Disclaimer: This post contains references to products from one or more of our advertisers. We may receive compensation (at no cost to you) when you click on links to those products. Read our Disclaimer Policy for more information.
You may think you must have copious amounts of wealth to qualify for or even deserve having a financial advisor.
While there are experts educated to handle elite wealth, we promise there is someone (or something!) out there for every financial situation and budget. If you’ve considered getting help managing your money, read on.
What Is a Financial Advisor?
Financial advisor is a catch-all term referring to different professionals like investment managers, financial planners, and stockbrokers. Even bankers and insurance agents can be included under this umbrella term.
An investment manager cares for a client’s portfolio by creating a strategy, buying and selling investments, and managing asset allocation.
A financial planner is someone who creates a long-term fiscal plan but may not provide advice or manage assets. They may specialize in retirement, estate, and/or tax planning or provide generalized holistic guidance.
Another type of financial advisor is the stockbroker or the broker-dealer. These individuals execute orders on the market, buying and selling investment products for their clients in exchange for a fee, commission, or even both.
The type of product (stocks, bonds, or mutual funds) they sell depends on their license. Though they must pass exams and register with the SEC, it’s important to remember brokers don’t provide specialized guidance like RIAs.
Registered Investment Advisors (RIAs) are held to the highest standard. Not only must they carry a Series 65 license, but they are governed by the Investment Advisers Act of 1940 that strictly mandates an RIA must put their client’s interests ahead of their own.
This fiduciary standard means they are legally bound to do what’s right for you, not for their bottom line. RIAs are registered with the SEC or their state, depending on their size. Quite often, they will also be a CERTIFIED FINANCIAL PLANNER™ (CFP) or Chartered Financial Analyst® (CFA).
This highly coveted designation from the Certified Financial Planner Board of Standards can be earned through a rigorous education, including ethical standards, followed by stringent testing of financial topics.
What Does a Financial Advisor Do?
Every good relationship is built on trust and communication, so your advisor will ask you a series of questions to get a complete picture of your personal financial situation.
You’ll go over income sources and expenses, assets and liabilities, plus long-term financial commitments and projected retirement needs.
They will inquire into your long- and short-term financial goals. When do you want to retire? Will there be any college educations to fund? Will you be downsizing in retirement?
From there, the advisor will determine proper investments and communicate your options and associated risks. By understanding your risk tolerance, they can better determine your asset allocation, which they will review from time to time to make sure it still aligns with your goals.
Finally, if you maintain an ongoing relationship with an advisor, they will monitor your portfolio and make changes as needed while exploring investment opportunities and keeping up on new legislation.
Bear in mind some finance professionals have a more hands-off approach and may simply provide recommendations. It’s then up to you to get things rolling.
Here are five specific tasks most advisors do:
To set yourself up for a few decades worth of stable income, you and your advisor will estimate your projected monetary needs in retirement.
Advisors can help you with topics like Social Security or IRA distributions in addition to long-term care planning and insurance.
Preparing for the eventual management of an individual’s assets in the event of their incapacitation or death is called estate planning.
It’s not a fun topic, but it must be discussed since we’ll all be there someday. It typically involves writing a will, setting up trusts (see below for more info), and naming an executor and beneficiaries. Finally, funeral arrangements are established. This entire process also involves a lawyer.
These are the duties most people expect when thinking of financial advisors. Investment management includes building a portfolio and managing it through timely reallocation.
Not only do advisors understand investment risk, but they are often the “voice of reason” for many investors. An expert can keep you focused on the long-term when returns start to fluctuate.
You can’t talk about building wealth without talking about taxes. Financial advisors guide their clients through investment decisions aimed at minimizing tax consequences. Sometimes they will work closely with your tax preparer.
Inheritance & Trusts
Long-lost Uncle Jack passed away, and now you’ve got $5,000 to invest. But in what? A financial advisor can help you consider how to use inheritance funds best while understanding tax implications.
Maybe instead of naming you in his will, Uncle Jack had a trust, which is kind of like another method of transferring wealth.
Trust are tricky creations, so just know a financial advisor should be involved in its creation, as well as a tax and legal advisor.
How Do I Choose a Financial Advisor?
Like all major decisions, choosing a financial advisor begins with research. Ask yourself questions first. What type of assistance do I need? Do I need to have a local consultant? Do I even need to talk to a real person?
#1. Research All Options
The Internet is a magical, mysterious place, and it’s likely the first stop you’ll make when researching nearby financial advisors.
You’re right here, aren’t you? We recommend delving into at least five options, and a lot will meet for a free consultation.
Ask your family and/or friends for their recommendations…just maybe not their investment advice.
#2. Review Qualifications and Fee Structure
Lookup any advisor’s qualifications because, as mentioned, some professionals are regulated more heavily than others.
The Financial Industry Regulatory Authority, or FINRA, has a handy “broker check” online where you can quickly search the history of your prospective advisors. This allows you to review client disputes, disciplinary actions, and certain criminal matters.
In addition, Form ADV is a disclosure filed by firms with the SEC and state securities authorities that provides information about advisory businesses, including fees and billing practices, plus the company’s history.
It also provides detailed information about an advisor’s education, work history, and certifications, as well as any disciplinary actions due to misconduct.
#3. Interview Potential Financial Advisors
It’s showtime! For your potential advisors, that is. Remember, they should want you as a client, so ask your questions with confidence because you’re the one in charge of the interview.
Are you comfortable around them, or are you confused and unsure? Does the advisor make you feel sheepish? Does it feel like you’re being sold something already?
Hopefully, you wrote or typed your questions up so you can jot down answers on the same page when conducting the interview.
Here are some inquiries to get you started as you chat with your potential financial partner:
- Are you a fiduciary?
- How do you and your firm make money?
- What’s your investment philosophy?
- What are the demographics of your average client?
Additionally, ask about how the relationship works. Can you email or call anytime, or is correspondence done in an appointment only? Who are their typical clients?
One final question: who is your custodian? Ideally, an advisor will answer with a company that is independent. It’s a big red flag for you if not.
How Much Does a Financial Advisor Cost?
There are a couple of ways an advisor may charge you, and it’s tied to how they make their money. Most charge a percentage of the assets they manage for you, called “assets under management,” or AUM.
The rate is anywhere from .25 – 2% per year. For example, a customer with $1,000 in investments and a 1% management fee will pay $100, whereas a client investing $100,000 will pay $1,000.
Often, as your balance increases, your fee percentage decreases. Here are the fee structures an advisor might use:
Investments they recommend generate a commission, which comes from you. This is a one-time fee paid at the purchase or sale of a fund.
For instance, if your advisor recommends you invest your $100 into a mutual fund that charges a 5% commission, you will only be investing $95.
Be wary because advisors may be tempted to recommend the product that pays the highest commission. Receiving commissions can potentially set up the relationship for conflicts of interest.
Fee-Only vs. Fee-Based
Fee-only advisors are compensated by charging fees on services only. The AUM model is most common, but a lot of firms require a minimum balance of $1 million.
This is the most transparent fee structure because the sales aspect of a relationship is eliminated. When you make money, they make money.
A fee-based structure is centered mainly on services provided, but the advisor may also charge commissions. An hourly rate may cost $200 – $400 and is ideal for investors whose needs are focused.
A flat fee or retainer fee paid monthly or annually is best for investors who need some ongoing advice but whose portfolios may not qualify under the AUM model.
Are Financial Advisors Worth It?
If it saves you time and, ultimately, money (think cutting expenses or appropriate tax planning), securing a financial advisor can be worth the cost.
Generally, the more complicated your financial situation is, the greater the likelihood you will benefit from a professional. It also depends on how comfortable you are managing your investments yourself.
Additionally, enduring a big life change like getting married or divorced, starting a business, or taking care of aging parents all may necessitate hiring a financial advisor. There can be financial and tax and even legal considerations tied to these major life changes.
We hire professionals because we want the project done the best it can be. Yeah, you can change a light bulb, but that doesn’t mean you can re-wire your whole house. Time is our best commodity.
Alternatives to Financial Advisors
If you don’t want to learn about investing or just don’t have the time, a robo-advisor may be good for you. To get set up with this online service, you’ll fill out an easy questionnaire to identify your goals, risk tolerance, and time frame.
From there, an algorithm builds your portfolio and automatically rebalances it for you. Robo-advisors can’t give you customized advice, but they are best for people with minimal money to invest since they require low or no-account minimums.
Fees are as low as .25% AUM, and companies like SoFi and Ally offer completely free account options.
Remember Form ADV? Even online management companies must file this official form with the SEC.
>> More: Best Robo-Advisors
#2. Online Financial Planning Services
Online financial planning services (like Facet Wealth or Zoe Financial) operate like a robo-advisor with a few perks of a traditional advisor such as investment management and customized financial planning.
Investments are managed by algorithms, but there is typically a team of advisors at your service. An online service is good for investors who don’t care about meeting in person but like to be able to talk to a real human from time to time. These services are a lower cost than a traditional advisor.
#3. DIY Wealth Management Approach
Emotions often get the best of us, and investors notoriously buy and sell at all the wrong times. But if you’re patient enough to employ a “buy and hold” technique and your financial situation is simple, you could manage your investments yourself.
It will take time to learn skills and will require lots of effort to keep up with current trends or new regulations.
Starting with a DIY approach will give you a leg up if you do decide to eventually hire a professional.
>> More:How to Buy Stocks
Bottom Line: What Is a Financial Advisor?
Financial matters are highly personal and finding someone to help you make the best decisions is a long process, but it will always be worth it.
We’re convinced there is someone or something out there for everyone. You know, for their investments.