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The star-spangled planner

Virtually anyone with a decent income or moderate wealth could benefit from the services of a financial planner.

By a financial planner, I mean someone with the expertise to produce a comprehensive financial plan for an individual household. This should cover the household&#39s financial goals, budget, risks and insurance, asset allocation, retirement plan and review of an estate plan.

Such detailed planning is unlikely to be met by advisers interested in commission on the financial products they sell.

A financial planner has a broad knowledge of areas such as tax planning, investments and estate planning but is unlikely to be an expert in any of these individual areas. Rather, the financial planner can help co-ordinate your financial planning with your accountant, stockbroker or law yer. The broad expertise that a professional financial planner possesses will help ensure that your financial goals are met and that areas of your financial life are reviewed.

Few people have the time, desire or expertise to do a complete financial plan for themselves. Hiring a planner will help you avoid expensive mistakes which could seriously damage your financial health.

It would not be difficult for a planner to find serious gaps in most household finances. Even individuals with expert knowledge in one financial field, such as investments, can overlook areas such as insurance or estate planning.

Saying that most people would benefit from using a financial planner is not to imply that there are not wide differences in abilities and costs among planners. If you are not careful, fees and commission could negate much of the benefit of choosing a planner.

These are the issues to consider when choosing a financial planner. The first step is to limit your search to someone who is competent in financial planning, such as a certified financial planner. The second step is to get recommendations from people you respect. Your aim is to find someone who meets your needs and who will look after your interests.

A problem that exists in selecting financial professionals is that what is in your best interest may fall a distant second to their interest in making profits.

The third question you need to ask is how the financial planner receives compensation and what this will cost you annu ally. You must consider fees, commission, transaction costs and the annual fees of the financial products they recommend. It is quite possible that after adding sales costs and management fees, the return that you receive from equities will not justify the risk.

Financial planners fall into two broad types: those who charge fees and those who charge a mixture of fees and commission. Which one will be best for you will depend on your particular circumstances.

If your only need is a comprehensive financial plan and you are willing to invest the funds yourself, then a fees-only financial planner who charges by the hour may be your best choice. If you want the financial planner to manage your money, then many fees-only planners move to an asset-based fee, normally 0.5 to 1.5 per cent of your assets.

In should be borne in mind that most financial planners put your money to work in a range of collective investment funds, which means you continue to pay the investment funds and additional management fee annually. Since evidence and theory suggest that none of these efforts will result in outperformance of an index -tracking fund, one might wonder why you should not go direct and save about 1.5 to 2 per cent in management fees. Plus, on average, you will have an investment fund that will outperform most professionals.

With commission-based financial planners, individuals run the risk that commission paid on financial products will add greatly to the cost of the financial planning. The risk of conflict of interest arises when the planner receives varying compensation based on which products they recommend. However, initial commission of 3 per cent on an investment fund might be cheaper than paying the annual 1.5 per cent fee to a fee-based planner.

You must compare all these costs when deciding which financial planner is best for you.

It is clear that knowledge on the client&#39s part is very important. While many people will spend a great deal of time shopping for a holiday, the decision of who to trust with their wealth is often made without as much thought.


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