How To Choose A Financial Advisor. Need help managing your money? If you’re like many Americans, you probably need help. Americans who lack personal finance skills lose an average of $1,200 a year, according to Financial treat.
Finding a good financial advisor can help you avoid these costs and focus on your goals. Financial advisors aren’t just for the wealthy – working with an advisor is a great option for anyone looking to get their personal finances on track and set long-term goals. Follow the steps below to find a financial advisor that fits your needs.
Before speaking with a financial advisor, determine which areas of your financial life you need help with. When you first sit down with an advisor, be prepared to explain your specific money management needs.
Remember, financial advisors provide more than investment advice. The best financial planners can help you find programs that meet all your financial needs. This may include investment advice for retirement planning, debt settlement, insurance product advice to protect you and your family, and estate planning.
Depending on where you are, you may not need a lot of financial planning. People with relatively easy financial lives, such as young people who don’t have a family of their own or are heavily indebted, may just need help with retirement planning.
However, people with complex financial needs may need additional support. They may be trying to set up a college fund or trust for their children, manage aggressive debt payments, or tackle tough tax issues. Not all types of financial advisors provide the same services. So decide what services you need and let them guide your search.
There is no federal law governing who can call themselves a financial advisor or provide financial advice. While many call themselves financial advisors, not all have your best interests at heart. Therefore, you need to carefully evaluate potential financial advisors and make sure they are in your favor and your funds.
Part of understanding the different types of advisors is understanding their fiduciary responsibilities. Some (but not all) financial advisors are bound by a duty of loyalty, which means they are legally obligated to work in your financial best interest. Others who call themselves consultants are only bound by the eligibility criteria, ie. H. They just need to recommend products that are right for you – even if they are more expensive and earn you higher commissions. (However, the SEC is trying to regulate this by limiting the use of “advisors” to those who adhere to fiduciary standards.)
No matter which type of advisor you choose, you should understand how they make money. That way, you can be sure if their advice is actually better for you or for their wallet.
Here’s how to consider the different types of financial advisors:
Fee-based financial advisors make money from the fees you pay for their services. These fees can be calculated as a percentage of the assets you manage, hourly rates, or flat rates.
Almost all honorary advisors are trustees. Often, they opt for a fee model to reduce potential conflicts of interest. Since their income comes from their clients, it is in their best interest to ensure that you end up with the financial plan and financial product that works best for you.
Some financial advisors make money by earning commissions on sales from third parties. Some of those financial advisors who earn commissions on sales may advertise as “free” financial advisors who won’t charge you for advice. Others may charge a fee, which means they only get a portion of their income from third-party commissions.
In any event, financial advisors earning third-party sales commissions earn some or all of their income from selling certain financial products to you. If you decide to work with a financial advisor who earns commissions on sales, you need to be extra careful.
Committee advisors are not trustees. They act as salespeople for investment and insurance brokers and are only bound by eligibility criteria. In contrast, some fee-based financial advisors are fiduciaries, although when discussing certain types of products, such as insurance, it is important to determine whether they will always act as fiduciaries or if they will “suspend” their fiduciary responsibilities.
Remember, commissions are not a bad thing in and of themselves. They’re not even necessarily red flags.
Some financial products are sold primarily as part of a commission model. Buying life insurance: Paid planners who get paid to help you buy life insurance may still have your best interests in mind when advising you on other financial products.
“To be clear, there’s nothing wrong with paying life insurance commissions,” says Karen Van Voorhis, fee-based certified financial planner (CFP) and director of financial planning at Daniel J. Galli & Associates in Norwell, Massachusetts. “That’s how the industry structure works.”
Buying financial products through a commission-earning financial advisor can be convenient, especially if someone earns a commission, no matter where you buy the product. It’s important to understand the difference. If you work with a financial advisor for a fee, you’ll know when they’re acting as trustees, especially if they’re helping you buy financial products.
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A Registered Investment Adviser (RIA) is a firm that provides fiduciary financial advice. RIAs employ Investment Adviser Representatives (IARs) with fiduciary duties. An RIA may have one or hundreds of IARs working for it.
IARs may call themselves financial advisors and may be for a fee or a fee. Some may have additional qualifications, including the designation of Certified Financial Planner (CFP).
“The Certified Financial Planner designation is the true gold standard in the financial planning industry,” says Van Voorhis. The CFP designation indicates that a financial advisor has passed rigorous industry examinations in real estate, investment and insurance planning and has many years of experience in their field.
Because of their extensive expertise, CFPs are well placed to help you plan all aspects of your financial life. They are especially helpful for those with complex financial situations, including managing large outstanding debts and planning wills, trusts and estates.
Robo-advisors provide low-cost, automated investment advice. Most specifically help people invest in medium- and long-term goals, such as retirement, through a diversified portfolio of pre-built exchange-traded funds (ETFs).
“For really tech-savvy young adults, a robo-advisor that just manages retirement funds could be a perfect fit,” said Brian Behl, chief financial officer at Behl Wealth Management in Waukesha, Wisconsin. “I don’t think they will get comprehensive advice on insurance, superannuation and taxation.”
People with complex financial needs should probably opt for a traditional financial advisor, although many robo-advisors offer financial planning services for a la carte or affluent clients.
“While it is true that bots are disrupting the industry…I think there is still a place for human advisors right now,” said Corbin Blackwell, CFP of robo-advisor Betterment.
Betterment, for example, allows customers to purchase personal financial advice courses, while Personal Capital, Wealthsimple, and Betterment offer regular financial plans for customers with high balances for an administration fee.
Betterment is one of the pioneers of robo-advisor investing methods. After more than a decade in business, we believe no other platform provides as much value to customers as Betterment.
Betterment scored well in all categories. Betterment Digital’s basic service tier has a competitive annual fee of 0.25% of your balance, and there is no minimum balance requirement. High-balance savers looking for a more premium service can take advantage of Betterment Premium, which provides access to real-time financial advisors.
Create an account, choose your goals and fill in some personal information, and Betterment will place you in a risk-adjusted exchange-traded fund (ETF) portfolio. Note that your portfolio will include more than a dozen ETFs, some of which may have high fees. We don’t think this is the best approach since you can get all the diversification you need with just three or four super cheap ETFs.
Note to those who choose the emergency fund option: you may end up with a portfolio (15% stocks/85% bonds) that is too risky for your blood. If you need the money after being laid off after a downturn, chances are you’re selling at a low price.
Betterment also offers alternative portfolios to choose from, including those focused on environmental, social and governance (ESG) factors. The platform offers automatic tax loss collection as well as tax-coordinated portfolio options to structure your stock and bond allocations to optimize your tax treatment.
In addition to the standard taxable account options, long-term savers should also check out Betterment’s retirement accounts, including traditional individual retirement account (IRA) options, Roth IRAs, and SEP IRA options for small business owners.
Once you have $100,000 in your account, you are eligible for the Betterment Premium service tier, which includes unlimited consultations with Betterment’s financial planning experts and a higher annual fee of 0.40%. If you prefer a lower fee of 0.25%, you can choose the Betterment Digital service tier with balances over $100,000.
Services provided by financial advisors vary from advisor to advisor, but advisors may offer:
In addition to investment management and financial planning, financial advisors provide emotional support and perspective during turbulent economic times. For example, at the start of the coronavirus pandemic in March 2020, client demand for financial advisor contacts increased by nearly 50%.
“I think we can be a source of sanity in these times,” Blackwell said. “We can weather the storm. We built this portfolio for a reason.”
When choosing a financial advisor, make sure they offer the services you are looking for in your financial and non-financial life.
Start developing your financial strategy with a personal capital financial advisor
Financial advisors used to charge a percentage of the wealth they managed for you. Today, advisors offer a variety of fee structures that help make their services available to clients of all financial means.
Commission-only advisors appear to be free on paper, but they may receive part of your investment or purchase as payment. These “free” financial advisors are usually available through investment or insurance brokers. Keep in mind that these advisors may only be bound by eligibility criteria, so they may end up costing as much — or more — than you would pay for a similar financial product proposed by a fiduciary financial advisor.
Paid and fee-based financial advisors can charge based on the total amount of assets they manage for you (Assets Under Management), or they can charge by the hour, on a schedule, through a pre-agreement, or through a subscription model. The usual average fee rates for financial advisors are shown in the table below:
Assets Under Management (AUM) 1.0% (0.25% – 0.5% for robo-advisors) $253 per hour $2,318 per plan Fixed assets $5,704 You want to make sure the people who guide your financial decisions are trustworthy and competent.
You can find a good financial advisor in a number of ways. Seek advice from friends, family and colleagues. Alternatively, you can search for a financial advisor online. Many professional financial planning associations offer free financial advisor databases:
When evaluating consultants, be sure to consider their qualifications as well as their background and fee structure. You can use FINRA’s BrokerCheck to review disciplinary actions and complaints against financial advisors. Remember, just because someone is a member of the Financial Planning Association does not mean they are a fiduciary financial advisor.
When meeting with a financial advisor for the first time, make sure you know the answers to these questions and are comfortable with their answers.
Due to the ambiguity of the industry, you must be careful to ensure that you find the right financial advisor to meet your fiduciary and financial needs. However, if you find the right financial advisor, they can help you achieve your financial goals and provide financial security for your loved ones and their future.
“Most of what I do in my life-focused approach to financial planning and wealth management is dealing with people,” said Wes Brown, CFO of CogentBlue Wealth Advisors in Knoxville, Tennessee.
John Schmidt is Assistant Distribution Editor for Investments and Retirements. Before joining Forbes Consultants, John was a senior writer at Acorns and editor of the market research group Corporate Insight. His work has appeared on CNBC + Acorns’ Grow, MarketWatch, and The Financial Diet.