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How to Choose a Financial Advisor

Do you need a financial advisor?

You may think that just because don’t have a lot of money yet, you don’t. And even if you want a financial advisor, you may think it’s impossible to get a qualified advisor to work with you if you don’t have six figures in the bank.

Many of the people I’ve been meeting with lately have echoed these sentiments, but I can tell you that just the opposite is true. Even if you don’t have large assets to manage, you may find that by working with the right advisor, you can reach your financial goals faster. In fact, it’s my opinion that, in many cases, young people need advisors more than older clients!

The question remains, how to choose the right advisor? The best way to answer this question is to be very clear on what your financial needs are.

Most of my younger clients need help in the following areas:

  • Starting Investing
  • Finding Small Business Funding
  • Budgeting
  • Buying Life Insurance
  • Setting Up Wills and Trusts

The first thing you have to understand that financial advisor is a generic term. An advisor can be anybody who helps you with financial matters including: an attorney, an accountant, a banker, financial planner, or wealth manager. It’s no wonder that when trying to choose a financial advisor, most people don’t know where to begin!

But if you are sure about which of the five areas listed about you want help with, the job of finding the right advisor is actually pretty simple.

Starting Investing

If you’re looking for the best investments to make, a money manager will be the advisor for you. Try as hard as possible to avoid working with anyone who works on commissions like stock brokers and insurance agents. They may be as honest as the day is long. But if a person makes more money by selling you one investment or another, that is what they’re going to try to sell you.

Now, it may be difficult or expensive to get a money manager to work with you if your resources are limited. But here’s a tip that may work. Speak to a successful friend or family member and get them to recommend a good advisor. Ask your well connected friend to make a call and introduce you to her advisor. Ask your friend to convince her advisor to meet with you as a personal favor. Advisors don ‘t like to turn their well-to-do clients down. As a result, you’ll have a good shot at working with a top advisor even if your resources are very limited.

An alternative, if you can afford it, is to look for a good fee-only financial advisor who charges by the hour and hire him or her for a few hours to review your investments and make a plan.

If $500 or so is too much for you at this point, you can start investing on your own with an online broker and guidance you glean from books and blogs like ours. Don’t go all crazy day trading. Find a few low-cost mutual funds and regularly invest in them. But when you’ve amassed $20,000 or more, spend a few hundred bucks to make a plan with an advisor.

Finding Business Funding

Let’s say you have some great business ideas but you need some help getting your enterprise off the ground. People come to me all the time with scenarios like these. But in this case, what you really need is a business lawyer and a good CPA. These professionals are much more important to the success of your business than a financial planner. Save your time and money by visiting with them first.

At the same time, you may consider alternative funding resources like a start up business loan from Lending Club. They may be able to help you raise the money you need quickly and inexpensively. You won’t need a financial planner for this either.

Budgeting

If you are convinced that you need help with budgeting, you may be able to find a fee-only planner or money coach who specializes in this kind of planning.

Before you spend your money that way, however, explore free or affordable self-service options like a budget tracking software package like You Need A Budget or Mint. Of course, once you master your software, you have to really use it. I’m a big fan of recruiting an accountability partner to make sure you stay on course— a friend who wants to get his or her budget in line too.

Life Insurance

If you need life insurance, you can determine how much life insurance you need by yourself and then shop for the coverage you need without an advisor. In fact, I’ll make it even easier for you. If you’re asking yourself whether to buy term life insurance or whole life, always opt for term life insurance when your main objective is to protect your family. Many agents love to sell you whole life or universal life but my experience tells me it’s a waste of money.

Wills and Trusts

If you’ve started a family and/or inherited money, it may be time to start thinking about your will and, if you do have significant assets, creating trusts for your children. Obviously this may come later in life, but it may apply to a few of you! In this case, you’ll want to talk to an estate attorney who specializes in this field. You can search for attorneys in your area using the ABA’s Lawyer Referral Service.

IF YOU DON’T KNOW WHAT YOU NEED

Now, some of us don’t always know what we need—and if that describes you—hire a good financial planner who will work with you on an hourly “fee-only” basis.

You may be tempted to work with a stock broker or insurance agent because they’ll offer to meet with you for free, but don’t fall for it. While they’d love to get in front of you for a few hours without charging you, they’ll do whatever they can to sell you a high-commission product that you likely don’t need. You may feel like you’re saving money by getting a “free” evaluation or plan, but if you blindly buy the investment products this kind of advisor recommends, you may be spending far more than you would for a few hours of a financial planner’s time.

Meet with a fee-only advisor. Pay for an hour or two of his or her time and map out a financial plan. It’s worth it!

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About Neal Frankle

Neal Frankle is a jolly fellow and Certified Financial Planner (CFP) from Los Angeles. He runs the financial advice blog The Wealth Pilgrim and co-owns the life inusrance Website MCMHA.org.

Comments

  1. Im still on the fence about financial planners. I truly believe they have a place for high net worth individuals, however, I wonder about their fees and commissions that cut into the lower worth individuals. Wills and trusts tend to be handled by lawyers dont they? There are so many free budgeting tools online, and free online advice from several credible sources, that I think they are often better going it alone.

  2. I have met with a few financial advisors over the past few years and I personally would rather deal with a shady used car salesman (no offense to any car salesmen). My experience has always consisted of high pressure sales pushing the life products that give them the most commissions and very persistent call backs. To me, this does not “advise” me about anything useful. After reading this article, I am more inclined to look for a financial planner, but as the previous poster mentioned… there are so many free budgeting tools and advice online that I just don’t see any benefit of a financial advisor/planner. I would be interested in hearing some positive comments about financial advisors that may sway my opinion (if there are any).

  3. I’m surprised that you declare ‘term life insurance is *always* a waste of money.’ This is actually not true – particularly for younger readers who may be looking for a policy which will last for a relatively long period of time. The article below spell out the pros and cons to term vs. life in a helpful, simple way:
    http://money.msn.com/life-insurance/term-or-permanent-life-insurance.aspx

    • David Weliver says:

      Thanks for sharing Mindy. Just to clarify, however, the author didn’t say he thought TERM life was a waste of money, but some other kinds of life insurance. I can’t speak for him, but I’d bet he would agree with you about the value of term life insurance, especially for young people with dependents. (Of course that last point is important, you don’t need term life insurance if you’re single and childless!)