Check regulations when selecting financial planner

But in recent years, selecting a planner has become especially difficult, given the number of financial professionals, comprehensive financial plans and investment products.

Resolution of an upcoming court case involving the Financial Planning Association and the Securities and Exchange Commission may soon make it easier to tell the difference between a financial planner and other types of financial and investment representatives.

In the meantime experts say there are several ways to distinguish a financial planner from other types of financial professionals.

Regulation

The SEC regulates the actions of registered investment advisers, some of whom are financial planners, and some are also investment advisers who do no financial planning. By contrast, NASD regulates the actions of registered representatives – more commonly called stockbrokers – and insurance agents who deal with securities and mutual funds.

The SEC regulates the actions of financial planners, who must comply with the Investment Advisors Act of 1940. Under the law, financial planners must provide and periodically update clients and the SEC or state securities regulators with information about themselves and their records. Brokers are required to provide much less information. Financial planners also perform more comprehensive services for clients including recommendations of appropriate asset allocations. Brokers need only recommend (and handle orders for) securities purchases and sales, being careful to limit recommendations to those that they consider suitable.

In short, registered investment advisers who are financial planners are obligated to place clients’ interests above their own. Stockbrokers were traditionally exempt from registering under the 1940 act and were exempt from fiduciary responsibility when buying and selling securities on behalf of their clients, including nondiscretionary accounts. Therefore, stockbrokers need not place their clients’ interests above their own; they must, however, meet the standard of knowing their customers and making suitable recommendations.

According to the FPA, the current SEC rule allows stockbrokers to avoid the fiduciary and disclosure standards of the 1940 act, while being able to provide the same services as financial planners. Stockbrokers are prohibited from calling themselves financial planners, though they can use similar titles such as financial consultant or financial adviser, and they can provide fee-based advisory services.

Disclosure

Financial planners who are registered investment advisers with the SEC must disclose conflicts of interest and their qualifications. It’s important also to note that financial planners and others registered under the Investment Advisers Act face the risk of higher liability for violating fiduciary and disclosure standards. Brokers registered under the Securities Exchange Act of 1934 are not considered fiduciaries and do not have to disclose as much about themselves and their businesses. Insurance agents who call themselves financial advisers may face even less regulatory oversight than brokers.

When searching for a financial planner, consumers might consider asking whether the financial planner is legally required to act in the client’s best interest, and whether recommendations are solely incidental. This is particularly important given that both financial planners and stockbrokers may derive compensation from fees based on percentages of assets managed and/or hours of consultation and related services. Brokers offering fee-based advice must also provide a consumer warning statement to new clients that the account is a brokerage and not an advisory account.

FPA, which offers a PlannerSearch function on its Web site, www.fpanet.org/public, and provides several consumer publications about selecting a planner, suggests that individuals request written disclosure documents from their planners.

Consumers also can review the NASD Web site, www.nasd.com, to find disciplinary actions taken against registered individuals.

It also might be a good idea to ask for an agreement of engagement letter, which should document and describe all services to be provided, all fees that will be paid by the client, and all compensation that the planner will receive from outside sources.

There are other issues that should be considered in the selection of a financial planner:

• Experience with the client’s issues;

• Credentials and education;

• Price and methods of compensation;

• Investment philosophy;

• Approach to financial planning; and

• Client references – ask for at least three from existing clients.

Since trust is at the heart of any working relationship with a financial planner, it’s important that the consumer is able to work with someone whose actions and words are consistent with the letter and spirit of laws and rules related to financial planning.

This article was produced by the Financial Planning Association and provided by William O. Woody of Stovall Woody Associates. Woody can be reached at william.woody@axa-advisors.com.[[In-content Ad]]