Hiring a financial advisor can significantly impact your financial well-being. So, how do you go about choosing the best financial advisor for your needs?
Before you start your search, it’s crucial to define what you hope to achieve. Are you looking for help with budgeting, retirement planning, estate planning or investment strategies? What are your financial goals? Ask yourself, “Why am I hiring an advisor? Do I need guidance only on my investment portfolio or do I need a full financial plan?”
This will help you to know what type of advisor you need. Financial professionals vary widely in their qualifications and services. The primary types of financial advisors are:
Securities Brokers: They sell financial products and earn commissions from sales, which can lead to conflicts of interest.
Registered Investment Advisors (RIAs): They provide financial planning and investment management without inherent conflicts, unless they sell commission-based products. RIAs typically charge an asset-based fee (around 1% annually) for managing investments, which aligns their interests more closely with those of their clients.
Wealth Managers: Typically cater to high-net-worth clients, often requiring substantial assets to begin working together.
Robo-Advisors: Automated services that manage investments based on algorithms, usually at a lower cost, with some offering access to human advisors for an additional fee.
Be aware that not all advisors possess the same levels of experience and credentials.
The most recognized certifications for Financial Advisors include:
CFP (Certified Financial Planner): Comprehensive knowledge across various financial topics, including retirement and estate planning.
CFA (Chartered Financial Analyst): Focuses primarily on investment management.
CPA (Certified Public Accountant): Especially valuable for tax-related financial planning when combined with a Personal Financial Specialist credential.
Other factors that will impact your choice are:
Experience: How long have they been in the industry? Have they been around long enough to have weathered and recovered from a few downturns?
Specialization: Do they specialize in areas relevant to you? You would not hire an advisor who specializes in saving for education if you don’t have children or grandchildren. It is important to find someone whose expertise aligns with your goals.
Fee Structure: Understanding how advisors charge is crucial for ensuring your interests align. Make sure that any potential advisor is transparent about fees.
Here are the common compensation models:
- Commission-Based: Advisors earn commissions from the products they sell, which may lead to potential conflicts of interest. Examples are Life Insurance and Annuity contracts. While most brokers prioritize ethical practices, the incentive structure still exists.
- Fee-Only: These advisors charge a flat fee or a percentage of assets under management (AUM). They are fiduciaries, legally obligated to act in your best interest. A fiduciary advisor always prioritizes your interests over their own.
- Fee-Based: This hybrid model includes both fees and commissions, potentially complicating the advisor's loyalty to your financial needs.
Common Fee Structures:
-
- Percentage of AUM: Typically around 1% (lower for robo-advisors).
- Hourly Fees: Average of $250.
- Flat Fees: Around $2,000 per plan.
- Retainers: Approximately $6,000 annually.
Fiduciary Duty: Are they a fiduciary? This ensures that they are legally required to act in your best interest. This helps to minimize potential conflicts of interest. Advisors who do not adhere to the fiduciary standard may prioritize their own commissions or incentives over your best interests.
Communication Style: Consider how often you want to meet and how they communicate. This is a long-term partnership. The advisor must be someone you can trust and communicate with effectively, as you may be working together for many years.
References and Reviews: Finding an advisor is similar to sourcing any specialized service. You can start by asking for referrals or searching reputable databases:
- National Association of Personal Financial Advisors (NAPFA)
- Financial Planning Association (FPA)
- Certified Financial Planner Board of Standards
Due Diligence: Review each advisor’s regulatory history through platforms like BrokerCheck and the SEC's Investment Adviser Public Disclosure. Ensure they have no significant disciplinary actions, which can be a red flag.
Once you have narrowed your search and decided on an advisor who meets your needs, you will be ready for your first meeting. Be ready with some information and be prepared to talk about:
- Provide Information: Share your financial details as requested.
- Discuss Goals: Share your short-term and long-term financial goals.
- Retirement & Estate Planning: Plan for long-term goals and legacy.
- Understand the Contract: Review fees, services, and responsibilities in the contract.
- Investment Management: Ensure your portfolio aligns with your risk tolerance.
- Debt Management: Develop a strategy for paying off loans.
- Budgeting: Create a budget to meet your goals.
- Insurance Coverage: Identify coverage gaps.
- Tax Planning: Strategize to minimize tax liability.
A financial consultant should communicate clearly and without jargon. You should feel comfortable asking follow-up questions until you're fully informed about their services. With the right support, you can navigate your financial journey, from everyday budgeting to long-term goals like homeownership and retirement.
Hiring a financial consultant can be a strategic move for your financial future, offering tailored advice and support. However, it’s essential to clearly define your needs, conduct thorough research, and choose an advisor who aligns with your financial goals and values. By doing so, you can maximize the benefits of professional financial guidance while minimizing potential drawbacks.
There are many benefits to professional financial guidance. A good advisor listens to your specific needs, creating a customized plan that considers your unique financial situation. Advisors help you stick to your plan, especially during market volatility, ensuring you don’t make impulsive decisions that could jeopardize your financial future. Advisors help you anticipate financial challenges and opportunities, encouraging proactive rather than reactive financial management. Best of all, offloading financial management responsibilities allows you to focus on what you enjoy, reducing stress and freeing up time for other pursuits.
Know that good financial planning can lead to greater financial security as well as a more successful investing life. And, a successful investing life will provide for more freedom to pursue personal interests.
Please feel free to call (215-836-4880) or email the office (ellend@regardingyourmoney.com) to set up an appointment to discuss any financial questions you may have.
Sources: Wall Street Journal, Bankrate.com, Seeking Alpha, Forbes