How to choose a financial planner

By Chris Chen CFP | Financial Planning

Sep 24

 

How to choose a Financial Planner

How to choose a financial plannerHow to choose a financial planner is a question that vexes many people looking for one, even as a number of online resources address the topic.  For instance, the Financial Planning Association as well as a number of online resources in the financial and popular media offer advice on that.

I was prompted to think about this issue by a question I received recently

Question “Currently I am pulling about 4% on my trading accounts.  These are probably below what is going on in the market, but that’s one of the reasons I am seriously looking at a financial adviser.

Do you have any empirical data (history) on what returns I could expect.  I am a numbers type so that would definitely help me in my decision making process. “

It is a great question.  Clients want results, and Financial Planners want results.  The difficulty with using results to measure effectiveness, and as a benchmark on how to choose a financial planner, is that there are so many moving variables that using historical results to choose a financial planner is not effective. As the saying goes, there are lies, damn lies and then there are statistics.

Hence my answer: Before answering the question “…we would need to work a little more on your objectives and your comfort with risk.  An investment portfolio would have to reflect both.  For instance, if you have a short term goal, you would want the money allocated to that goal to be in a lower risk investment allocation.  If you have a long term goal, you would want the opposite.  Then, could you compare the performance of the two? They would be like apples and oranges, so probably not.

Now if you and I had the same long term goal, should we be invested in the same way?  Only if we have the same attitudes toward risk, ie how we feel when the market goes down.  Depending on our respective comfort with risk, you and I would have different asset allocations.  Could you compare the performance of our two asset allocations?  It would be like comparing a red delicious with a granny apple.  Sort of the same thing, but not quite.

With regard to your results, I assume that they are year to date.  Compared to a S&P 500 return of 19.33% year to date on 9/23/2013, a 4% return year to date would be reflective of a fairly conservative asset allocation with relatively little risk.  In a stock trading situation, your 4% probably came with taking substantial risk.

My job as a financial planner is to understand your goals and your comfort with risk.  Then I can propose an investment allocation and investments that efficiently help you reach your goals with the appropriate amount of risk.

In summary, I could provide you with numbers, but they would not be meaningful without the underlying context of where they came from. Chances are they will be better than some other financial planners’, and worse than some others. In and of itself that would not be meaningful, and, in my opinion, you should not rely on those numbers to decide how to choose a financial planner.”

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About the Author

Chris Chen CFP CDFA is a Wealth Strategist with Insight Financial Strategists LLC in the Boston area. He specializes in retirement planning and divorce financial planning

Ellen September 25, 2013

When I started looking for a financial planner, I did not know where to look. At first I started asking about historical performance. Many financial planners did not give them to me, I guess like you do not. Some actually provided information, and I got seduced. Boy, did I regret it!

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