You've read all the books and you've likely watched all the Youtube videos but you still don't know where to start. We get it. Sometimes, when it comes to your personal finances, it can be hard to apply generic advice.
Maybe you're in a bit of a financial fix - or, things may be going really well. Whatever the case, you might be asking yourself, do I need a financial advisor? And it's a totally legitimate question.
In this article, we'll do a deep dive into what it takes to work with an advisor, and when you might need one.
What is a financial advisor?
In a snapshot, a financial advisor is a professional who provides advice and guidance to their clients on what to do with their money. They are required to have specific training and licenses in order to provide advice.
Typically, advisors wear many hats. However, their underlying role is to help you set and meet your financial goals.
They advise clients with investments and retirement funds. They are strategists, devising plans to support your unique situational needs (e.g. college savings, estate planning, and business finances).
And they also serve as educators, giving you the knowledge you need to inform your situation around taxes, insurance, and investments.
Types of financial advisors
The two main types of financial advisors are robo-advisors and human advisors.
1. Robo advisors: A robo-advisor is basically a digital financial advisor. The advice provided is based on complex algorithms that match the financial guidance offered to your personal profile. Additionally, a robo-advisor can automatically make investments for clients which can be great if your portfolio is simple. There is however typically zero human supervision in the process.
Robo-advisors work best for passive investing. Working with one usually only requires a small opening balance, making them accessible to everyone.
2. Human advisors (in-person or online): For a more hands-on approach, hiring a human financial advisor is best. This person will become your go-to financial resource. However, due to the hands-on approach, this can typically come with high fees depending on the services you take on.
They are available for you to ask them questions directly and you can develop a long term relationship with them. You definitely want to ensure that it is someone you can trust.
What type of financial advisory services do they offer?
A financial advisor serves many purposes. Their primary goal is to help you to plan for your future.
Services they offer include guidance on how to save and how much to save, what financial accounts you should open, and what investments to make based on your goals. They also advise on how to think through risk, buy a home, and plan your estate.
How much does a financial advisor cost?
When it comes to the fees financial advisors charge, you'll find you have a range of options. There are essentially 3 payment structures that financial advisors work with:
- A flat fee
- A percentage-based fee
- Hourly fee
In-person financial advisors fees
When working with an in-person financial advisor, you'll come across different payment options. Some ask for a flat fee. This can range anywhere from $2,000 - $8,000 a year.
With this, you will get a personalized financial plan built to suit you and your family's needs. You also get hands-on help with implementing the plan. This can be a great help because having a plan is one thing, but putting it in action can be a different battle.
On the other hand, an in-person advisor may work from a different model. Some charge a percentage-based fee on the amount you have invested (i.e. your assets under management).
This fee is typically about 1%. Note that a lot of advisors will use this fee structure if your minimum investment is over $250,000 and the percentage you pay may drop the higher your investment.
Lastly, in-person advisors may offer an hourly fee that can range anywhere from $200 - $400 per hour. This gives you immediate access to a personalized financial plan with steps to implement.
However, you receive no follow-up or support. You'll be on your own to put the plan into action. This works best when you are comfortable with handling your own finances and you are diligent enough to follow through.
Online financial advisors fees
Online financial planning offers a lower fee structure to help you with your financial planning. Fees are based on the assets under management, i.e. a percentage-based fee structure, and can range from 0.30% to 0.89%.
There is typically no requirement for large amounts of money to open such an account.
Online financial advisors include platforms like Betterment and Wealthfront, which give you access to a personal financial plan and ongoing investment guidance.
When you need a financial advisor
You may be wondering when a person needs an advisor. In an ideal world - always. However, realistically, hiring a financial advisor can be costly.
Despite this, there are some life situations that do warrant the use of a financial advisor. Cases like these include:
When you can't figure out your personal finances on your own
For some people, managing money is more than a chore. It's an absolute nightmare. And that's OK.
We all have activities where we shine and others not so much - some people love cooking, doing dishes, or creating art. Others love managing money. If you don't fall in this last bucket, you're one of many, and hiring a financial advisor is probably a wise move.
When you're just starting out on your personal finance journey
If you're new to working intentionally on your finances, it can get overwhelming. You have to learn about the stock market, bonds, budgeting, retirement planning, saving - the list is endless. A financial advisor can help un-muddy the waters for you.
While it is probably a good idea to seek financial advice as a beginner, remember that it can cost you hundreds of dollars and more. With the ease of information access we have today, it is highly advisable to do your own research first before taking the leap on hiring help.
When you have complex financial considerations
You might not have a straightforward financial situation. Sometimes life happens and you find yourself needing outside counsel to navigate situations. This can include complex family matters, multiple financial accounts, or managing multiple sources of income.
When you don't need a financial advisor
There are also certain instances where you may not necessarily need a financial advisor. For instance:
You've automated your finances
If you've automated your finances and are hitting your savings and investment goals then you're likely in good shape.
Many people in this bucket have set up a simple investment plan that automatically rebalances with little to no need for making adjustments. Here's an example of a financial plan to help you ensure you are on track.
You're looking for tax help
Tax help should not be confused with financial advisory help. While they both deal with your money, the professionals who can help are completely different.
A Certified Public Accountant (CPA) is best equipped to support all your tax needs. A CPA who is also passionate about financial planning will be able to touch on your bigger financial picture while homing in on your taxes.
What to look for in a financial advisor
If you are ready to seek out a financial planner, here are some key questions and considerations to keep in mind.
What is their fee type?
As mentioned before, hiring a financial advisor can cost you hundreds if not thousands of dollars. It is crucial to do a ton of research to understand how exactly the fees will work for your financial situation before committing to a specific advisor.
Fees will differ by state and level of service. The key to remember is that the simpler your investment needs are, the less you'll have to pay. If you are just starting out and need basic investment management then paying $1,000 for an advisor is a lot. However, if you're further along with more complex needs, that amount might make sense.
Do they have the right certifications and credentials?
Credentials matter. When you sign on a new advisor, you're trusting that person to help you build a secure financial future.
If you're looking for a financial planner, you'll want to work with someone who has a Certified Financial Planner (CFP) title. This will mean that the individual has successfully fulfilled the CFP Board's requirements - education, training, experience, and ethics - to receive this designation.
Do you work well with them?
When dealing with any advisor in life, a relationship built on trust matters. When it comes to personal finances, this matters even more as this could impact your entire future.
As you search for a financial advisor, have as many live conversations with them as possible, do your research and ensure you trust and can depend on the person fully. Look for reviews and if you can, ask for referrals. The more aligned you are in mission, values, and strategy with your advisor, the more rewarding working with them will be.
Where to find a financial advisor near you
Via personal referral
Nothing beats the power of a referral. A referral grants you the assurance that someone you trust has received great value from working with the advisor they are recommending. In addition, it gives you first-hand proof that the advisor is reliable and has proven success.
But don't stop there. A referral is only one piece of the puzzle. You'll want to make sure the advisor provides 5-star treatment to everyone he/she encounters. Be sure to do your research and you can even check online for complaints filed to FINRA (the financial regulatory body).
From online reviews
The internet has opened up ways for us to ensure checks and balances are in place before signing up for services. The biggest way the internet helps is through reviews. As you look at profiles of financial advisors, look at their personal reviews as well as the reviews of the organizations they are affiliated with.
If you see any concerning feedback but are still particularly interested in working with the person, be sure to ask them about this when you're interviewing them. You never want to blindly sign up with an advisor.
At your local bank or financial institution
If you're looking for a safe and vetted financial advisor, you can work with your local bank or financial institution. This option gives you a cushion of assurance that you're dealing with an institution you're comfortable with and familiar with.
In addition, working with an advisor from your local bank helps you to know that you're paying standard market rates that are comparable to independent advisors. Another pro to this avenue is that some advisors offer more than investment advice and can help with life insurance and business planning as well.
If you feel stuck and aren't sure which way to go, hiring a financial advisor may not be a bad idea. If you're just starting out in your financial journey or have more complex needs, working with an advisor may help to put your mind at ease.
Keep in mind that as you gain more education and experience, you'll be better able to own the process of managing your finances if you so choose.