They often manage your life savings. Be smart about who you hire.
Planning your financial life can be a lot to handle on your own. If you’re paying off your debt, how much should you invest into your Roth IRA? Should you buy a house or keep renting while you build up some liquidity? A certified financial planner can help you get organized and formulate a plan for your money, but how do you know who to trust and whether they’ll be right for what you want to accomplish?
When you meet with a certified financial planner, here are the 15 questions you should ask them to make sure they are trustworthy, experienced and have your best interests at heart.
- “‘What’s your definition of a financial planner?”
The definition of a financial planner is very broad and can encompass everything the planner helping with everything from investing and retirement, to insurance and taxes. You want to make sure that the financial planner you go with defines their job in a way that aligns with what you will need them to do. Some may only want to deal with your investments, others may take a holistic approach and even get into the nitty gritty with your budget — make sure the planner you hire can do exactly what you need. Use this tool to get matched with a planner who meets your needs.
- “What are your qualifications?”
When it comes to planning your financial universe, you likely want a certified financial planner (CFP) or, if you want help with taxes, a certified public accountant (CPA). Just because someone says they’re a financial planner doesn’t mean they’ve taken the exams that qualify them to be a certified financial planner or CFP. They may have other licenses, such as the Series 7, that allow them to sell financial products, but that’s not the same.
“Know the difference between an actual qualification designation and what is a list of tests that a person took in order to sell stocks and bonds,” explains Katie Brewer, a Dallas-based certified financial planner and founder of Your Richest Life.
To become a certified financial planner, you must take financial planning educational courses, pass an exam with a historic pass rate of around 60%, adhere to ethical requirements, have 6,000 hours of professional financial planning experience or 4,000 hours of apprenticeship experience and keep up with continuing education. Becoming a CFA also requires rigorous education, exams and more.
“Don’t be shy about asking your financial planner when they received their CFP® mark and how long they’ve been in the business,” explains Brewer. “Trust me, we’re used to it.” You should also double check a CFP’s credentials at CFP.net.
You should also ask other questions like how long they’ve been practicing, what their typical client looks like, and their personal philosophy around financial planning.
- “How do you get paid?”
Ideally, you want a fee-only financial advisor, as they do not get commissions or other payments from the financial institutions whose products they recommend, and instead are paid directly by you, their client. Typically you pay them either an hourly or flat fee, or a percentage of assets under management. “It’s important to know how people are compensated so you can look out for red flags such as self-serving advice (e.g. garnering a commission when they buy or sell certain securities) vs. making the best choice for your situation, “ says Brewer.
- “Are you “fee-only” or “fee-based?”
While it may sound the same, they’re actually not. A fee-based planner works off commissions and may have an incentive to recommend or prioritize a product above other actions or items in your plan, such as saving for a rainy day. A fee-only planner gets paid solely on what you pay them for their time, strategy, and money management.
- “What’s your fee structure?”
Planners should be upfront about their pricing structure and should never make you feel like you’re playing a game of “how much do you cost” vs. “how much do you have?” Advisors will charge either by an hourly rate, a project rate or flat rate for a plan or a percentage of the assets under management. You have the right to have all of this explained to you and which plan, if options are offered, would best suit your needs and budget.
- “How much should I expect to pay you per year?”
Just like a senior hair stylist will charge more for a haircut than a junior stylist, the pricing for financial planners can vary according to the city they’re in, how much experience they have, and the amount of assets you need managing. A typical fee for a planner might be 1% of assets under management, but as you gain wealth, they might lower this fee. At the same time, a financial planner may work on a sliding scale or charge an hourly fee. Depending on what city you live in and the firm, you can expect a fee-only CFA’s hourly rate to start at around $200.
- “Will you sign an agreement regarding your compensation?”
No matter what, a fee-only planner should be comfortable sharing and signing an agreement describing their compensation and services that will be provided before you sign on with them.
- “Do you receive ongoing fees from any of the mutual funds in the form of 12(b)-1 fees, trailing commissions or other payouts?”
You can also ask if they receive ongoing fees from any of the mutual funds in the form of 12B-1 fees, trailing commissions or other payouts. Sounds too technical? Sure, but that’s kind of the point. But it’s a yes or no question that can help you figure out how this planner gets paid rather than just asking if they’re a fiduciary, which is a person working with your best financial interests in mind
You can also ask if they receive referral fees from attorneys, accountants, insurance
professionals, mortgage brokers, or others and then allow them to explain how it would or wouldn’t impact their advice to you.
- “Will you sign a fiduciary oath?”
Asking someone if they’re a fiduciary isn’t always enough. People can “ice skate” around that terminology and give fuzzy or unclear answers to that question. Instead, you may consider asking them to sign a fiduciary oath.
“If someone is fee-only, they shouldn’t have a problem signing a document stating how they get compensated,” Brewer says. “If someone is, for example, a broker dealer who works on commissions, they probably wouldn’t be allowed to sign it.”
- “What kind of people do you normally work with?”
If the answer is “everyone,” that’s a red flag, said Brewer. If they brag about how they work with everyone from freelancers to hedge fund CEOs to athletes, it could mean that they’re really versatile–or they don’t have any kind of specialty at all and are just throwing spaghetti at the wall to gain new clients. “I’d recommend a financial planner who specializes or at least has experience in the life stage where you’re at,” she says.
- “Can you repeat that so I can understand it?”
Personal finance can have a lot of jargon, yes. But that doesn’t mean that your advisor should be speaking over your head or creating an atmosphere where you feel like you’re asking a lot of “stupid questions.” “If you walk in and somebody is giving you a bunch of jargon and it’s going right over your head, or you feel like they’re condescending, then like you don’t have to put up with that,” says Brewer.
- “Are you a member of any fee-only financial associations?”
Check to see if they’re a member of a financial planning organization like NAPFA: The National Association of Personal Financial Advisors (NAPFA) or XY Planning Network, both of which are well-regarded, fee-only associations of planners. While this isn’t a necessity to hiring someone, it can show a dedication to their field.
- “Do you have any limitations?”
This may seem like you’re luring them into a trap but really, you’re asking them if they would refer you to someone if there was an area of financial planning that’s outside of their expertise.
For example, you’d want an advisor who would admit to not being an expert at debt management or complicated estate planning. If they say, “I can do anything” or offer a vague response, such as “I’m sure we can figure it out,” that’s a red flag that the planner may just not want to admit that they’re not an expert at everything.
- “How often should we speak to each other?”
This may depend on age, your goals, and the complexity of your financial situation and portfolio of assets. For example, if you’re 35 and need someone to create a plan for you and manage your investments, speaking to them twice a year may be enough. That said, if you need more hand-holding and want to be sure that you can get in touch with questions in between visits, that should be part of the service.
Your planner should get back to you in between set check-ins within a week so you’re never left hanging with a question.
- “Can I speak to some of your former or current clients?”
Financial planners should be comfortable giving you references of clients whose money they have managed. If they aren’t, this could be a warning sign.
Questions to ask yourself after meeting with a potential advisor:
Is this person spending enough time to understand my financial goals?
Is this person pushing me to make decisions I don’t feel comfortable with?
Is this person speaking to me in a condescending tone?
Is this person giving me vague answers regarding payment structure?
Is this person giving off a “used car salesman” vibe?
Dominating the financial planning landscape so far in 2021 has been the possibility of changes to tax laws. At this time, no definitive plans to increase taxes on individuals have been introduced. President Biden recently unveiled an infrastructure and climate proposal that included an increase in tax rates on corporations. The plan calls to raise the corporate tax rate from 21% to 28%. In 2017, the corporate tax rate was 35%.
Even though everything is still speculative at this time, we did want to review the individual tax changes that are getting significant media attention and were a focus during President Biden’s campaign.
▪ Estate Tax Laws – Currently, individuals can pass $11.7 million to the next generation without paying estate taxes out-of-pocket. This doubles to $23.4 million for married couples. There has been talk of this threshold being lowered. In 2017, the limit was $5.49 million per individual, $10.98 million per couple.
▪ Capital Gains Taxes – The top capital gains tax rate is 20% for individuals with income above $445,850 and married couples with income above $501,600. There is some support in Washington to change the capital gains rate to ordinary income tax rates for taxpayers making more than $1.0 million per year. The top ordinary income tax rate is currently 37%.
▪ Cost Basis Step-Up at Death – Upon a taxpayer’s death, assets held outside of a tax-deferred investment vehicle receive an update in the cost basis based on the value of the asset on the date of death. For example: an 85-year-old has held shares of XYZ company for 50 years. The cost basis is $0 as it was gifted from an employer. The heirs receive the XYZ stock with the basis adjusted to the stock price on the date of death. The heirs sell the stock with minimal income tax consequences. Another common scenario is a primary residence purchased years ago in an area of the country that has seen rapid real estate appreciation.
Instead of adjusting the estate law as we discussed above, changing the cost basis step-up rules could generate additional revenue for the government and has gained ground in recent months. However, this is becoming less likely as administratively it would become much more difficult and time consuming to settle estates.
If you have questions on how potential tax law changes may impact your financial situation, please reach out to your Fee-Only Financial Planner or accounting professional.
Many of our clients are entering a stage in their life in which they are still parenting their own children, while their parents are also in need of help. This can be a very stressful and expensive time for everyone involved. How do they find balance? Where should they turn?
The first step is to make a list of areas that need addressed and then partner with professionals that have experience in these areas. If you do not have a Fee-Only Financial Planner, call Galecki Financial Management at 260-436-8525. You can also visit www.napfa.org and use the Find My Advisor tool to locate a Certified Financial Planner™ Professional near you. This individual will help you walk through the financial steps and difficulties associated with parents entering this new phase of life. They will know what it will cost, what facilities you should research, and how to move forward.
Depending on the financial situation of your parents, they might need additional help with the cost of long-term care. Your Financial Planner will know a good elder care attorney, but you can also visit www.naela.org to find an elder law attorney near you. This individual will discuss additional payment options available for your parents and how they might be able to qualify for Medicaid assistance.
Working with a Fee-Only Financial Planner and a qualified Elder Law Attorney will get you on the right path. It can be a very difficult journey, both emotionally and financially. But, having experienced partners to walk you through this process will make things much easier than if you attempt everything on our own.
Even if you don’t closely follow the stock market, you likely saw headlines in late January on GameStop and how an army of Reddit users took on Wall Street. The most popular platform these Reddit users used to invest was with the smartphone app, Robinhood. Robinhood is a popular choice for many due to its accessibility, it’s free to use and their array of investment choices such as, stocks, options, ETF’s, and cryptocurrency. We aren’t going to go into too much detail on any one specific investment type, but instead dive into the reason Robinhood and platforms like it are so attractive to new or first-time investors and whether that attraction is good, problematic or a mixture of both.
Robinhood has existed since 2013 but gained most of its popularity later in the decade. Millennials have been their primary demographic throughout its existence. In many of the economic or financial benchmarks (salary/wages, home ownership, etc.), the Millennial generation has been lacking behind their predecessors. However, thanks to the emergence of Robinhood and apps like it, investing could be an area where Millennials and Gen Z make up some ground.
Robinhood’s marketing approach, although somewhat controversial, is undeniably successful. Their use of push notifications, graphics and promos make the app feel almost like a game. Many compare the marketing techniques to popular sports betting apps like DraftKings or Fan Duel. This is where the problematic aspect rears its ugly head. Gambling can be addicting and detrimental to one’s financial wellbeing. Combining the risks, accessibility to those risks and the appeal to inexperienced or new investors has already resulted in a deadly outcome.
In June 2020, a University of Nebraska student committed suicide when he saw a negative cash balance of over $730k. This balance was a result of option trading, which can be extremely risky. Although it turned out the significant negative balance was just a temporary display until an underlying stock settled. This is an extreme and unfortunate example of how inexperience and lack of knowledge can lead to consequences that the investor may not fully understand or know how to handle.
The fact remains, this app and others like it aren’t going to go anywhere anytime soon. They continue to attract new investors, mostly from a generation that is beginning to look for new ways to accumulate capital and build for retirement.
The uncertainty surrounding Social Security’s future among Millennials is just another factor that’s driving them to invest within these sorts of apps. The positive in this, is it’s expanding access to the market and allowing more people to have the opportunity to build wealth in a time where the wealth gap is widening at a historic rate.
But like the famous quote from Winston Churchill says, “with opportunity comes responsibility.” Which begs the question, where does that responsibility lie? Certainly, the individual investor will take on most of the responsibility for their own choices. But is there a point where the gimmicks and marketing strategies from these apps might be considered predatory? These are questions that will likely continue to come up as these apps expand their userbase and broaden their appeal to a generation starving for financial success and independence.
The extraordinary global events of 2020 have rocked budgets, sapped savings and frustrated fiscal aspirations. But with the new year comes an opportunity to review personal finances and re-assess savings and spending goals.
Here are 4 tips to help you clean up your finances this spring after a pandemic-tainted year that has shaken many and prompted plenty to re-examine their financial strategies.
Evaluate Your Current Financial Situation
You can’t take action or work to “clean up” your financial situation if you’re unsure of what it actually looks like — from the big picture down to the details.
Start with the basics: ensure you’re operating with a budget, you have a system to track your finances and you’re living within your means.
Take a look at each of these elements in detail. Is your budgeting process one that you like and consistently stick with month after month? If it’s not working for you, it’s time to try something new. Remember, there’s no such thing as one right way to budget your money.
The perfect budgeting system is one that you can stick with and makes sense to you. That said, we do offer broad based financial planning, and in celebration of our 30th year, we’re also offering our Initial Financial Overview for $300 (Regularly $775). Learn more here or schedule an intro meeting.
After you’ve got your monthly budget in line, also take a look at how you manage your money on a daily basis. If things are slipping through the cracks, take time to clean the cobwebs from your financial processes and create systems that actually function for you.
Once you cover the details, check out the big picture. Look at your net worth — your assets minus your liabilities — to get a feel for your overall financial health.
Cut Unnecessary Costs
Lifestyle inflation is a hard thing to avoid, and it’s a trap many of us fall into at one point or another. This spring, take a look at your spending and your expenses. Have any “wants” crept into the “needs” category?
If so, clean ’em out and put them back where they belong. Understand the difference between luxuries and what you truly need to live a comfortable, happy life within your means.
Also take a look at the expenses that you can’t avoid: housing, food transportation. What costs rose over the last year? Call service providers and any company that regularly sends you a bill to ensure you’re not paying for more than you need. You can do some spring cleaning just by trimming those expenses you can’t throw out completely.
Organize Your Financial Life
Do you know the status (open or closed) of every single credit card you’ve ever had? Do you know where you’ve stashed your tax returns from the last seven years? Can you access a credit card statement quickly so you can dispute an incorrect charge in a timely manner?
You can’t manage information you don’t have or know. And you certainly can’t keep track of every aspect of your financial life if you don’t have a clue about parts of it. This sounds simple, but a little organization goes a long way.
Reconnect With Your Financial Goals and Priorities
Much like costs and expenses that sneak up on you, your financial goals and priorities can shift around without you realizing it. It’s always good to take a step back and check in with yourself. Are you still on the right track toward what you want to achieve?
If you’ve missed a few goals or have gone way off the path, that’s OK. Look at the goals you’re setting and first make sure they’re “SMART”: specific, measurable, actionable, realistic, and timely (which means they have a deadline attached to them). When your goals don’t meet these criteria, you could set yourself up for a rough time in reaching them.
Make it a habit to check in with yourself and what you want so you can ensure your actions take you closer to goals and dreams instead of further away from them.
It feels great to spring clean your home and enjoy the start to a fresh new season. The same can be said when you spring clean your finances. You can replace outdated money management systems and habits, get organized, and rediscover your financial priorities to make the next 12 months even better than the last.