Everything you Must Know About Choosing a Financial Advisor
Choosing a financial advisor is a big decision. Financial advisors can provide various services, from helping with investments to planning for retirement, managing cash-flow to selling insurance and so much in between. Therefore, knowing what financial advisors can do, what certifications they require, and what to watch out for is important.
What are Financial Advisors?
The term financial advisor is a blanket term for just about any professional that helps with your money. The services they offer vary by specialty and certification. Many ‘advisors’ don’t need certification, so it’s important to research and know what you want from a professional before hiring them and trusting them with your money.Unfortunately, there isn’t any standardization across the industry for the titles, so there can be confusion when determining which professional is right for you. The key is to learn everything about an advisor you’re considering, including his/her certifications, services, and pricing module.
Services Financial Advisors can Provide
Financial advisors can provide many services, including the following:
• Help better manage your cash-flow and saving strategy
• Advise on how to achieve your short and long-term financial goals
• Plan for retirement
• Plan your estate
• Help with tax planning
• Create a debt payoff plan
• Manage your investments
The services an advisor can provide depend on their background, expertise and certifications. You could speak with two financial advisors who offer completely different services, but without asking the right questions and taking time to understand their model, you may not fully understand what you are getting into.
Types of Financial Advisors
The list of types of financial advisors is long, but here are the most common types.
• Certified Financial Planner
CFPs have undergone rigorous training, achieving several educational requirements such as obtaining a college degree and passing extensive tests. Their background can be in insurance, investment, and real estate, including many years of experience in each industry.CFPs are best for individuals looking for complex investment or financial advice because you know the advice you’re receiving is from an educated individual that can help you achieve your goals.
• Investment Advisors
A Registered Investment Advisor can help with your investments. They can provide advice and manage portfolios for you. However, RIAs must act as fiduciaries, which means they must recommend investments with your best interests in mind and will not expose you to unnecessary risk.
• Registered Representative
A Registered Representative sells assets, such as life insurance and mutual funds. They work for a specific broke but are overseen by FINRA. You don’t pay RRs; instead, they earn commissions from the assets they sell you, so they aren’t fiduciaries and should be used cautiously.
• Financial Coach
A financial coach is the best option when you’re looking for someone to give you budgeting advice or to help you save more. They can’t give investment advice or manage your investments but can help you with many other financial scenarios to help you achieve your financial goals.
• Robo-Advisors
Robo-advisors are computers handling your investments, so they aren’t a human offering advice; however, they can be a cost-effective way to get help with your investments. Some robo-advisors also offer the option to get human advice for a flat fee.
What do Financial Advisors Charge?
The cost is something that stops most people from considering a financial advisor. Unfortunately, many mistakenly assume you need a lot of money to use a financial advisor, but you don’t. The industry is adapting to provide more varied service models and fee structures to accommodate a wider range of consumers. A financial advisor can help anyone who has goals and wants to reach them. So whether you have a little more or a lot, help is available.
So how do they charge? It depends on the type of advisor, but here are some common ways.
Commission-Only Advisors
Financial advisors that work on commission, such as Registered Representatives, so they may seem ‘free’ to you because you don’t pay them a fee. Instead, they earn commission on the assets they sell you, so their commission is built into the cost of your investment. This fee structure can lack transparency unless it is made clear exactly the commission they earn and how it compares to other types of products they could use for you.
Assets Under Management
Investment advisors usually charge a percentage of your assets under management annually. For example, if they charge 1% AUM and you have $250,000 invested, it would cost $2,500 per year for their services. Some firms may have a minimum amount you have to invest with them to be a client. This fee can be all inclusive of the other services the advisor may provide such as retirement planning, tax planning and more. But be sure to ask, because what is included will vary from one advisor to the next.
Flat-Fee
Some advisors charge a flat fee, whether per month, per hour, or per plan. This type of fee tends to make the service more readily available to those who may not have a large amount of assets or may want to manage their investments on their own while using an advisor for other planning work. Always ask what’s included in the fee and what additional fees they may charge if any.
Fees are not the only thing to take into account.
How to Choose the Right Financial Advisor
So how do you choose the right financial advisor for you? Here are some key considerations:
Consider your Goals
Think about the reasons you want to use a financial advisor. For example, do you need help with basics like budgeting and saving, or are you looking for more complex investment advice to build your wealth. You want your needs to align with your advisors services and expertise.
What Level of Support do you Need?
Think about the level of service you want out of the relationship. Are you looking for guidance or someone to do everything for you? The more help you need, the more important it is that you find an advisor who provides ongoing support and access, which many CFP® professionals do.
What can you Afford?
All financial advisors cost money, but you can minimize the costs by choosing an advisor that charges a flat fee or even free robo-advisors that do your investing for you but don’t charge any commissions.
Final Thoughts
Choosing a financial advisor is a big decision you shouldn’t take lightly. Decide what you need help with the most and how to best achieve your goals. Then, do your research before choosing a financial advisor to ensure they have the desired certification and are authorized to help at the level you need to achieve your financial goals.