When seeking a financial advisor, you may be confused by your choices. Many professionals help you with estate planning when giving you financial advice. In contrast, others make investment recommendations for your portfolio, help with budgeting, reduce debt, or provide tax optimization strategies.
A financial advisor is a qualified professional who provides services to manage finances, make decisions, and reach your goals. This post discusses choosing a financial advisor that is right for you and your budget.
1. What Kind of Financial Services Are You Looking For
You may be looking for someone to advise you for a single purpose like debt management or a comprehensive financial plan. A financial advisor can handle various services, specialize in a specific plan, or strategically guide you towards your goals.
It depends primarily on your needs for:
- Paying off debt
- Setting financial goals
- Investment management
- Saving for retirement
- Creating a financial plan
- Estate planning
- Tax planning
You may require financial advice because of a financial situation or changing circumstances in your household like marriage/divorce, having a child, college planning, starting a business, or retirement. Increasingly, more people are considering early retirement, or FIRE which stands for financial independence, retirement early, meaning that they need to plan for a longer life span than traditionally.
In uncertain times, there is great value in having a financial advisor. In a recent Harris Poll, 38% of survey respondents said they were working with a financial advisor, up from 29% pre-pandemic.
2. Qualification Requirements Vary
Financial advisors or planners have a bachelor’s degree with an accounting or finance focus as the minimum requirement. Advanced educational degrees are not uncommon. Their course of study distinguishes certified financial planners (CFPs), with a rigorous exam, required experience, and high standards.
Consider your financial advisor candidate’s soft skills, such as adaptability, communication, and problem-solving, and if you have good chemistry. We have a list of questions below you should ask your candidate when hiring your financial advisor.
3. Look For A Fiduciary
Many financial advisors are fiduciaries. You want them to be experts, professional, and trustworthy. Choose your planner who adheres to the fiduciary standard. The standard requires the planner or advisor to act in the best interests of their clients.
Among the highest fiduciaries are Certified Financial Planners, or CFPs. The CFP certification is distinct from CFAs, or highly respected financial analysts who are in the investment analysis field. It requires certification in specific personal finance areas.
CFPs must commit to continuing education on financial and ethical matters. Before hiring a financial advisor, you should verify the status of anyone claiming to be a CFP and whether they have undergone a disciplinary process. You can check their status on the CFP Board website.
CFP credentials may provide added comfort and confidence in your choice when choosing a financial advisor. However, it is not a guarantee of excellent performance. You want to pick the right financial advisor or team with the right fit for your needs. There is no single best financial certification as each has its merit. Check out the top financial certifications before hiring a financial advisor or coach.
Registered Investment Advisors or RIAs help you manage your assets, mainly by your investment portfolio. These professionals know market patterns, investing in stocks, mutual funds, and other securities. They are fiduciaries making similar recommendations to a CFP. Their pay structure is fee-based, but they earn commissions from selling financial products. CFAs or chartered financial analysts, are highly respected in the investment analysis field, distinct from financial advisors.
4. Suitability Standard
In contrast to the stricter fiduciary standard, FINRA requires the suitability standard for financial professionals who work for broker-dealers. Suitability is lower than the fiduciary standard, which means the financial professional should only make recommendations suitable for their clients based on personal factors. When seeking a financial advisor, the suitability standard would not be enough to satisfy though who want help in reaching goals.
5. Look For Fee-Based Only Financial Advisors
Generally, your fees range from the fee-based only, commission-based, flat fee, or a blend of fees and commissions. However, there may be extra costs for buying financial products such as insurance.
The pay structure differs for different financial professionals from fee-based-only or charging flat fee, commission-based only, or a blend. We favor financial advisors who are fiduciaries and are fee-based only who will help you with your needs, act in your best interest and look to sell commission-driven products.
If you plan to work with a financial advisor for a specific project, they may offer fee-based structures that can be fees by the hour, a flat fee for your plan, or a percentage of your annual assets.
Hourly rates may be in the $100-$400+, with one-time financial plan costs of $1000-$3000+, and annual fees of percentages ranging from 0.25% to 1%-2% of assets under management (AUM). Some planners charge a flat rate or by the hour is best for those just starting to make money, who want a simple financial plan, and don’t yet have many assets.
The Robo-advisors offer simplified, low-cost investment management using computer algorithms that build your investment portfolio based on your profile, including goals and risk tolerance. They charge the lowest fees starting at a percentage of 0.25% of AUM, require a low asset minimum, and are well below those that offer human financial advisors.
For those who are at the early stages of building their portfolio and are not yet in need of comprehensive financial planning, Robo-advisors fit the bill. Some Robo-advisors have human advisors at higher fees, and some traditional wealth management companies like Fidelity and Schwab Intelligent Portfolios offer Robo-advisors. The fees will begin at 0.50% for AUM for those that provide human advisors. Many financial advisors blend their services based on their targeted clients
Online Investment Management Firms
We like Personal Capital which provides free comprehensive financial tools for budgeting, net worth, and portfolio analysis while having a highly regarded wealth management service with dedicated human advisors. Alternatively, many online wealth management companies offer comprehensive financial planning services. Their fees range from 0.49% to 0.89%, with the higher costs associated with lower AUM, starting at $100,000.
Traditional wealth management firms like UBS, Morgan Stanley and others charge 1% or higher fees, depending on access to new securities or private equity. Their advisors may sell you the firm’s products.
6. It Depends On Your Needs
There are many financial strategies to handle a family moving through changing life cycles. You may be seeking a one-time financial plan after getting a sizable bonus or an inheritance. Others want to have a planning team to work with them on an ongoing basis.
Trustworthy financial planners and advisors can help you build wealth with a disciplined approach. They may help you alleviate the financial stresses you encounter when saving for a house, college tuition, insurance, and retirement using the most tax-efficient strategies.
It may be challenging to wrestle with these personal finance specifics when you have a busy career earning a high income. Paying $10,000-$20,000 annually on a $1-$2 million portfolio that may produce tax savings isn’t bad.
Many traditional financial planners require a minimum of assets to invest, usually in the $250,000 range or significantly higher, and may not work with you. Other planners may prefer to grow with beginner clients to add value, particularly as clients have expanding family needs.
7. How They Are Regulated
Different regulators play a role according to the primary designation. Regulation of financial planners may be according to their professional title. Planners with CFP credentials are subject to the Certified Financial Board of Standards requirements.
The Securities Exchange Commission (SEC) and the state where they do business regulate investment advisors who provide financial planning.
The State Board of Accountancy regulates the accountant who may be preparing a tax plan.
8. Other Financial Services
Money and Debt Management
Consider a money coach or credit counselor when you need help saving money, setting up a budget, reducing expenses, and debt management. You can often get free assistance from a certified credit counselor by searching on the nfcc.org website.
Accredited financial counselors or AFCs can aid you in money management through their organization.
Related Post: How To Pay Down Your Debt For Better Financial Health
Investment Advice and Trades
Investment advisers and brokers provide all manner of investment services, from do-it-yourself online trading to full-scale investment advice and money management. They are subject to the suitability standard, less demanding than the fiduciary duty. Generally, investment advisors and broker-dealers need to register with the SEC, the Financial Industry Regulatory Authority (FINRA), and state regulators.
A Registered Investment Advisor (RIA) advises high-net-worth individuals on their investments and manages their portfolios. They have a fiduciary duty to their clients, which means they provide investment advice by acting in their clients’ best interests.
Creating A Financial Plan
Financial planners are financial advisors who provide clients with a range of personal financial services. They can help you create a simple one-time financial plan if you are just starting, grapple with a specific financial objective, or provide a comprehensive goal-based plan. The latter may encompass savings, investments, college savings, insurance, retirement, tax planning, and estate planning.
Each plan should be tailored to your needs and provide a disciplined approach to achieving your financial goals. Financial planners will want to gather data from personal and financial life and make forecasts to achieve wealth. Hiring a financial planner is a good starting point when you are in the early stages of accumulating assets or already have substantial assets but need guidance in your complex financial situation.
Where To Find The Right Financial Planner
The National Association of Personal Financial Advisors (NAPFA) are fee-only planners who adhere to the fiduciary standard. They accept no commission-based planners.
We recommend you look at Wealthtender to help you find a financial advisor that can help you reach your money goals with a personalized plan. You find people to work with under Financial Advisor Directory and Financial Coach Directory to search for financial professionals based on the financial certifications they hold. You can also read the in-depth article linked to each designation listed above for more information about hiring a financial advisor or coach holding a particular designation.
You may consider the Garrett Planning Network if you are just starting with fewer initial planning needs. They are certified financial planners or persons working towards obtaining their credentials. They tend to focus on smaller projects for an hourly fee.
XY Planning Network is relatively new, focusing on young professionals looking for fee-based financial planners with the CFP designation. Their organization serves Generation X and Millennials. Their fees appear to be within hourly rates or flat fees.
There are great Facebook Groups to visit, such as Females And Finance, run by Sheryl Hickerson, to help you find the right person for you. Women, in particular, have distinct needs for financial planning.
Do I Need A Financial Advisor?
Managing money well is time-consuming and requires expertise in many areas. You can develop a simple financial plan on your own as you are starting. Even if you do not work with a financial advisor or planner, you need to consider your short-term and long-term goals.
As your assets grow, you may need guidance and assistance in developing financial strategies.
10 Questions You Should You Ask When Seeking A Financial Advisor
- What are your qualifications, credentials, and experience?
You will want to know who you are dealing with in terms of expertise, education, certifications, and experience.
- Do you work with a team, and how do you work together?
Financial planners often have their specialties and overlap with others who can complement their skills.
- Are you a fiduciary?
A fiduciary standard is a more stringent duty of care. When speaking to a professional financial candidate, you want to understand how they view their role to you. It is your money and your financial future. You want your advisor to be working on behalf of your best interests, not theirs.
What Does This Cost
- What are your fees, and what are my costs all-in?
Understand their fee structure and what it covers. Be clear about the extra costs you may incur, such as buying an insurance policy.
- How will I be communicating with you?
Biannual plan reviews are common. If you have an ongoing relationship with your financial advisor, it is essential to understand how you will review and update your plan. How often will they be checking your financial plan or investment portfolio with you? What kind of communication should you expect, particularly when making changes.
- How will they work with you?
Will they take the time and have the patience to make complex concepts understandable to you. This information does matter, and it may take time to build confidence and a good rapport.
Characteristics of Your Financial Advisors
- What is your investment philosophy? You want to understand your planners’ fundamental growth and value investing beliefs. Ask them about their asset allocation strategy and online tools. Markets can be turbulent, so you need to know how they may address investments during recessions. If you are considering early retirement in your 40s or 50s, ask them if how they can help you prepare.
- How should I measure success in our financial or investment plan?
You need to understand the benchmarks that will provide you with results relative to your financial goals. There may be different measurements for various aspects of your plan.
- What added value may I expect from you as our financial advisor?
This question is tricky. You want to know what kind of relationship you will have. Of course, you should expect expertise, professionalism, and trust. When you want to make an investment that advisors believe is not sound, will they tell you “No”? They must have your back.
- What are some of your clients’ criticisms of you and your team?
No one person is perfect, so knowing those criticisms will help you measure your prospective financial planner and how they fit with your needs.
It is vital to achieve your short- and long-term goals to support you and your family. We discussed how to hire a financial advisor, the varying fee structure, and pick the right one for you. It is an important decision so take your time to find the right person.
What are you looking for when seeking out a financial advisor? What traits are essential to you? We would like to hear from you!
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With a passion for investing and personal finance, I began The Cents of Money to help and teach others. My experience as an equity analyst, professor, and mom provide me with unique insights about money and wealth creation and a desire to share with you.
2 thoughts on “How to Choose A Financial Advisor”
Very tricky to retire early with a financial advisor.
Best to you, Partners in Fire! Happy Fourth!