A Suze Orman exclusive

Here are my Five Questions for Grilling a Potential Financial Planner:

Okay, this bears repeating: if a prospective adviser makes money from commissions on your investments, then they fail my litmus test on that fact alone. There's simply too much conflict of interest. I want you to stick with fee-only planners; they charge a set fee for their services, rather than relying on commissions. And as you begin your search, keep in mind that friends are always a good place to start for referrals. You can also check out this Planner Search Tool that will point you to local fee-only planners.

1. What's Your Background? Did they do the work to become a certified financial planner (CFP)? What other formal training do they have? And how long have they been in business? Ten months, or ten years? Experience matters a lot.
2. Do you recommend Term Life or Cash Value policies for most of your clients? You better hear Term. If someone starts extolling the virtues of Cash Value life insurance, you should stop the interview right there and politely leave.
3. Do you use Index mutual funds and Exchange Traded Funds? You want to hear YES. They don't need to use index funds or ETFs exclusively, but you want to know that indexing is part of the mix. The bottom line is that very few actively managed mutual funds consistently beat the indexes. A big part of the reason is that good no-load index funds have super-low costs, and the less you spend on fees, the more you will have left in your account.
4. Do you recommend most of your clients have just a Will, or do you suggest a Will and a Living Revocable Trust? A living revocable trust is such an important document, that I would be wary about any planner who doesn't think it is useful.
5. Do you recommend using a Home Equity Loan or Line of Credit to pay off credit card debt? A responsible planner will say no to this. When you borrow against the equity you have in your home, the home becomes the collateral for the loan. Miss too many payments and you run the risk of losing the home. Your credit card debt, on the other hand, is what is known as unsecured debt: there is no collateral that the card company can come take if you fall behind on your payments. It therefore makes no sense to put your house on the line to pay off a debt that is unsecured.