You may think financial advisors work only for the wealthy, but now people in all sorts of financial situations can get help with their financial planning.
After all, it makes sense to ask for help as you navigate the wild world of student debt, save for retirement, and seek investment advice. You don’t have to find personal finance solutions all by yourself.
But finding the right financial advisor can be tricky, especially with so many options now available.
6 Steps to Finding the Right Financial Advisor
If you’re looking for the best financial advisor for you, this 6-step guide should help:
- Step 1: Learn the different kinds of financial advisors
- Step 2: Identify why you need financial advice
- Step 3: Learn how these financial professionals get paid
- Step 4: Do you need a fiduciary?
- Step 5: Use the right search tools
- Step 6: Meet for in-person interviews
Let’s take a closer look at each step.
Step 1: Learn About the Different Kinds of Financial Advisors
What, exactly, is a financial advisor? This job description includes more duties than you might think. Before Googling “financial advisors near me” first make sure you know a bit more about what you’re looking for.
Some financial advisors resemble coaches. They can help you make basic financial decisions and teach you solid spending, saving, and borrowing habits.
Other financial advisors perform high-level investment management for the wealthiest individuals and businesses.
Here’s a summary of the main types of financial advisors out there:
- Investment advisors. These are some of the most common types of advisors. You’d pay them a fee for their advice about whether and when to trade specific securities. They know market conditions and can help create 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 your entire financial life: retirement and investment goals, insurance, taxes, and more. They often work with specific types of clients like small businesses.
- Robo-advisors. These digital investment management services use algorithms and data about your financial goals to tailor suggestions about where and how much you should invest.
Many advisors use a hybrid model which combines some contact with a person in addition to robo-offerings.
Some experts are still critical of robo-advisors, saying that they don’t have the same level of risk management as a human does. If you’re attracted to this low-cost option, they recommend picking a hybrid model — such as Schwab Intelligent Portfolios Premium or Vanguard Personal Advisor Services — to combine the ease and low cost of a robo-advisor, while chatting through risk management with a human.
Step 2: Identify Why You Need a Financial Advisor
Finding the right kind of financial advisor will be easier when you’ve determined exactly why you need financial planning services.
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 for a house, car, or nice vacation, it can be hard to put aside money for something in the future like retirement. But a financial advisor can ensure you’re maximizing retirement-specific tools like your 401(k) or Roth IRA so you can maintain your lifestyle after you finish working.
- Paying down debts: If your mortgage or other debt is weighing you down and keeping you from meeting other goals, a financial advisor can help you find solutions.
- Investing: No matter your stage in life, investing requires regular re-balancing — replacing stocks with relatively safer options like bonds, for example — to ensure your portfolio always matches the level of risk you want to take on. A financial professional can help you do this, as well as recommend specific financial products that make sense for your investment portfolio.
- Tax planning: Many factors play into what you owe Uncle Sam, including what kind of financial products you buy and use. A financial advisor won’t help you prepare and file taxes, but the right advisor could help you limit your exposure to taxes as you work toward other financial goals.
- Budgeting: It’s safe to say you don’t want to spend your paycheck the moment it hits your bank account. But what should your financial goals be? 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 for your child’s college tuition or a wedding, a financial advisor can offer investment advice to help you meet your goals without having to take out loans or use high-interest credit cards.
- Getting insured: There are always new insurance products coming to market. Whether you’re choosing home insurance, life insurance, or even annuities a financial advisor can help you find the product that best fits your needs — and point out any holes in your coverage.
- Estate planning: It’s easy to put off planning for your death, but it’s also necessary to ensure your loved ones are taken care of. Financial advisors can help get 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.
Identify why you need a financial plan. You may need more than one kind, and that’s OK. Then you can make sure the financial professionals you’re considering have the skills, knowledge, and experience to help you.
Step 3: Know How Financial Professionals Get Paid
Financial advisors get compensated for their time and expertise in a variety of ways.
- Hourly rate: You could pay an advisor for his or her time like you would an attorney or plumber.
- Flat or annual fee: Your financial advisor could collect an annual percentage of your assets under management.
- Commissions: Your advisor could collect commissions on the financial products he or she sells to you.
- Retainer fee: If you have a complex financial situation, sometimes a financial advisor will work through a retainer model, for a monthly, quarterly, or annual charge. Since this is not asset-based, it can help minimize conflicts of interest and focus on advice.
Some financial advisor’s fee structures combine two of these methods. An advisor could charge a flat fee while also collecting commissions on sales of new products.
If you need advice for a specific problem and don’t plan to build a long-term relationship that includes investment management, you’ll probably pay an hourly rate.
But it’s important to find out for sure because you don’t want to be surprised when your account takes a big hit or you receive a quarterly bill in the mail.
And, if you’re wondering whether you can trust a financial advisor to look out for your best interests instead of putting their commissions first, you’re already a step ahead of the game.
Step 4: Do You Need the Fiduciary Standard?
You might think all financial advisors would put their clients’ needs first and avoid any potential conflicts of interest — but that’s not always the case. This is true partly because so many different financial professionals fall under the term “financial advisor.”
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 own compensation.
Registered investment advisors have this obligation while critics say brokers do not, despite a recent regulation that was intended to strengthen these 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 fiduciary standard.
Meeting the fiduciary standard matters most when you’re hiring a financial advisor to invest and choose financial products on your behalf. If you’re simply seeking help building a monthly budget, this issue is likely not as crucial.
In either case, don’t be shy about asking potential financial advisors whether they are fiduciaries and any other questions about how they’re compensated. It’s your net worth at stake, after all.
Step 5: Search for the Financial Planning Help You Need
Now that you know what you need and how to look out for your best interest, it’s time to start searching for the best financial advisor for you.
While you could always use the internet to find financial professionals in your area, you also have more precise search tools available.
Alan Rosca, a securities attorney, jokes that people will travel to faraway 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’ll rely on a quick Google search to find the right financial advisor.
“We should spend the same amount of time before we give somebody our hard-earned money,” he adds.
Rosca recommends finding help by using the Financial Industry Regulatory Authority’s BrokerCheck (FINRA) where you can do some digging into someone’s experience and see whether 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 (RIA) has the certifications they say they do.
Finally, you can also check out the National Association of Personal Financial Advisors (NAPFA) for fiduciaries in your neighborhood.
Step 6: Meeting Potential Financial Advisors or Brokers
Once you’ve identified some potential advisors in your neighborhood or city that meet your requirements, start making calls and set up appointments.
Since there are various ways an advisor makes money — like a commission for selling products, the annual percentage of an investors’ assets, or an hourly rate — 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.”
If an advisor doesn’t want to discuss these details, move on to someone else.
At this point, you’ve done enough homework to know whether someone’s skills and reputation check out.
That said, once you enter into a relationship, you always have the freedom to choose a different Certified Financial Planner (regulated by the CFP board), broker, investment manager, financial advisor, or chartered financial consultant.
The most important thing is for you to understand what’s going on with your financial life and feel the freedom to continue asking questions until you do understand the details.
How Much Does a Financial Advisor Cost?
When you’ve never worked with a financial professional before, you may not have a reference point for how much this kind of service will cost.
Going rates for financial advising vary, but the average fees equal:
- 1 to 2% per year of your assets under management
- a fixed fee of between $1,000 and $3,000 for a service like creating a full financial plan
- an hourly fee of $100 to $400 per hour, according to financial advice site SmartAsset
If you need a cheaper option, a 2018 Money analysis found the average annual management fee is just 0.36% for robo-advisors. You won’t get the same attention to detail, but it can be a good starting point.
Before start working with your 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?)
- If you get charged an annual percentage, is it billed quarterly or monthly?
- Are you charged by the hour? And what is their duty to you — will they be acting as a fiduciary?
- Also, ask questions about your specific situation. If you’re 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 Zers 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 for what you need. After all, your life savings might depend on it.
The Fiduciary Standard Isn’t Always Simple
We’ve already discussed the fiduciary standard in Step 4 above. But since this is a complex topic that deserves more attention, we dug a little deeper.
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.
In 2019, the Securities and Exchange Commission implemented the new Regulation Best Interest (Reg BI). The new code of conduct holds that financial advisors and broker-dealers should only recommend products that are in the customer’s best interest. Further, they should clearly identify any possible conflict of interest or financial incentive the broker-dealer may have.
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.
In sum, 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 whoever is marketing the investment, like a mutual fund manager).
It may be best to actively 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 analyst 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.
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