How Much Should You Pay for Financial Planning?

Last Updated Jul 21, 2010 10:54 AM EDT

Retirement planning can be complicated, and many people will need some help from trained professionals. Unfortunately, that help won't come for free -- nothing worthwhile ever does. In reality, "free" financial planning advice often ends up being very expensive.

When buying financial planning services, I advocate the "Goldilocks solution": Don't pay too much or too little -- try to find the amount that is just right.

To help you figure out what's "just right," let me offer two examples that illustrate the extreme ends of what not to do.

Here's the first example: The list of people who are happy to give you free financial planning advice is endless: your brother-in-law, your next door neighbor, your buddy at work, even your hair stylist. Before you put any of their advice into play, ask yourself this: What sort of training do they have in investment and retirement planning? Unless they have professional credentials, I'd recommend you politely thank them for their advice and then change the subject. Don't feel as if you need to agree with them just to be friendly. I'm constantly amazed at the really bad advice people get from their friends and family, which could potentially cost them thousands of dollars.

Here's the other end of the spectrum: The list of people who are all too happy to charge too much is also long. The worst will charge you for their advice and put you in investments that pay them commissions or have high expenses. I'm also amazed at the number of people who place tremendous trust in their financial advisor but don't know how their advisor is compensated. (These are the same people who will tell you they just saved $10 buying a pair of shoes on sale.)

If you're working with a financial advisor, simply ask: "How are you paid?" You shouldn't feel ashamed to ask this simple question; if your advisor makes you feel as if you shouldn't be asking, look elsewhere for retirement planning advice. On a similar note, if you don't understand the answer, look elsewhere. There are plenty of good advisors out there who can explain exactly how they're compensated in plain English -- and who won't charge you an arm and a leg.

If you're on the hunt for a reputable financial planner, I'd be particularly wary of advisors you meet in organized social situations such as church, service clubs, charitable organizations, and so on. One common M.O. of insurance and investment salespeople is to join such organizations to be on the prowl for new clients.

A related problem is affinity fraud, where financial criminals hook one victim, then move on to his or her friends and family. The criminals call it "cul-de-sac" marketing. Bernie Madoff is just the latest example of someone who perfected the art of affinity fraud. He hooked some high profile celebrities, who then went on to recommend him to their friends and family; his victims thought he must be good if he was serving so many accomplished people.

So what should you be doing? Implementing the Goldilocks solution means you pay qualified financial advisors by the hour to give you investment, insurance, or retirement planning advice. Their rates typically range from $150 to $300 per hour. While this hourly rate may seem high, you'll most likely pay much less for the professional advice you get this way as opposed to paying commissions or a percentage of assets under management.

Your advisors should have no financial stake in the decisions you make -- which means they shouldn't take commissions or be paid by financial institutions. Their compensation shouldn't depend on whether you buy insurance or self-insure, or whether you buy an annuity or not. They should recommend investments and insurance with the lowest costs and best performance.

The best reason for following the guidelines in this post is simple and powerful: Over your lifetime, you'll have thousands of dollars more to spend on yourself and your family.

Image from iStockphoto contributor leventince.
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    Steve Vernon helped large employers design and manage their retirement programs for more than 35 years as a consulting actuary. Now he's a research scholar for the Stanford Center on Longevity, where he helps collect, direct and disseminate research that will improve the financial security of seniors. He's also president of Rest-of-Life Communications, delivers retirement planning workshops and authored Retirement Game-Changers: Strategies for a Healthy, Financially Secure and Fulfilling Long Life and Money for Life: Turn Your IRA and 401(k) Into a Lifetime Retirement Paycheck.