A financial advisor (or planner) is a broad term and is generally used to refer to a professional who helps create a financial plan, gives advice, or manages your money. Often, they specialize in different areas, which is particularly beneficial if you are looking for guidance for something specific, like estate or tax planning. However, not all financial professionals are the same, and it is up to us, the consumer, to find the best fit for our needs. Here is what you need to know before hiring a financial advisor.
In This Article
Do I Need a Financial Advisor?
It depends. If you lack the interest, knowledge, or ability to manage your finances, hiring an advisor might be right for you to ensure you are on track with your savings and investment strategies. Or perhaps you are preparing for a major life event and need some guidance from a neutral source. Or maybe you have a more complex financial circumstance, like owning a business or have a large net worth and need more advanced strategies.
What Should I Look For In a Financial Advisor?
There are a ton of financial professionals who want your business, but there are some key factors to look for before hiring an advisor. First, you want a fiduciary, someone who must act in the client’s best interest and disclose any conflicts of interest. If you are unsure, just ask; they should be able to provide proof in writing. You don’t want to assume, based on job titles, such as Vice President, Director, Broker, etc., that they are, in fact, a fiduciary.
Second, when it comes to certifications, one of the most respected is the CFP (Certified Financial Planner) designation. To become a CFP, these planners must complete the “4 E’s” of a rigorous certification: education, exam, experience, and ethics.
Lastly, financial advisors are paid in many different ways, but their fee structure should be transparent. Do your research and make sure you understand exactly how and when they get paid and for what services. Let’s take a look at the difference between fee-only vs. fee-based advisors.
A fee-only financial planner or advisor is compensated directly by their client and will occur via an hourly rate, a service fee, or an Assets Under Management (AUM) fee. Paying by the hour or a flat fee for a particular service are the most inexpensive options to start. However, the AUM fee is where the advisor or firm charges the client a percentage of the total portfolio value as payment for managing it. The standard AUM fee is 1% but often ranges from 0.5 to 2% based on your assets, meaning you will be charged a different percentage based on the amount of money being managed. And some firms have negotiable AUM fees once your portfolio reaches a certain threshold. In the chart below, you will see the impact of AUM fees, which are charged yearly. And for simplification, I used 1% as the fee across the board.
In comparison, a fee-based advisor can be compensated by earning a commission on certain products, services, or investments. This may create a conflict of interest as they are usually not fiduciaries and may sell you something from which they profit, like whole-life insurance. Therefore, fee-based or commission-based professionals are best approached with caution or avoided.
Not everyone needs a financial advisor but if you do, take the time to research all your options. And keep in mind a financial advisor does not need to be a lifetime commitment; you can pay for services as needed. If you have a strong baseline of financial knowledge and prefer to do it yourself, you could save significant amounts of money in fees in the long term with a simple but effective financial plan. If you are going to use a financial advisor, make sure the fees paid are worth the service and that the advisor is a fiduciary. Remember, financial advisors work for YOU; they are available to help guide you, show you all your options, and formulate a plan to achieve your goals.
What do you think? Do you use an advisor?