It may be hard to trust a stranger to manage your finances or provide insurance and investment advice, but a financial advisor can help you make smart decisions and leverage your income and assets using a strategy intended to set you up for long-term success.
Not everyone needs a financial advisor. Yet financial professionals are not just for the super wealthy. If you’re unsure about your financial decisions or how you’re managing your money, you might want to consult a professional.
Financial advisor can help you determine how much to save and how to invest your money in a manner that keeps on track to meet your goals. If you have specialized needs, they may be able to help you address them.
It’s crucial to vet anyone you allow to access your money and to keep track of whatever they do with it.
What Can A Financial Professional Do for Me?
In addition to making sure your money is being invested appropriately, financial advisors can be helpful in certain situations.
Circumstances that warrant the advice of a financial professional:
- You have a major change in your life, such as getting engaged, having a child or getting divorced.
- You have a financial windfall, such as winning the lottery, inheriting a large sum of money or getting promoted.
- You’re getting close to retirement.
Depending on their expertise, a financial advisor can offer a range of services to ensure you’re investing and spending your money responsibly.
Some of these services include:
- Retirement planning
- Wealth accumulation
- Investment management
- Achievement of financial goals, such as saving for college or buying a home
- Personal finance management
- Insurance needs
- Investment risk assessment
- Savings advice
- Estate planning
Financial professionals can guide you when you’re considering investing your money in a business or when you need assistance in paying off debt. Consulting with a professional can increase your financial literacy and your ability to make smarter money decisions.
Financial Advisor vs. Financial Planner
One of the challenges of hiring a financial professional is figuring out what kind of advisor you need. The industry has various terms that can be used interchangeably or may carry specific legal meaning.
For example, according to the Financial Industry Regulatory Authority’s (FINRA) descriptions, financial planners come from different backgrounds and can offer a variety of services, from brokerage and investment advice to insurance sales and accounting. Some financial planners will offer comprehensive services, whereas others will just sell specific financial products.
“Financial advisor” — or “adviser” as it’s spelled in the financial industry — on the other hand, is a generic term that usually refers to brokers.
“Registered investment advisor,” (RIA) is a legal term that is applied to a company or individual registered with the Securities and Exchange Commission (SEC) or a state securities regulator.
Other designations for registered investment advisors, according to FINRA:
- Asset Managers
- Investment Counselors
- Investment Managers
- Portfolio Managers
- Wealth Managers
RIAs may provide investment advice specific to the client’s needs, as well as financial planning services.
So what do you need, a planner or an advisor? The answer to the question can be found in your personal finance needs and which professional’s services meet them.
Let’s Talk About Your Financial Goals.
The most stringent legal and ethical standards are enforced by the Securities and Exchange Commission and followed by fiduciaries. Fiduciary advisors are fee-only advisors who put their clients’ interests before their own. They do not charge commissions, as opposed to fee-based advisors, who charge fees and commissions.
Chartered retirement planning counselors, accredited investment fiduciaries, registered investment advisors, investment advisor representatives and Certified Financial Planners™ all abide by fiduciary standards.
Typically, fiduciaries charge a quarterly fee equal to a percentage of the assets the advisor manages for you. These advisors can charge as much as 2 percent of the assets they manage.
Advisors Who Follow FINRA’s Suitability Standard
If an advisor is not considered a fiduciary, he or she is still required to abide by an alternative industry standard, regulated by FINRA and known as the suitability standard. These advisors are required to recommend investments that are suitable for the client but aren’t bound to the client’s best interest.
These advisors work on commission, and therefore, their incentive to promote a particular product may be based on their own best interest, rather than the client’s. On the other hand, they also have an incentive to keep you as a happy client, so you should consider the integrity of the advisor and not just the standard he or she follows.
How Much Does a Financial Advisor Cost?
Advisors operate under three different charging models:
Each model has its potential for conflicts of interest, which should be weighed with other deciding factors. Ethical advisors should be open with you about this potential conflict and willing to discuss their methods for protecting your interests.
Advisors can charge 1 percent of your assets or more. Or they may charge an hourly rate. Most advisors, especially those who charge according to the amount of assets they will manage, require you to have at least $50,000 in assets. Many require at least $250,000 or even $1 million in assets under management, or AUM.
Commission-based advisors are often employed by large financial institutions that sell products such as mutual funds, annuities and life insurance. These advisors receive commissions on the products they sell. These advisors may have a conflict of interest because higher commissions are an incentive to sell certain products regardless of whether they are the best fit for the client.
Fee-based advisors usually work for a broker/agent and provide financial advice for a fee, typically an hourly rate, a flat retainer or a percentage of the assets they manage. They are also licensed to sell products for a commission and thus face the same conflicts of interest as commission-based advisors.
Fee-only advisors do not receive commissions. They provide advice in exchange for a fee paid directly by the client. The fee is usually either an hourly rate or a percentage of the assets they manage, generally from 0.5 percent to 2 percent a year. They are fiduciaries who have a legal duty to act in the best interest of the client. Some may agree to work for a flat fee. For example, a fee-only advisor may quote $1,500 in advance for a plan. They might charge a fee quarterly or annually.
But even fee-only advisors may be motivated to act contrary to a client’s best interest. A fee-only advisor who charges by the hour, for example, may take longer than necessary to develop a financial plan or prep for client meetings. Or an advisor who receives a percentage of assets may keep the client’s money invested longer than it should be in order to charge more for managing a larger portfolio.
Automated portfolio management services called robo-advisors are a good option for people who want a cost-effective solution for investment management. These digital services offer low-cost investment management. They can’t, however, help you plan for the future.
The program asks questions and then builds an investment portfolio based on the client’s risk tolerance and goals. The program monitors the client’s portfolio and changes investments as needed.
Annual fees range from 0.15 percent to 0.89 percent. Some advise for free, charging only the cost of the investments. These services require low account minimums.
Hybrid robo-advisors, which allow you to consult with a human financial professional, typically charge at least 0.5 percent of the assets under management.
There are also hybrid financial advisors who use robo-advisor models to manage their clients’ assets.
How to Find a Financial Advisor
Identify a list of potential advisors and check them out before making your final selection. Most advisors will agree to meet with you once without charge so you can see if they’re a fit.
Ask people you know for recommendations. Check with colleagues, friends and family. If they recommend someone, ask about how long they’ve worked with that professional, what kinds of services the advisor provided and why they chose that person.
The AFCPE, a nonprofit organization that has worked with the government and the military to promote its mission of providing financial security to people of every income level and background, offers a directory of accredited financial counselors who cater to low- and middle-income people. The organization does not provide investment or insurance advice and will never sell you products.
Consider your goals. If you’re looking for advice regarding saving for a house, you may want someone who provides consultation in exchange for an hourly fee.
Likewise, if you need a comprehensive plan from which you can take action without further guidance, you may want an advisor who charges by the hour.
If you want someone to manage your portfolio moving forward, your best bet is a long-term financial planner who charges a percentage of the assets they manage.
Consider whether the planner earns commissions or charges a flat, hourly rate. Planners who earn commissions may have a personal incentive to push particular investments that may or may not be right for you.
Let’s Talk About Your Financial Goals.
Meeting and Interviewing Financial Professionals
Your first meeting with a financial professional should be two-way. You should be asking about their credentials, fees and approach. They should ask you about your goals, finances, plans, risk tolerance and approach to saving.
Before the meeting, write down your financial objectives. Make sure to bring the list with you. Having clear priorities is essential and should be communicated during your interview with an advisor.
Questions To Ask a Financial Advisor
Since this is a mutual interview, you should also be prepared with questions to ask the financial professional. Bring a list of questions with you to the meeting and a way to record the individual’s answers.
The National Association of Personal Financial Advisors and FINRA recommend asking the following questions:
- How are you compensated?
- If you accept commissions, will you itemize the amount of compensation you earn from products that you recommend to me?
- Do you accept referral fees?
- Are you held to a fiduciary standard at all times?
- Do you provide comprehensive financial planning or just investment management?
- How will you help me reach my financial goals?
- What happens to my relationship with the firm if something happens to you?
- What experience do you have working with people like me?
- What professional licenses do you currently hold?
- Are you registered with FINRA, the SEC or a state securities regulator? If so, for how long and in what capacity?
- Do you have any disciplinary actions, arbitration awards or customer complaints? If so, please explain them. (Compare responses to information found in BrokerCheck and other third-party sources.)
- Do you or your firm have an overarching investment philosophy?
- What type of investment products and services do you offer?
- Are there any products or services you don’t offer? Why?
- Do you or your firm impose any minimum account balances on customers? If so, what are they? What happens if my portfolio falls below the minimum?
- Can you provide me with any customer references?
- Are there conflicts of interest that we have not discussed? What are they and how do you resolve them?
Ask them how frequently they will communicate with you. What do they consider success for a client and in a client relationship? Do they customize their approach to your needs and preferences? Ask where your assets will be kept, what institution will be holding your money.
Try to gauge how aggressive or cautious they are in planning and see if that aligns with your comfort level. Find out if the advisor will be the only professional working with you, or if he or she is part of a team.
Do not agree to any form of payment during your first meeting. Go home and think about it and talk to people you trust. If you feel pressured at all, that’s a red flag.
Ask for any investment recommendations in writing, including the reasoning for the recommendation and the cost of the investment.
What To Look for In a Financial Advisor
According to the Certified Financial Planner Board, you should look for these seven key traits in choosing a financial planner:
- One: Competence
- Your advisor should be well educated and have significant experience.
- Two: Objectivity
- Your financial professional should put your needs first and word with you to achieve realistic goals.
- Three: Integrity
- Your advisor should be trustworthy, taking their duties and responsibilities to their clients seriously.
- Four: Clarity
- The financial planner should clearly communicate the services to be provided and the associated costs. They should also disclose any risks and potential conflicts of interest.
- Five: Diligence
- The planner should have a thorough understanding of the client’s goals and make suitable recommendations. The advisor will reasonably investigate the products and services they recommend.
- Six: Compliance
- If the planner is CFP® certified, he or she will adhere to state and federal laws that prohibit them from providing investment advice or stock brokerage services unless they are properly qualified and licensed as a broker/dealer. Broker/dealers are licensed to buy investment products on behalf of their clients and sell such products to clients.
- Seven: Privacy
- The planner must keep all confidential information about their clients’ personal and financial affairs private, sharing it only when needed to do business, at the client’s consent or when ordered by the courts.
How To Do Background Checks on an Advisor
Before hiring anyone, you should check their background to make sure they haven’t been disciplined and that they are, indeed, licensed or certified as they claim. According to the SEC, unlicensed and unregistered people commit much of the investment fraud in the United States.
Do an internet search of advisors and their firms. Check with relevant government and industry accountability, licensing and certification sites to confirm their credentials and determine any disciplinary history.
The SEC regulates investment advisors who manage $110 million or more in client assets. Someone with a Series 6 securities license may sell mutual funds, variable annuities and variable life insurance. A Series 7 license authorizes the professional to also sell individual stocks, bonds and option contracts.
Advisors with less than $100 million in assets under management must register with the state regulator for the state where the advisor has its principal place of business.
According to FINRA, when a state-registered advisor’s assets under management reach $100 million, the advisor may elect to register with the SEC. When advisors’ AUMs exceeds $110 million, they generally must register with the SEC.
You can check the backgrounds of investment advisors on the SEC’s website.
If you want to research the background and experience of financial brokers, advisors and firms, you can look on FINRA’s Broker Check site, which covers both state and federally registered professionals.
And finally, you may check with your state’s insurance department to see if the advisor has been disciplined on the state level.
CFP®, CFA & Other Professional Designations
Most financial advisors have some sort of accreditation or certification, noted by a string of letters after their names. These letters signify approval by a professional or educational organization that imposes requirements including testing, continuing studies and ethical standards.
These initials offer you another opportunity to check advisors’ backgrounds.
FINRA has a guide containing nearly 200 professional designations used by financial professionals. The guide explains whether they are required to have continuing education and whether the issuing organization takes complaints or confirms credentials.
The two primary designations claimed by financial advisors are CFP®, or Certified Financial Planner, and CFA, chartered financial analyst. Both designations are regulated by agencies that enforce disciplinary actions on professionals that do not comply with standards. These disclosures are available online.
Certified Financial Planner™ is the most significant credential. They must pass a rigorous test administered by the Certified Financial Planner Board of Standards. The candidate profiles on the board’s website give the minimum investable assets they require and whether they charge fees or receive commissions.
The Certified Financial Planner Board also posts discipline records by state on its website. Discipline can take three forms: a public letter of admonition, a temporary suspension of certification or a permanent revocation of CFPⓇ certification.
Chartered financial analyst (CFA) is a highly respected title and considered the pinnacle of financial analysts.
The Chartered Financial Analyst Institute posts current public disciplinary sanctions for violations of its code of ethics and standards of professional conduct. You can also contact the institute to report unethical conduct.
Buyer Beware: Avoiding Advisor Fraud and Incompetence
Beware of advisors who make promises they can’t fulfill. Don’t trust them if they brag that they’ll beat the market. Also, don’t believe in guaranteed high rates of return without high risk.
FINRA’s “Red Flags of Fraud” include:
- Unlicensed advisors selling unregistered securities, which can include stocks, bonds, hedge funds and oil or gas deals
- Overly consistent returns
- Advisors who credit complex investing techniques for unusual success
- Missing documentation and stocks without stock symbols
- An investor who pressures you to make a purchase
Advisors should provide authoritative advice across a range of financial topics. They should ask you about how many risks you want to take and respect your risk tolerance.
When a Free Lunch Costs Too Much
Watch out for products and services pushed during so-called “free-lunch” investment seminars. Invitations to investment seminars that tout a free meal as incentive to attend are a popular sales strategy in the financial industry.
Often, the goal of these lunches is to recruit clients and sell products. Just remember that even if you eat the free food, you are not obligated to buy anything or sign up for any service. Don’t rely on these sales pitches as your sole form of research before buying an investment or insurance product.
If you do attend an investment seminar, pay special attention to the cost of the product being promoted. This includes the initial and ongoing costs to you. Find out how difficult it will be to sell the investment and how long your principal will be tied up.
Check into surrender charges, penalties or fees for getting out early and whether the investment is registered and where.
Even better, do your research before attending the seminar. Check the licensing and registration of the person delivering the pitch.
And maybe just skip lunch that day or cook something at home.