Getting educated about your retirement and wealth-management options is a necessary part of planning for your financial future. But let’s be honest. You don’t have the time to be a financial expert. You don’t want to be a financial expert. You would rather have an easy plan you can execute without having to constantly worry about changes in legislation or the economy or financial products. Enter the financial advisor.
- Financial advisors or planners counsel people on wealth management and other personal money matters.
- Financial advisors can just draw up plans, or they can recommend specific investment products and vehicles.
- Some advisors charge a straight commission every time they make a transaction or sell you a product; others charge a fee based on the amount of money they have been given to manage; some assess an hourly fee.
- While a good financial plan can be an investment, some advisors drive up costs, by recommending frequent turnover of assets or steering clients into more expensive (high-fee) investments.
- Always make sure your financial advisor abides by fiduciary standards—legally obligated to act in your best interests and disclose any conflicts of interest.
What Is a Financial Advisor?
Financial advisors, also known as financial planners, are professionals who help their clients tackle some of the tough issues relating to wealth management and personal money matters. They can put together an entire retirement savings plan with a timeline or simply answer a question about whole life insurance.
Here’s a snapshot of a few things a planner can do:
- meet with you to assess your current financial situation and goals
- develop a comprehensive plan that addresses major areas of concern (retirement, college planning, insurance, avoiding estate tax, and so on)
- coach you as difficult financial issues arise in your life
- invest funds for you/set up investment accounts
- find financial vehicles for you, like insurance policies or mortgages
While the financial advisor field is largely unregulated—anyone can hang out a sign advertising financial advice or planning, no license required—there are those who have industry credentials, like certified financial planner (CFP), chartered financial analyst (CFA) and chartered financial consultant (ChFC).
One of the best-known designations is that of Certified Financial Planner (CFP); it's issued by a private trade association that mandates qualifying exams and continuing education for those with the certification.
When to Seek Out Financial Advice
Still, with all of the information available to you in books, print media, and the multitude of websites dedicated to personal finance, do you really need a financial advisor?
Well, how much free time do you have right now? And, in addition:
- Do you have a fair knowledge of investments?
- Do you enjoy reading about wealth management and financial topics and researching specific assets?
- Do you have expertise in financial instruments? Do you have the time to monitor, evaluate them and make periodic changes to your portfolio?
Going it alone is a possibility, but to do it right you’ll need to spend a lot of time keeping up to date on all the changes in the investing, insurance and risk areas of life. Changes in tax laws or other legislation that could affect your financial affairs. Changes in mutual fund options at your brokerage firm: Perhaps one of your funds closes and you need to decide where to put the money). Changes in the amount of money you can contribute each year to a retirement account. Changes in the sorts of financial products out there or the introduction of new products.
Life Events That Demand Financial Planning
Professional advisors say there is no magic asset number that pushes an investor to seek advice. Rather, it is more likely an event that spooks a person and sends them scurrying through an advisor's door. These events usually involve windfalls or major losses—or a major life event. Other common triggers include:
- I’m nearing retirement and I want to ensure that I’m on the right track.
- I just inherited some money from a parent and I want to get some advice on how to invest the money.
- I was recently married, and we need help managing our finances as a couple.
- I was recently divorced or widowed and need help moving forward financially as a single person.
- Mom and dad are getting older and they/we need help managing their overall finances.
- I hate investing and financial planning and want professional help to ensure that I don’t mess up my future.
- I enjoy financial planning and investing, but want a second opinion to see if I could do it better.
Not to mention that you also need to develop a long-term financial plan that includes considerations for retirement, paying off your house, funding the kids’ college education, estate planning, and a timeline for when you can actually retire.
percentage of Americans who'd rather discuss their weight than their finances, according to a 2017 study by Acorns, the investment app
One-Time Financial Advice
Many financial planners and advisors will work with savers on a one-time basis, either to develop a financial plan or help with a specific issue or question. Generally, these advisors work on an hourly basis or agree to take on the project for a flat fee.
For example, if your company has offered you a buyout package to take an early retirement, you might engage the services of a financial advisor to help you sort through your options. He or she can help you evaluate any incentives your company may be offering, such as enhanced pension benefits, and help you visualize the long-term costs or benefits of such a decision.
As another example, you might ask a financial planner to put together a comprehensive financial plan or a review of your current situation. In addition to helping you better understand your finances, you would likely walk away with actionable steps or a roadmap to follow.
Keep in mind that it is not uncommon for a one-time engagement to evolve, either into a full-time advisory relationship or more regular financial "check-ups."
How a Financial Advisor Can Help
Financial advisors can be great when you are confused, emotional or simply ignorant of various wealth-management topics. Add in the fact that a majority of people can’t see far enough into the future to imagine their retirement, much less plan for it, professional advice can be very handy. A qualified advisor will ask you a lot of questions—some of them uncomfortable!—in order to get the full picture of where you want to take your life.
Once all of the details are in hand, he or she can put together a plan and offer you advice on investments, retirement planning, estate planning, tax liability, and your kids’ college education. The breadth of the advisor’s knowledge can make a lot of your difficult decisions easier.
Some financial planners go further, actively helping you buy insurance products (policies, annuities) and to invest in financial products, like mutual funds or CDs. They tend not to be able to trade actual securities, like stocks or bonds, themselves, but they can act as your liaison with a broker or money manager who does. They can also work with a trust and estates lawyer or accountant on your behalf.
A financial advisor/planner is not automatically the same as a Registered Investment Advisor, a professional who advises individuals on investments and actively manages their portfolios, usually receiving a percentage of the assets’ worth in compensation.
When to Hire an Advisor Full-Time
Just as there are many good reasons to seek out the services of a financial advisor for a one-time or short-term need, it can also make sense to engage the services of an advisor on a full-time basis.
Various advisors and firms all work in different ways, but it is common for an advisor in one of these arrangements to provide ongoing investment management services as well as ongoing advice on financial planning issues that an investor might encounter. These topics can include estate and tax planning, preparations for retirement, saving children's college and a host of other considerations.
Payment for these services is often a percentage of the investment assets under management (AUM) or, increasingly, a flat retainer. Typically, under this type of arrangement, the investor and advisor would formally meet (in-person or virtually) twice per year or quarterly, with the client having access to the advisor as often as needed for any questions or issues that might arise in the interim.
The benefit to this sort of arrangement is that the investor not only has a professional watching his or her assets but also receives advice on his or her overall situation throughout the various stages.
How a Financial Advisor Can Hurt
As great as a good financial advisor can be, they’re not all good. An incompetent (or, worse, dishonest) advisor can cost you a lot of money. Here’s a snapshot of how:
- Churning your investments: getting you to buy and sell more than necessary in order to generate higher commissions for themselves.
- Expensive investments: Pointing you to mutual funds with high expense ratios when a similar low-cost index fund or an exchange-traded fund (ETF) would be a better choice.
- Bad planning: A well-intentioned advisor who puts together a sketchy or holes-ridden financial plan is not helping you at all. Of course, plans do need to be flexible, given changes in the economy, interest rates—and of course, the curveballs that life can throw at you personally (loss of a job, long-term illness, etc.). But you need to start out with a detailed blueprint and clear course of action.
- Not responding: Even an unbiased advisor is useless if he or she never returns your calls/emails or is MIA when your need arises. Timing can be of the essence with many financial and investment scenarios, and you must feel confident your advisor will respond to you promptly.
Helps you plan long-term
Researches, comparison-shops, and recommends investments, products, and strategies
Acts as quarterback for your financial team
Generates an additional expense
May not be unbiased in recommendations
May recommend more costly products/churn portfolio
Hire a Fiduciary
To avoid problems, make sure your advisor has a fiduciary duty to you. Fiduciary duty means your advisor is legally obligated to put your needs above his/her own and always act in your best interests, offering you an unbiased view and opinion. In a financial planning context, that means they can’t steer you toward investments that are expensive for you (through expense ratios and sales charges) just because they’re more profitable for them (thanks to commissions). They must also fully explain any recommendations to you, and disclose any potential conflicts of interest—like, “XYZ mutual fund company pays me a 30% commission, and ABC company only pays me 25%."
Being a fiduciary also means that they respect your financial goals and risk tolerance, advise you accordingly, and recommend appropriate action. A planner can’t guarantee investment performance—that the mutual fund he puts you in will rise by a certain amount or even rise at all, say. However, if you make it clear that you want to invest conservatively, preserving your capital at all costs, it would be against his fiduciary duty to put you in an aggressive growth stock fund that is extremely volatile. Or, if you are dependent on investment income to live, to push high-interest junk bonds without revealing they have a high risk of default.
Paying a Financial Advisor
Getting quality advice isn’t free. Going to a professional financial planner will cost you money. Some planners charge by the hour or have a set rate for certain services: This is called fee-based planning. Some are compensated by a commission every time they make a transaction or sell you a product. Some get paid in both ways.
Fee advisors claim that their advice is superior because it carries no conflict of interest, as commission-based recommendations might. In response, commission advisors argue that their services are less expensive than paying fees that can run as high as $100/hour or more—and that you're paying for demonstrated services and activities, not just amorphous advice or untrackable work hours.
Questions to Ask a Financial Advisor
Investors looking for the "right" advisor should ask a number of questions, including:
- Do you have experience working with clients like me? This could include retirees, pre-retirees, same-sex couples, divorcees, widows or any applicable "niche."
- How much and how do you charge? Will you make any money from the investments I choose?
- What services do you offer? Just planning, or active management?
- How often will we meet to review the portfolio/plan/situation?
- How often and by what method will you contact me? Are there any limitations on how frequently I can contact you?
The nature of the advisory field is also changing. investors now usually have access to their accounts digitally and so, beyond traditional, in-person meetings, may meet with their advisors virtually for some or all of their portfolio review sessions.
Additionally, many robo-advisors offer a hybrid advice model, which combines the typical asset allocation and advice services of a traditional advisor with a digital, automated platform. These are computer algorithms, though, so don't expect customized advice, unique strategies, and hand-holding from them.
The Bottom Line
When deciding on the type and the scope of advice that you might need from a financial advisor, it's important to ask the right questions about your money needs and to assess your own level of comfort in managing your own finances.
Some consumers may balk at the idea of paying hundreds of dollars just to plan budget and invest their money, but think of it as an investment: The money can buy you a quality plan that can be put together in a few hours and last you 20 years, with only a minimal need for a financial checkup with the planner from time to time.