Managing Money : Hire Planner Based on References, Questions

QUESTION: My wife and I are thinking about hiring a financial planner. What should we look for and what should we be on the lookout for?

P. M. L

ANSWER: The first thing you should know is that anyone can claim to be a financial planner. They are not regulated by any government agency, and there are no laws that restrict what they can do. The consumer must be careful.

Some people will tack on “CFP” (certified financial planner) after their name. To legally use the designation, the adviser must complete at least 45 hours of continuing education a year. Although well-qualified advisers may not have the designation, it affords a potential client a measure of confidence.

Like finding a doctor or a lawyer or a dentist, the best recommendations will come from friends or relatives with personal experiences dealing with a planner. Absent a recommendation, turn to the Yellow Pages in the phone book and look under financial planners.

Here are some questions to ask: How long have you been in this business? How have you prepared for this job? What job did you have before becoming a financial planner?

If the answers suit you, the next area for discussion is money. How will the planner charge for his services? There are three possible arrangements: charging a flat fee for advice and services; giving free advice but collecting a commission on sales of investments to you, or a combination of both.

Obviously, someone who advises you to buy investments that pay him a commission has a built-in bias toward those investments that you shouldn’t ignore. Some might consider this bias a potential conflict of interest and wonder if the product that is recommended might help the adviser more than you.

Planners who charge fees, whether hourly charges or prearranged amounts, generally do not stand to benefit from recommending one course of action instead of another. However, the fee-only adviser may not be able to help his clients carry out his recommendations.

Consequently, clients face additional fees charged by stockbrokers or insurance agents or other salespeople. Also, you should pay attention to the salesperson your planner refers you to. Ask if there is any professional connection between their practices to be extra sure that the advice you are following was given strictly for your benefit.

In the case of a combination fee-and-commission planner, the fee portion is usually much lower, and a client has a degree of protection from conflicts of interest because not all of the planner’s charges are coming from commissions.

To determine that recommendations are not just meant to generate commissions for someone, ask the planner to disclose how much money he or she will make if you follow their suggestions.

Q: I have watched my capital investment in Government National Mortgage Assn., or “Ginnie Mae,” securities shrink by some $15,000, during which time my interest payouts have been lowered three times. Just where does the “full faith and credit” of the United States government come into the picture? Is there a stop-loss provision in a Ginnie Mae investment or could it continue to shrink to a small fraction of its original worth?--M. F.

A: Your question exposes some of the reasons that investment experts advise clients to be extraordinarily careful about buying into such complicated and sophisticated funds as Ginnie Mae. Contrary to your suspicion, your principal is not at risk if you stay in the investment until it matures. Further, you have the comfort of knowing that these securities are backed by the government.

Before explaining what probably has happened to your investment, let’s first describe these securities. Ginnie Maes are a type of mortgage-backed securities that allow investors to buy a share in an organized (and government-insured) pool of residential mortgages. Principal and interest payments on these mortgages are repaid to shareholders, usually monthly. These securities are generally available at stock brokerages and are typically sold in minimum amounts of $25,000. The life of the securities ends when the mortgages mature or are prepaid.

Now, as to your investment. Here’s what our experts think happened: When you wrote us, interest rates were falling. During such times, homeowners are likely to refinance their mortgages. This means that the pool of mortgages on which interest is being paid has been reduced. It also means that the pool is receiving funds from mortgage repayments--the principal--that must be disbursed to the securities holders.

Now, what happens is that a larger portion of your monthly payments comes from the principal portion of the pool, rather than the interest. This probably is why it appears your capital investment has shrunk by $15,000. Actually, you have been repaid that amount. You probably thought you were receiving interest payments alone, but you have been receiving a portion of your original investment.

When interest rates rise, as they have recently, the payouts on Ginnie Mae securities generally extend to their full maturity because mortgage holders are unlikely to refinance their homes. In other words, investors receive the original yields promised for the securities and are not paid off early. However, you should know that the resale value of Ginnie Mae securities declines when interest rates increase because investors can get better yields from securities priced at the current rates.

“Ginnie Maes are a strange security,” said John D. Connolly, chief investment strategist for Dean Witter Reynolds in New York. “It’s marketed to people as a high-return deal, but in many cases, the return of the original (capital) investment is counted as part of the yield (by investors and promoters). It’s not.” Connolly advises the average investor to research Ginnie Mae securities very carefully before taking the plunge.

An update on Social Security earnings statements: Several weeks ago, we told you that the Social Security Administration would be coming out in July with a new and improved version of its popular Form SSA-7004, “Request for Statement of Earnings.” Well, that date has been pushed back until August, and possibly September.

However, the current form SSA-7004 is still available from your local Social Security Administration office. When you get the form, which asks your birth date, Social Security number and a few other questions, complete it and mail it back to the enclosed address. The Social Security Administration will then send you back a listing of your employment earnings and expected retirement benefits.

With the new forms, the responses from the SSA will include far more data about your earnings and expected benefits. Agency officials also recommend that you request and complete the form every three years to verify that the administration has your correct employment data.

Carla Lazzareschi cannot answer mail individually but will respond in this column to financial questions of general interest. Please do not telephone. Write to Money Talk, Business Section, Los Angeles Times, Times Mirror Square, Los Angeles, Calif. 90053.