become a great money maker for brokers. In truth, "fee-based" means brokers can charge you commissions and fees at the same time. They hide behind both broker and registered investment advisor labels and use them to benefit themselves. Brokers are able to sell a product with an upfront commission and then place it in an account that charges an annual fee on that same asset. Again, they do not have to disclose any kick backs or revenue sharing agreements which provide incentive to sell one product over the other.  

8. What Tools Do They Use: Is the advisor able to use the best industry tools or are they tied to only what their company allows? Are they technologically savvy so you can communicate or get information when and where you want? Because I am an independent financial planner I am able to evaluate and implement the technology tools I believe provide high value, are easy to use and relevant to my clients. Are they set up for video conferencing, sharing documents through Dropbox or another cloud based service, computer sharing, financial planning software?

9. How Do They Invest: History, research and studies show it is almost impossible to consistently beat the market. So why pay an actively managed fund more for something that doesn't perform better? Instead, look for an advisor that uses index funds. They are more tax efficient, have transparent investment holdings and have very low costs. It is also important that the advisor is focused on long-term investing (5 or more years), uses a diversified asset allocation strategy and rebalances.

10. What Advice Can They Give: Brokers can not give advice, only general "guidance", on investments inside 401(k) and other employee benefit plans. They won't give advice on these plans because they have to take on a fiduciary responsibility and that limits how and what brokers sell. 

RIA firms and their advisors can and will provide advice on all of your accounts and assets regardless of where they are. This gives clients a cohesive strategy across all their accounts so they are working to achieve their goals.

Social Security Benefits - What You Need to Know

How to maximize your Social Security benefits can be one the most important financial decisions in retirement. Navigating through the maze of Social Security rules can be one of the most difficult aspects of your retirement. Below is a summary of Social Security information that I think everyone needs to know.

• Determine Your Benefits: In 2011, Social Security stopped mailing annual estimated benefit statements as a cost savings measure. Recently, they revised this change so everyone will receive a statement every 5 years. I recommend that everyone should track their benefits more frequently by creating an account at: http://www.ssa.gov/myaccount/

• Earliest Start Date: Age 62 is the earliest that a person can start taking Social Security. The drawback to starting early benefits is the amount is permanently reduced. Depending on your full retirement, benefits can be reduced up to 35%. Everyone should make an estimate of the break even date for taking benefits early versus your full retirement age versus age 70 bonus benefits. The difficult part is guessing the date of death. To calculate your reduction of benefits use this calculator: http://www.ssa.gov/oact/quickcalc/early_late.html                                                                                                                     

• Full Retirement Age: This depends on the year you were born. 

          1943 to 1954: age 66

          Every year starting at 1955 to 1959 add 2 months

          1960 and later: age 67

• When to Apply: You must be at least 61 years and 9 months old to apply for Social Security benefits. You should not apply for benefits more than 4 months before you want to begin benefits. Benefits are paid the month after they are due. Remember to sign up for Medicare 3 months before age 65.

• Spousal Benefits: If you are married, you or your spouse, but not both can receive spousal benefits. To qualify, the spouse applying for spousal benefits needs to be at least 62 years of age and the other spouse has to currently be eligible or receiving Social Security. Again, benefits will be reduced if the spouse is younger than their full retirement age. In some cases the benefit can be reduced to 35% of the spouses benefit. On the other hand, taking spousal benefits can allow the other spouse to delay benefits thereby increasing the benefits in the future (see file and suspend below).

• Income Limits: If you start benefits before full retirement and still work, your social security can be reduced. In the 2014, if you are younger than your full retirement age for the entire year the maximum amount you can earn is $15,480. For every $2 earned above the maximum amount, $1 will be deducted from your Social Security benefit. If you reach your full retirement age in 2014 your benefits will reduced $1 for every $3 over $41,400 until the month you reach full retirement age. At your full retirement age, there is no reduction of benefits on any amount of income you earn.

• File and Suspend: Do you want to increase your benefit 8% per year? If you file and suspend at full retirement age, Social Security will increase your benefit 8% for every year you wait up to age 70. This could increase your total benefit by as much as 76% over starting Social Security at age 62. One catch. Make sure you pay Medicare part B out of your own pocket. Otherwise Social Security will not increase your delayed benefit.

• Divorced: After full retirement age, ex-spouses can collect spousal benefits on each others work histories and delay their individual full retirement benefits. To qualify you must be unmarried, marriage had to be 10 years or longer, be at least age 62, if ex-spouse is deceased you have to be 60 or older. If the divorced is filing for spousal benefits between 62 and full retirement age you must have been divorced for at least 2 or more years and benefits will be reduced. 

• Taxes: At full retirement age, the percentage of your social security benefits that are taxed depends on your income. Some sources like Traditional IRAs, SEPs, 401(k) withdrawals count towards your taxable income and can determine how much of your Social Security is taxed. On the other hand, ROTH IRA withdrawals do not count. Just another reason to consider contributing to a ROTH. The percentage of benefits that are taxable ranges from 0% to 85%.  In 2014, joint filed taxes: Less than $32,000: 0% of benefits are taxed; Between $32,000 and $44,000: up to 50% of benefits are taxed; Over $44,000: up to 85% of benefits are taxed                                                                                                                                                                            

• Self-Employed: If you are self-employed you can receive full benefits for any month in which Social Security considers you retired. "Retired" means you must not have earned more than the current income limit ($15,480 in 2014) and you must not have performed substantial services. The substantial services test is whether you worked in your business more than 45 hours during the month. If the work is considered "highly skilled" and you worked between 15 and 45 hours in a month then benefits could be denied. If you are under full retirement age for all of 2014 your earnings have to be less than $1,290 per month and did not perform substantial services. View this resource: NOLO