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FREQUENTLY ASKED QUESTIONS (FAQ) SECTION
What is financial planning?
Financial planning is the process of determining how an individual can meet life goals through the proper management of his or her financial resources. Examples of life goals include a comfortable retirement, buying a home, saving for a child's education or starting a business.
What is a financial planner?
A financial planner is someone who uses the financial planning process to help clients determine how to meet their life goals. A financial planner can take a "big picture" view of a client's financial situation and make financial planning recommendations based on the client's needs in areas such as budgeting and saving, taxes, investments, insurance and retirement planning. Or, the planner may work with a client on a single financial issue but within the context of that client's overall situation.
The FPA of Houston believes that everyone needs objective advice to make smart financial decisions and that when seeking the advice of a financial planner, the planner should be a Certified Financial PlannerTM licensee. That is because in order to earn this designation, individuals must pass a comprehensive examination and continue to meet the education, experience and ethics standards established by the Certified Financial Planner Board of Standards, Inc. (CFP Board).
How do I know if I need a financial planner?
Significant changes in your life can dramatically affect your finances. You may benefit from working with a CFP professional if you:
- Want to assess your overall financial profile
- Have a change in marital status
- Want to start your own business or prepare a business succession plan
- Experience the death of a spouse or other close family member
- Sell a major asset such as a business or piece of highly appreciated real estate
- Want to leave a legacy to your family
- Want to plan for and enjoy retirement
- Want to diversify your investment to protect against a market decline
- Need assistance in creating a savings plan for your children’s education
- Purchase a home
Financial planning is a valuable process for anyone who wants assistance in determining strategies to meet short and long-term financial goals. Plus, with the help of a financial planner you can overcome unforeseen life changes, while still working to achieve your life goals.
What steps are involved in the financial planning process?
1. Establishing and defining the client-planner relationship.
· Does the planner explain or document the services to be provided?
· Are the planner's and your responsibilities clearly defined?
· Are the compensation arrangements clear to you?
· Have you and the planner agreed on how long the professional relationship should last?
2. Gathering client data, including goals.
· Does the planner ask for relevant information or ask you to fill out a questionnaire about financial resources and obligations?
· Does the planner help you to define and prioritize your personal and financial goals and assess your risk tolerance and time horizons?
· Does the planner request applicable records and documents?
3. Analyzing and evaluating your financial status.
· Does the planner analyze and evaluate the information gathered above to determine whether or not your goals can be met?
4. Developing and presenting financial planning recommendations and/or alternatives.
· Are the financial planning recommendations tailored to meet your specific goals and based on analysis and evaluation of the information provided to the planner?
· Does the planner communicate the recommendations to you in a way that you can make informed decisions?
5. Implementing the financial planning recommendations.
· Do you and the planner agree on implementation activities and who should perform them?
· Will the planner help implement his/her recommendations or coordinate or refer you to other professionals, such as attorneys or stockbrokers?
6. Monitoring the financial planning recommendations.
· Have you and the planner agreed to have recommendations and your financial progress monitored periodically?
· If so, does the planner review and evaluate changing circumstances and make new recommendations based on these changes, as appropriate?
How are financial planners compensated?
There are several commonly accepted methods of compensation:
o Fee-only: The planner is compensated entirely from fees for purposes of consultation, plan development or investment management. These fees may be charged on an hourly or project basis depending on your needs, or on a percentage of assets under management.
o Commission-only: There is no charge for the planner’s advice or preparation of a financial plan. Compensation is received solely from the sale of financial products you agree to purchase in order to implement financial planning recommendations.
o Combination Fee/Commission: A fee is charged for consultation, advice and financial plan preparation on an hourly, project or percentage basis. In addition, the planner may receive commissions from the sale of recommended products used to implement your plan.
o Fee-offset: Commissions from the sale of financial products are offset against fees charged for the planning process.
o Salary: Some planners work on a salary and bonus basis for financial services firms.
In all of the above categories of compensation, you should request information on any real or potential conflicts of interest. In addition to commissions received from any financial product sales, you should ask whether there are outside incentives or bonuses to be gained by the planner for certain recommendations.
Are All Financial Planners Regulated?
No. Many people who claim to be financial planning professionals are licensed on the state and federal levels in specific areas, such as insurance or securities. However, they are not specifically regulated for their financial planning activities - with the exception of the Certified Financial Planner professional, who is licensed by the CFP Board. CFP professionals are held accountable to the CFP Board's Code of Ethics and must also meet its practice standards requirements. The CFP Board has the power to suspend or revoke the CFP license from an individual who violates the Board's standards.
The Securities Exchange Commission (SEC) and/or state agencies also have requirements for "investment advisers" - a role that most financial planners fulfill. If a planner is a registered investment adviser, or a representative of an advisory firm, FPA of Houston advises consumers to carefully review the Form ADV, which discloses a planner's experience, education, credentials, licenses, manner of compensation and potential conflicts of interest.
Following is contact information on several agencies to call for background information on a financial planner:
- The Securities and Exchange Commission (SEC) will verify if an adviser is registered with them. Call 800.732.0330 or for more information on the SEC, visit www.sec.gov.
- The North American Securities Administrators Association (NASAA) can provide you with the phone number of your state securities department to confirm registration as an investment adviser in your state. Call 202.737.0900 or for more information on the NASAA, visit www.nasaa.org.
- The National Association of Securities Dealers (NASD) will verify whether the adviser has had any disciplinary action brought against him or her. Call 800.289.9999 or visit www.nasd.com.
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