A Worksheet Approach to Selecting a Financial Planner

    by AAII Staff

    Most individuals interview potential financial advisers before making a final selection to help them determine whether they are making the right choice. But what questions should you ask?

    The purpose of this article is to give you two worksheets that may help you ask the right questions. Credit to the National Association of Personal Financial Advisors (NAPFA) for the use of their Financial Planner Interview and Compensation Disclosure Forms in providing these worksheets.

    The Financial Planner Interview

    Typically, financial planners will offer a free initial one-hour consultation during which a preliminary screening is done of your information in order to determine whether the firm will accept you as a client. At the same time, you should be using this free interview to screen the potential adviser to see if he or she is someone you will trust and with whom you would feel comfortable. The following questions are designed to give you some basic information about the adviser; all of these questions should be asked during the initial interview.

    In addition to the various questions outlined, you should monitor and observe the financial adviser's questioning technique when obtaining initial data from you. While financial data is needed, there should be a greater amount of questioning centered around your goals and objectives. Questioning centered in this area shows evidence that the adviser is truly concerned with helping you achieve these goals and would most likely have a greater concern with your satisfaction through the achievement of your objectives. If the questioning centers mostly on financial items and, more specifically, on a specific financial area such as your insurance programs or investments, you may have an adviser who is more concerned with doing work in these particular areas.

    When asking for client references, request that the references be clients in situations similar to yours. You should ask for only the names of those clients who have been with the adviser for at least a three-year time period.

    Disclosure Form

    In addition to the interview questionnaire, it will be important for you to determine what your total costs will be, and what the total compensation generated to your financial adviser will approximate. The Disclosure Form, which follows the Financial Planner Interview Questionnaire, is designed to highlight the various compensation issues that may be of concern. Its purpose is to provide full and specific disclosure as to how the financial planner and planning firm will be compensated if the client decides to accept and implement the planner's recommendations. In addition, it should help you generate a fair comparison between various adviser's costs when doing your evaluation.

    The form is divided into three sections. In the Investment/Insurance Products section, the planner indicates the recommended product, the recommended amount to invest or purchase, and the commission rate and estimated amount that will be received by the planning firm and all affiliates. In the Services section, the planner indicates the estimated income to be received by the firm and all affiliates from the services suggested. The third section, Other Compensation, requires an explanation of other forms of compensation the planner and planning firm may receive as a result of the planner's recommendations.

    Generally, the planner will provide an estimate of expected income to the firm and all affiliates because exact amounts may be unknown at the time recommendations are made. However, the planner should specify amounts to as great a degree of accuracy as possible. The planner and the client should be able to rely on this document if there is a question about whether the planner made a good-faith effort to fully disclose compensation.

    Both the client and the planner should sign this form, and the client should receive a signed copy. In filling out the disclosure document, you should be aware of some of the terms used:

    12b-1 fees: These are charges deducted from your investment in a mutual fund. Occasionally, these costs are used to pay the broker or financial adviser who sells the mutual fund.

    Trailing Commissions: These are amounts paid by the insurer to the planner and/or the planning firm for each year that you own an insurance policy. Referral fees are another form of trailing commission. Typically, referral fees are paid by an outside vendor for the planner's referral of your business. The planner may earn a fee, similar to a trailing commission, for each year in which you are invested with the outside vendor.

    Surrender Charges: These are charges deducted from the balance in your annuity policy or insurance contract if the policy is cashed in or surrendered early. These charges apply primarily to insurance and annuity products and may vary from product to product. A portion of the surrender charge is used to reimburse the insurer for the commissions paid to the planner at sale.

    Back-End Fees: Similar to surrender charges. An amount deducted from the balance in your investment if the investment is sold early. These charges apply primarily to mutual funds.

    Contingency Fees: A payment that is contingent on certain events. For instance, the planner or planning firm earns a payment only if they can find a buyer for the non-performing investment property.

    Eligibility for Sales Prizes: The planner qualifies for additional compensation if a certain level of sales of a specific product is reached.

    Soft-Dollar Benefits: The planner, or the planning firm, receives compensation not in the form of cash but in the form of other benefits. Among other things, "soft-dollar" benefits might include a subscription to the Wall Street Journal, a new computer, or payment for training programs for staff.

    Performance Compensation: Compensation is contingent on reaching certain performance objectives. For example, if the investment earns 10%, the planner or planning firm may earn 0.5%, but if the investment earns 20%, the planner or planning firm may earn 3%.


    This information is designed to help you choose and evaluate a financial adviser. However, it is by no means foolproof.

    In addition, keep in mind that just because an individual receives commissions does not mean he will not be a good financial adviser. You will need to make this judgment for yourself. However, these worksheets will at least give you an idea as to your total costs and they should provide an inkling as to the financial adviser's motivation for taking on your case.