Almost a CFP
Posted on August 29, 2005 41 Comments
Remember how I planned to visit a financial planner? Well, I haven’t yet (big suprise).
I still had some questions about planners, and still felt very hesitant about seeing one. When I got an E-mail from a new, young personal finance blogger who happens to be a CFP in training, Chad Smith (twentysomethingfinance.blogspot.com), I took the opportunity to ask a few questions. Here’s what I wrote him and how he responded.
BB: Question for you – any advice for women on how to approach a financial planner? It’s actually really intimidating. I’ve been thinking about going for some time, but I have this impression that he/she will take one look at me and shoo me out of the office because I don’t have enough saved up to work with. (Or worse, once he/she agrees to work with me, he’ll be so astounded at my appalling lack of financial knowledge that I’ll be laughed out the door.)
For those who are intimidated, do you recommend looking for younger planners like yourself who need to build a client base? (Or is that a bad idea b/c young guys need commission more than old guys)? Or is there some magic team of planners looking for young clients right now? Or should women just head to female advisors – and where does one find a female advisor?
CS:
First off, there is nothing to be intimidated about. It sounds like you have a very good understanding of finance in the first place. I would find it hard to imagine that any financial planner would laugh you out the door.
The gender question really boils down to personal preference. You want to find someone that has a personality that fits the mold you are looking for and that meshes well with your own. This might lead you to someone who is young because you will be able to identify more with this person.
In terms of the “young guys need commission more,” you will want to find someone that is a fee-only planner. This means that they are a fiduciary and put the client’s interest first. They receive a fee for the work they do for you and are not motivated to sell you a product (mutual fund, annuity or life insurance) because it will generate a higher commission for them.
There are plenty of planners that are willing to help young people; it’s just a matter of whether the young person can find value in the cost of the work. For most people in their twenty’s, money is tight and they feel the cost is too high.
The first step a young person should take would be to write down a list of goals they have for the next ten years. The goal-setting exercise generates excitement and gives people something to shoot for. Next, as you often write about, young people should nail down a flexible budget to follow. You need to have some idea of your own standard of living so that you can stay within those means. Debt also seems to be a big part of the current young person’s life ranging from large student loans to even larger credit card balances. A plan should be designed to pay down this debt beginning with the highest interest rate debt first.
From an investment perspective, my advice would be to sock away as much money as you can in your company qualified plan (401k) up to the matching portion that your employer provides and then to put any extra money in a Roth IRA. You deposit after-tax money into Roth IRA’s, but as you probably know, the money can be withdrawn tax-free at retirement. The money also grows tax-deferred in both accounts.
Generally, young people wait until they have a major question (First home purchase, marriage, kids, etc.) in order to seek out the help of a financial planner. This is when a planner can bring the most value to a young person’s situation. Keep in mind that there is no concrete path laid out for this process and each person has to find what works best for him or her.
Thanks Chad!
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41 Responses to “Almost a CFP”
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August 29th, 2005 @ 3:17 pm
I interviewed one CFP, I didn’t like him, so I never bothered to look for another one. I find that they really don’t tell you anything you don’t already know. They make fancy speadsheets for you though.
August 29th, 2005 @ 4:16 pm
This is great advice from Chad and I agree with the above comment by nyc money – personal finance isn’t rocket science and you’d be better served by doing the work yourself. I’d presume you’ve amassed enough knowledge in doing this blog for 2 years to know what you need to do. If not, I’d venture to guess that you at least have some interest in learning anyway…so if investing is a bit confusing, pick yourself up a used copy of Personal Finance for Dummies and get started:
1. Set your short and long-term goals.
2. Create a budget.
3. Establish an emergency account.
4. Fund 401k to employer match.
5. Pay off any debt that is at a ridiculous rate (>10%).
6. Max out Roth IRA.
7. Max out 401k.
Good luck!
August 29th, 2005 @ 7:29 pm
I believe that the ideas we share around these blogs provide a lot of personal finance ideas.
Having formal aid would help, but I wonder if the cost will pay off.
I don’t believe in using a commission based financial planner. And a fee based financial planner will cost me a fortune: he/she has to be better than me at financial planning (which I must say, is very possible, but requires more than a few years of experience). I also need to spend a lot of time with him/her for the both of us to understand the financial goals, and financial instrument performance. It will take quite a lot: 3 to 5 hours, just to start getting some benefit, I believe.
It could get expensive to the point where I might as well think about private banking altogether.
Money and Investing
August 29th, 2005 @ 10:25 pm
I’m definitely more advanced in my financial knowledge than when I started this blog, but I’m still no expert. One of my co-workers once said the best thing you can do as a young person is to see a financial planner. He said it’s too hard becoming an expert in the area when someone else already knows the subject.
Although, if the majority of the exercise found in PFFD, then I guess I can start there too. Cost is always, always a factor for me. No point in spending a lot if you don’t have it in the first place.
Thanks, as always, for your great advice.
August 30th, 2005 @ 12:55 am
Financial Planning for the (affluent) public is much different than general personal finance. Chad gave a well thought out generic response for those just starting out. However, a CFP has been educated and tested in complex investments, insurance, income tax planning, and Estate planning (transfer of wealth). It is much more comprehensive than offering a person that is just starting out a generic fp recommendation. How a CFP can really help a younger person is educating them while assessing their risk profile and making investment recommendations for their 401k/IRA (for which they won’t make a commission and the client can sleep at night), keeping them on track with their financial progress, and helping them overcome (coaching them through) the emotional stress that financial decisions can cause the general public.
Just so that everyone knows, I have outlined what it takes to become a Certified Financial Planner, as I am currently in the process myself….
A Certified Financial Planner has to take 5-6 courses, taking anywhere from 6 months to 2 years, if not combining it with a Masters. Then they must study and pass a 10 hour exam that currently has a 60/40 pass/fail rate. Upon passing the exam, if you do not have an experience in the fp industry one must obtain 3 years in the fp industry before applying for the CFP license. Part of the application is a background/history check. Once all of this is done, then the new CFP recepient must takes courses and complete a certain number of Continuing Education (CE) credits.
August 30th, 2005 @ 4:07 am
I am 23 and have yet to contact a financial planner — like you I am also intimidated. I just don’t know who to trust or where to go. I don’t come from a family that was good with money so I just can’t ask for a referral. I like this post though, gave me a few ideas. Thanks!
August 30th, 2005 @ 11:46 am
As Chad recommended, it may be best to find a fee-only planner. You can go to the Nataional Association of Personal Financial Advisors which is an association (one of the largest) that represents fee-only planners. If you go to the public site you will see things such as “Find a NAPFA registered advisor”, “How to choose a planner”, and “Working with a fee only advisor”.
Financial Planning is like a regular tune up on your car, you have to do it to keep it running. However, your financial security and well being are a lot more important than a darn car!
August 30th, 2005 @ 4:37 pm
Financial Fruition is right. To be a Certified Financial Planner, you have to go through a rigorous education program and take a grueling comprehensive exam, which had a 58% pass rate for the July 2005 exam. This is in addition to the three years of experience that you must have in the field as well as keeping yourself educated in the years following certification. The comprehensive planning approach requires the use of complicated software designed specifically for this purpose and hours of detailed analysis by the CFP that uses many different fields of study. A CPA herself told me while taking my review class for the CFP exam, that the difficulty level of the tax course alone was astounding. Therefore, people should never underestimate the value that a CFP can add to his/her situation.
In my response, I was just trying to emphasize the importance of cooperation from both parties. For most young people their situation does not call for the complex construction of an elaborate financial plan. However, I feel that it is just as important to educate the young so that they can begin organizing their investments in a format that will ultimately benefit both parties more when it is time to work with an advisor.
Thank you to Nicole for posting my response.
August 30th, 2005 @ 5:56 pm
i don’t think it’s necessary for you to see one. i contacted a cfp because i needed them to help me get business paperwork together. they help you organize, which is something i’m terrible at. they told me i need to set up a trust, and get my business documents together. it’s too much work so i never went back. if you have an accountant, they can help you with that stuff too.
August 31st, 2005 @ 3:19 pm
A CFP checks in.
I refer to the “planners” that work for brokerage firms and bank investment firms as the “wolves” and I have a section on my site dedicated to exposing their tactics. The key phrase is “conflict of interest.” Does any planner you consider have your best interests in mind, or theirs? That is the key question to consider. I know several commission-based planners who went for their certification just for the credential. I am fee-only.
If you ever feel intimidated by the process of talking to a planner, keep looking for that perfect fit, or learn as much as you can about the subject and become one yourself.
As was mentioned in the comments preceding mine, a person who has earned the CFP designation spent the better part of two years in course work plus hundreds of hours of study to pass the exam, and has at least three years planning experience. In getting back to that perfect fit, no planner worth their weight would ever feel threatened or slighted if you went for someone else for your planning needs.
As for accountants, they are really good at telling you what happened and how much tax is owed or due, but rarely do they recommend tax planning moves, as they are usually too busy churning out returns. When they do recommend a good planning move it is often disregarded.
A good CFP will act as your coach in helping you plan for financial independence. When you think of needing a planner in those terms, not everyone needs a coach, and therefore not everyone needs a planner. But if you feel you need one, make sure their goals are not only aligned with yours, but that yours come first.
Uncle Jack
.
August 31st, 2005 @ 5:49 pm
Great discussion… you guys are all solid.
August 31st, 2005 @ 10:10 pm
You can always talk to an Investment Advisor at a credit union for free. They are a great resource.
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