MoneyUnder30.com
MoneyUnder30.com

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.)

I will say first that, in my opinion, few twentysomethings 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 twentysomethings 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. Enter Mark:


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.

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 or per-planning 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 up front 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 worry about conflicts of interest with fee only advisors. For these reasons, fee-only financial advice has become increasingly popular in the industry.

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 clients invest in 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 cleints’ 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 an 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 advsior.

Common Questions To Ask When Hiring An 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% to 2% of the assets under management.

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, goods ones may be out there that don’t hold these titles, but it’s a place to start.

You can start your search for a fee-0nly financial advsior at http://www.napfa.org/ (National Association of Fee-Only Financial Advisors).

Not ready for a financial advsior? Take control of your own investments with a simple investing strategy or Betterment, a service that keeps your investments diversified in a simple mix of stocks and bonds that track the entire market.

Have you used a financial advisor? How did you find him/her? What have you gotten out of the relationship? Share your story in a comment.

###

Get access to our best money hacks:

Join over 11,000 other young professionals and learn how to get out of debt by 30, increase your income this year and invest for financial freedom.




100% free! I will NOT spam you and I will NOT share your email.

Comments

  1. I think the average person is better off just putting his/her money in index funds. I suggest everyone read the book “The Little Book of Common Sense Investing” by John Bogle.

  2. Do you think it is fair to ask the FP what their net worth is or what their total assets value are? I tend to think their net worth should be large than mine, but maybe that’s not a fair question.

    • David Weliver says:

      Interesting, point, Arthur. You obviously wouldn’t want to work with a financial planner that doesn’t have his or her own finances in order, and net worth might be one way to get a hint of that. Personally, I might be more interested in the 10-year rate of return they’ve gotten on their investments and for their clients. A transparent planner would probably share either if you asked.

      Certainly, however, many clients are going to be wealthier than their financial planners…just in the way athletes may be fitter than their coaches…the coaches don’t always need to outperform their players to valuable, even necessary to the athletes’ success. I think the same holds true for a planner.

  3. I had a commission-based financial advisor that I signed on with right after I got my first “adult” job. I stuck with him for about 3 years, and fired him 6 months ago when I started doing my own research and being more active in my personal finance. He was useful in exactly one way: he got me in the habit of saving and investing very early on, and through an automatic investment plan. That’s where the value ended because his investment choices were very high load (5%) and high fee funds — he was making money and I was losing money (even with the market recovery!) When I first started working, I simply did not know any better, but now I feel much happier managing my own investments. I’m not doing anything complicated at all (no load, no transaction fee, low managing fee index funds using dollar cost averaging with buy-and-hold long term strategy), so I really don’t think that I need any help at this point. I am hopeful that there will come a day when I have enough money invested that I will seek the professional advice of a fee-only financial planner. On the other hand, I learn more every day, so maybe by the time I have 500k invested I can be my own expert.

    • Good for you Janet! I have not and will not hire anyone so long as I can read and do basic mathematics. If all else fails, do what nanna and pa-pa did, PUT IT IN THE BANK and earn whatever little interest you earn, but certainly never losing it. I don’t like risk and gambling, so I play with a few high-yield checking accounts at 4% and watch the interest accumulate. That’s just me. I don’t believe you should ever let someone else be responsible for you existing financially. If you don’t know what APY and APR and index, etc. are, then you should fly a little further from the sun. Good to hear you got wiser and clever Janet.

  4. I am just starting out, but so far, I have done my own investing. Each day, I continue to read and learn about investing and living wisely. Even though I consider myself knowledgable, I would have to agree with Mark. Once I get to $500,000, it’s about time to get an outside perspective.

    I wonder how many people actually get to this point though? Seems like there aren’t too many people in this world that have $500,000 to invest. Maybe 1% of the population? Or less?

  5. I figure in a few years I’ll get a financial advisor, but for now (being twenty-something), I don’t have enough $ to justify it.

    Though it is tempting, to have someone to sit down with, and to help draw a roadmap of where I want to be finanically… but thats something I could do on my own over time.

  6. I agree with TSM, that I don’t personally need one at this point in my life. I am sure that as the complicating factors of life increase, I will want more help. That said, I disagree with your introduction that few 20-somethings need financial planners. Maybe not in the traditional sense, true, but someone to sit with you in front of your financial life and help you read the map? That would be priceless to so many people our age. I am sure there is not much “money in it” for the advisor beyond the simple hour fee for their time, but if investment advisors could do this pro-bono or at a reduced rate, what a great gift for a new grad!

  7. People that don’t think they need or want an advisor need to AT LEAST sit down and write out their financial goals and go stick it on their refrigerator so they see them every day. If you don’t you will rarely live as comfortably as you could from simply sitting down with a professional.