Do You Need A Financial Advisor?

I asked Mark to write about hiring financial planners/advisors because occasionally you guys email me wanting to know if you should hire one and—if so—how to go about it. (Figured it was better to ask an actual financial advisor than try to answer on my own.)

First off: In my opinion, few 20-somethings need financial planners. (The possible exception: You have $500,000 or more of investments that you got from grandma or the sale of your tech company.)

Of course, I certainly can see why many people would like to work with one. Making sense of money is no easy task (it’s what keeps blogs like mine in business), and it would be nice to have somebody in your corner who seems to know what she’s doing.

But from a financial planner’s perspective, the harsh reality is that working with relatively poor 20-somethings is rarely profitable. (I might argue that planners should think long-term and take on young clients in the hopes of retaining them as they grow wealthier, but I understand that clients who can pay the bills today take precedence.)

So if you’re determined to work with a financial advisor, you’ll need to do some groundwork to find one to take you on.

As you go about your search, you’ll want to consider the following.

Here’s Mark:

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For some people, money is confusing, daunting—even terrifying.

Others may be more comfortable with money but might still benefit from a professional opinion.

Enter the financial advisor.

Financial advisors help clients reach financial goals by recommending how to allocate and invest the client’s money. For many, those goals include a comfortable retirement and perhaps education funds for children, but goals might also be pursuing a second career, buying a vacation home, or starting a business.

Although every financial advisor performs similar work, there are big differences among the services provided by different types of advisors…and how these services are priced.

For a bit of background, I’ve worked as a financial advisor for the past six years, specializing in investment management. I’ve learned a lot about the industry. I also know a number of financial advisors and can tell you that the quality of services they provide ranges from outstanding to virtually worthless.

As with any profession, there are some great financial advisors who do everything that they can to help their clients and that really care about their clients needs. Unfortunately, there are also some who are just in it for the money and only exist to sell the products that put the biggest commission in their pockets.

Before you even consider hiring a financial advisor, you must educate yourself about the difference between the two.

The different types of financial advisors

Financial advisors come with different titles. Sometimes they are financial advisers with an “E”, financial planners, or investment advisors, or wealth managers. They may—or may not—do the same thing.

In general, financial planners may be able/interested in helping you with your entire financial picture, including budgeting and debt, whereas investment advisors/wealth managers will be solely focused on helping you choose investments.

Despite the different titles, the most important difference among advisors is not what they call themselves, but how they get paid.

Fee-only financial advisors

Fee-only financial advisors provide financial help to investors for a fee. The fee may be an hourly rate session fee, or it may be charged as an annual percentage of assets under management (common among investment advisors).

Fee-only advisors may offer financial planning, retirement planning, wealth management, budgeting, debt help, etc. All of the fees are disclosed upfront to clients so that they have an idea of the exact services that they are getting for their money. Fee-only financial advisors can charge by the hour or by the project.

One of the biggest advantages of fee-only financial advisors is that they are able to offer clients unbiased advice since they are not compensated by companies to sell products. They receive no commission or sales fees from companies, so they are not motivated to put clients in any particular product.

Clients do not have to worry about conflicts of interest with fee-only advisors. For these reasons, fee-only financial advice has become increasingly popular in the industry.

One option is SmartAsset. For no fee whatsoever, they vet qualified financial advisors across the United States and will match you with up to three advisors.  Plus they offer tons of tools, calculators, and content that can help you make money decisions on your own. SmartAsset has earned for themselves quite the reputation for helping people get connected and started working with a financial advisor which in my experience is a huge game-changer when you start really planning your financial future.

Commission-based financial advisors

Unless an advisor or planner explicitly advertises he’s working on a fee-only basis, chances are he’s being compensated in some way by an investment company.

Commission-based financial advisors may offer the same services as fee-only advisors but are compensated differently. They receive a commission by fund companies or brokerages for the sale of financial products. They often receive a percentage of the total amount that their clients invest in for particular funds or products.

As you can imagine, the chances to earn big commissions on certain products—even if they’re not the best investment for the client—can create an ethical dilemma for these advisors.

Although many, many of these advisors may be reputable and try to act in their clients’ best interest, as long as they are paid by selling certain investments, there’s at least the perception that you—the client—may not always come first.

For example, let’s say you are in the market for a few funds for your retirement portfolio and you decide to get a financial advisor. You hire a commission-based advisor that works for Acme Investments, a mutual fund company.

Your financial advisor can sell you mutual funds from a number of different fund companies, including Acme. However, she will likely be more motivated to sell you Acme’s own mutual funds because she will get a higher commission.

For example, if you invest $200,000 in Acme funds, she may earn $1,000, but if you put the same amount of money in other mutual funds, she’ll only earn $250.

If you decide to work with a financial advisor or planner that does not promote themselves as “fee-only,” ask them to detail for you how they are compensated, including what commissions they earn on any products they’re selling you.

If they won’t give you a straight answer, find a new advisor.

The Department of Labor has issued a new rule requiring financial advisors to adhere to the fiduciary standard—which says they must act in the best interests of their clients—which may significantly limit the ability of commission-based advisors to push products that pay big commissions but offer paltry returns. The rule takes effect in April 2017.

Frequently asked questions for those considering a financial advisor

Now that you know a little bit about the background of financial advisors, let’s take a look at some of the more common questions that you might have when it comes to selecting a financial advisor.

When should you hire a financial advisor?

Here’s the cop-out answer: it’s personal. If you have questions about investing, saving money, retirement planning, taxes, or just need some help getting your finances in order, a financial advisor may be able to help.

On the other hand, you may be just fine managing your own money and investments for a long time. If, however, you have $500k or more in investments (and certainly more than $1 million), it’s probably time to get an advisor. Even if you know a ton about investing. Heck, even if you’re an investment professional yourself, half of hiring an advisor is to get an outside, unemotional opinion about your financial choices.

How much do you need in assets to hire a financial advisor?

Although you may find some advisors willing to take you on with any amount of assets, you may find many advisors will only advise high-net-worth clients and impose investment minimums of $100,000 on the low end ranging up to $1 or $2 million.

How much does a financial advisor cost?

Fee-based financial advisors average $150 to $300 per hour. Commission-based advisers will receive a percentage of the total number of transactions that you make. Financial advisers that offer managed portfolio services may charge anywhere from 0.5 percent to 2 percent of the assets under management.

Related: Which Type of Financial Advisor Do You Need and How Much Should You Pay?

What determines whether or not you have a good financial advisor?

Finding the right financial advisor depends on a number of factors. You want to fund someone that is trustworthy, knowledgeable, ethical, and has experience. But most importantly, your financial advisor should listen to your goals and be willing to help you craft a plan to meet them.

Do your homework, and talk to several advisors before hiring. Ask for references. And don’t be afraid to switch advisors if you don’t get a good feeling.

Some financial advisors and planners hold specific designations such as Certified Financial Planner (CFP) or Chartered Financial Analyst (CFA), both designations that require certain combinations of education, experience, and exams. Others may be accountants, attorneys, or other professionals who also offer financial planning services. No single degree or title guarantees a cracker-jack advisor—good ones may be out there that don’t hold these titles—but it’s a place to start.

Related: Are Certified Financial Planners Worth the Money

Summary

When looking for a financial advisor, you’ll likely want to stick with a fee-only advisor. That way you know they’re not looking to just make a commission off of you.

Not ready for a financial advisor? Take control of your own investments with a simple investing strategy or one of our recommended investment accounts for young investors.

Read more:

• These Are Some Of The Best Financial Advisors For Millennials
• Roboadvisors Vs Financial Advisors: Which Option Is Best For You?