From navigating the wild world of student debt, to saving for retirement, to wealth management and investment advice, we’re constantly thinking about how to best approach our finances. But we don’t have to do it alone.
While financial advisors have historically been considered only for the wealthy, there are now more options than ever for all kinds of financial situations. Do your research and there’s a good chance you will find a financial advisor that fits your needs and budget. A good financial advisor can help you build up security for your post-work life, pay off your loans and make the most of tax benefits.
Choosing an advisor, however, can be tricky. Yes, there are many options to choose from — and with technology advancing, more are popping up each day — but navigating all the regulations and cost structures to find the right fit for you requires doing your homework. From identifying what type of advisor you are looking for to knowing what to ask them at your first meeting, you want to make sure you’re getting what you’re paying for: financial planning and investment advice that puts your needs first.
So if you’re choosing a financial advisor, here are steps you should take to make sure your money is in safe hands.
Step 1: Decide What You Need a Financial Advisor For
Before you start your search for a financial advisor, determine exactly why you need one. Are you early in your career and just want to know how much — and how — to save for your financial goals? Are you paying for your child’s education, or navigating finances during a divorce? There’s likely an advisor for your specific situation. Some of the issues they help with include:
- Retirement planning: If you’re saving up for a house, car or nice vacation, it can be hard to put aside money for something that is in the future like retirement. But a financial advisor can ensure that you’re building up your retirement security with tools like a 401(k) or Roth IRA so that when it finally is time to stop working, you can maintain your lifestyle.
- Paying down debts: If you’re being weighed down by your mortgage, or feel as though you’ve been paying off your car or student debt for too long, a financial advisor can ensure you’re on the right track, or get you started.
- Investing: Whether you’re early in your career or just a few years out from retirement, investing requires regular rebalancing — replacing stocks with relatively safer options like bonds, for example — to ensure that your portfolio always matches the level of risk you want to take on. A financial advisor can help you do this, as well as recommend specific investments that make sense for you.
- Tax planning: Many factors play into what you owe Uncle Sam, including where you live, your income and whether or not you’re married. A financial advisor likely won’t help you prepare your tax filings, but they can help you identify ways to limit the amount you’re paying and pick tax-advantaged vehicles, like retirement savings accounts.
- Budgeting: It’s safe to say you don’t want to spend your paycheck the moment it hits your bank account. But how much can you spend, and how much should you be saving or investing? A financial advisor can help you determine what makes sense for you, and adjust the plan as you earn more or meet an unexpected hardship.
- Saving: This encompasses a lot. Whether you’re saving up for your child’s college tuition or a wedding, a financial advisor can help you with investment advice so your money grows, as well as how much should be allocated to the end goal each month.
- Getting insured: There are always new insurance products coming to market. Whether you’re choosing home insurance or life insurance, a financial advisor can help you find the product that best fits your needs, and point out any holes in your coverage.
- Estate planning: Planning for your own death can be scary, but it’s also necessary to ensure your loved ones are taken care of. Financial advisors can aid you in getting your paperwork, like a will or revocable living trust, in order. Advisors can also help you identify people to make decisions when you can’t, like a health care proxy and an executor.
Step 2: Research the many types of financial advisors
The term “financial advisor” covers way more job descriptions than you might be aware of. These advisors can range from financial coaches (who may start with basics, like enhancing financial literacy) all the way to wealth advisors (who work with the really, really wealthy). Here are the main ones to know:
- Investment advisors. These are one of the most common types of advisors and are paid a fee to provide advice on specific securities or market trends as well as making a holistic financial plan.
- Stockbrokers. For those looking for more transactional help, stockbrokers buy and sell securities like stocks and bonds on behalf of their clients. They’re usually associated with a brokerage firm and can make trades for both retail investors (everyday investors like you and me) as well as institutional investors.
- Certified Financial Planners. CFPs help clients create long-term wealth management plans, taking into account retirement and investment goals, insurance, taxes and more. They often work with specific types of clients, like small businesses.
- Robo-advisors. These digital management services often use data about someone’s financial goals to produce tailored suggestions about where and how much that person should invest. Many have a hybrid model, which provides some contact with a person in addition to the robo offerings. (Some experts are critical of robo-advisors, saying that they don’t have the same level of risk management as a human does. But if you’re attracted to this low-cost option, then they recommend picking a hybrid model, like Schwab Intelligent Portfolios Premium and Vanguard Personal Advisor Services, so you can have the ease and low cost of a robo-advisor, but can chat through risk management with a human. )
Step 3: Learn About Financial Advisors and Complicated Regulations
It would seem that the job of a financial advisor would entail putting their clients’ best interests first — but that’s not always the case. Only some financial advisors must adhere to the fiduciary standard, meaning they must put their clients’ best interest ahead of their own, even if that means recommending strategies that could reduce their compensation. Registered investment advisors have this obligation, while critics say that brokers do not, despite a recent regulation that was intended to strengthen their standards. This comes as a surprise to a lot of people: a 2019 survey from the digital wealth manager Personal Capital found that 48% of Americans mistakenly believe that all financial advisors must meet this standard.Consumer protection advocates have long been pushing for a more strict and clear fiduciary standard across the industry. But they’ve been disappointed with many of the moves made to further the protection of individual investors.
Just this year, for example, the SEC implemented the new Regulation Best Interest (Reg BI). It’s supposed to hold brokers to a higher standard. Instead of having to put their clients’ interests first, brokers had only to recommend products that were suitable for the client.
The problem with the new regulation? The SEC didn’t clearly define “best interest,” says James Watkins, an attorney and managing member of InvestSense, a consultant that helps pension plans and others meet their fiduciary duty to act in their clients’ best interest. So it doesn’t protect investors to the extent that a true fiduciary rule would. The SEC said it will be defined on a case-by-case basis, but “this lack of a clearly defined ‘best interest’ standard only serves to create unnecessary uncertainty and unnecessary risk exposure for both advisors and investors,” Watkins says.
It’s also important to keep in mind that brokers may have a different pay structure than advisors. They may make money by selling you products that are okay for you (and will offer them a bigger commission) but are not necessarily the best for you.
If it’s not clear, don’t be shy about asking prospective advisors how they’re compensated. Watkins also recommends asking if an advisor is “open architecture” or “closed architecture.” The former means that the advisor can sell anything to you, while the latter means the advisor is limited in what they can sell (because they are receiving some sort of compensation from whomever is marketing the investment, like a mutual fund manager). So it’s best to find someone who is “open architecture.” And seek out advisory firms that are fee-only, paid exclusively by the client, so you know third-party incentives aren’t involved at all.
The best way to protect yourself is to choose a financial advisor who voluntarily minimizes the conflicts of interest in their business model and voluntarily adheres to a fiduciary standard higher than the one the SEC enforces, says Barbara Roper, director of investor protection for the Consumer Federation of America.
One way to do this is through the CEFEX certification, which audits and certifies firms and advisors and certifies them as meeting a true fiduciary standard.
Step 4: Do a Background Check and Research Your Potential Financial Advisors
People will travel to farther gas stations or appliance stores to find the cheapest gas, dishwashers or dryers. They’ll spend hours at car dealerships before buying a car. But they won’t always go that extra mile to find the right financial advisor, says Alan Rosca, a securities attorney.
“We should spend the same amount of time before we give somebody our hard-earned money,” he adds.
Rosca recommends looking up a broker on FINRA’s BrokerCheck, where you can do some digging into someone’s experience and see if prospective advisors have faced any disciplinary actions. You can also use the SEC’s Investment Adviser Public Disclosure website to confirm that a Registered Investment Advisor has the certifications they say they do.
Since there are various ways an advisor makes money — like commission for selling products, annual percentage of an investors’ assets or an hourly fee — you shouldn’t be afraid to ask for the details.
“Different payment structures might create different incentives,” Rosca says. “If somebody is paid only to sell investments, it means if he doesn’t sell you anything, he doesn’t make any money.”
How Much a Financial Advisor Costs
The rates for a financial advisor vary, but the average fees are 1-2% per year of assets under management, a fixed fee of between $1,000 and $3,000 for a service like creating a full financial plan or an hourly fee of $100 to $400 per hour, according to financial advice site SmartAsset. For those looking for a cheaper option, a 2018 Money analysis found that the average management fee is just 0.36% for robo-advisors.
So before you pick an advisor, make sure to ask some basic questions:
- How much will you be paying and how is that number determined?
- Are they compensated for recommending certain products (and if not, how do they select the investments and products they recommend?)
- Or are you charged by the hour? And what is their duty to you — will they be acting as a fiduciary?
- What exactly does that look like?
- Also ask questions about your specific situation. If you are a divorced woman in your 40s, does the advisor have other clients in the same boat? If you’re a small business owner, do they have experience with that specialization? If you’re just starting out in your career, have they worked with millennials or Gen Z-ers in the past?
Whether it be a look at their credentials, or a detailed explanation of their pay structure, don’t be afraid to ask what you need. After all, your life savings could depend on it.