Financial advisors can help their clients to define their financial goals, prioritize them, and develop a plan to achieve them. But depending on the specific individual, a relationship or level of engagement with a financial advisor can vary, as different investors have different needs.
Generally, deciding whether you need a financial advisor will come down to whether you feel you need some advice or a guiding hand in handling your finances. There are important considerations to make, too, as financial advisors don’t typically work for free — but they can help with a variety of finance-related issues.
Understanding the Role of Financial Advisors
Financial advisors can offer many services, but broadly, they’ll dissect a client’s financial picture, discuss their goals with them, and create a plan as to how to move forward.
What Financial Advisors Do
Financial advisors can help clients zero-in on specific financial goals, put together plans for investing or getting out of debt, and more.
An advisor can provide financially based education, which can help their clients identify whether they’re on track for achieving their goals. They can also help clients determine whether their habits are causing problems for their overall financial wellness.
Further, financial advisors can guide their clients through paying off debt, saving for the future, investing in a diversified portfolio, and aligning an investment approach with specific goals, timelines, and risk-tolerance levels.
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Assessing Your Need and Readiness for a Financial Advisor
There are numerous things to consider when trying to determine if you’re ready or in need of a financial advisor and their services.
When to Consider Hiring a Financial Advisor
As clients make their decision about whether to use a financial advisor or not — and, if so, which one will offer what they want and need — here are some items they could consider:
• What type of help is needed from an advisor? Education? Coaching? Management?
• What services can the financial advisors provide?
• How well does this match up with your specific needs?
• How does the advisor charge? In other words, how does your advisor get paid?
• What context can be provided about fees? How does a percentage translate into real dollars, both today and in the future?
Evaluating Net Worth, Earnings, Spending, and Financial Goals
It’s important to note that not everyone’s financial situation will warrant professional financial advice. As such, you’ll want to take some time to try and evaluate your net worth, earnings, and goals — do you feel that you can keep a grasp on those aspects of your financial picture? Or do you feel like you’re in over your head?
If you feel like you could use some advice, then it may be a good idea to reach out to a financial professional and see how they may be able to help.
Life Events and SituationsThat Warrant Professional Advice
Also keep in mind that your situation will change over time. You may get a new job, a big promotion, or a big raise — all of which can drastically change your financial situation. In such cases, if the change is significant enough, it could be a good idea to reach out for guidance.
Types of Financial Advisors and Their Services
“Financial advisor” is a broad term that describes several different specialties. Accordingly, it can be helpful to understand the different types of financial advisors out there.
Different Financial Advisor Specializations
Here are some (but not all) of the different types of advisors:
• Certified professional planners (CFP™): CFPs are advisors who’ve earned a specific designation, and that can help people with a large range of financial services.
• Wealth managers: Wealth managers take a broad approach to helping individuals with their finances, and typically offer a range of services.
• Investment advisors: Investment advisors focus on providing advice and management related to investment portfolios.
• Retirement planners: Like investment advisors, retirement planners tend to focus on a specific area of a person’s financial picture: Retirement.
Choosing the Right Type of Advisor for Your Needs
The specific type of financial advisor that is a good particular fit for any individual will vary depending on the person’s specific situation. As such, there’s no “one-size-fits-all” for financial advisors, and you’ll likely be best off giving some serious thought as to your needs, and how an advisor can help you.
It may be worth speaking with several different advisors to get a better sense of how they could help, and then making a decision as to which, if any, to work with.
Understanding Advisor Fees and Payment Structures
There are many types of fees and payment structures that may apply to financial advisors.
Commissions
When advisors are compensated on a commission basis, they receive pay based on the products they sell. The amount of commission paid can vary widely depending upon the product and the company.
Multiple arrangements can exist for advisors paid on commission, including receiving a percentage of a client’s assets before money is invested or being paid by the financial institution involved after a transaction takes place. Or, the client might be charged each time that stocks are bought or sold.
Advisory Fees
When an advisory fee is charged by the advisor, the general charge for the client is a percentage of the assets they manage. It’s reasonable to expect that an advisor can explain the reasoning behind the fee being charged, given a client’s specific circumstances — and if it’s higher than expected, it’s also reasonable to ask what added value the client is receiving.
Perhaps, for example, the advisor also helps with tax planning, or estate planning. They may be investigating a client’s financial vulnerabilities or otherwise going beyond standard money management services.
Actively managed portfolios may come with a higher fee because the advisor may charge more for putting more effort into getting the best value for their client.
Planning Fees
With this type of fee, the advisor would charge an upfront fee, or a subscription-based one, to provide either a financial plan or ongoing advice. As a potential client considers financial advisors, they may find themselves talking to someone who charges a fixed planning fee to create an initial plan and then uses a different fee structure to actually manage the portfolio. What’s most important is to be clear about what will be charged, and how.
Hourly Fees
In this case, the financial advisor charges a straight hourly fee for their services. On the one hand, having an advisor charge an annual fee means that a client may not need to worry as much that their advisor is recommending products because of the income the advisor would earn off of that recommendation.
Choosing a financial advisor that charges per hour can be costly, though, especially if more investigation needs to be done to find a product that fits a client’s needs. This may or may not be a huge concern, but if resources are limited these fees can potentially be hefty.
How to Choose the Right Financial Advisor
There’s no “right” financial advisor for everyone, but there can be some who may be better fits for your specific situation than others.
Tips for Finding and Selecting an Advisor
Starting broadly, it can be helpful to try and discern what types of services you need, or what type of advice you think would be most beneficial. From there, you’ll want to winnow down the types of advisors you’re looking for — you can review the short list above, or dig even deeper — and think about how those types of advisors can address your needs.
Then, consider the fees and costs, also as discussed. Some may not necessarily be worth the cost of retaining their services — but again, it’ll depend on the individual.
You can also look at, or search for advisors through various trade groups — there are many for financial professionals. It can be helpful to narrow down your search to a few selections, meet or interview them, and then make a decision.
Red Flags and Key Factors to Consider
A few things to look out for when you’re shopping around for financial advisors or planning services: Conflicts of interest, a lack of credentials or qualifications, and high-pressure sales tactics. While these aren’t necessarily deal-killers, they can be things to look out for. And remember, if you feel uncomfortable, you can always move on and talk to other advisors – there are hundreds of thousands of them in the U.S.!
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Working with a Financial Advisor
Working with a financial advisor should be a rewarding experience. Here’s what to expect.
What to Expect in the Relationship
You should anticipate that your relationship with your advisor will be close — but not too close. They’ll take a hard look at your finances, consider your goals, and (hopefully) do their best to give you actionable advice and guidance. They may not want to get too personable, though, as emotion can enter the picture and make the process a bit murkier.
You should be ready to share fairly detailed aspects of your financial life, your career, family and personal goals, and more. That may be uncomfortable for some, but it’s important for an advisor to get the whole picture and map out a way to help you reach your goals.
The Takeaway
Financial advisors help individuals reach their financial goals by offering advice and guidance. There are many different types of financial advisors, and many different ways in which they are paid or charge for their services. As such, there’s no catch-all “financial advisor,” and not every type of advisor will be right for each individual.
For that reason, it’s important that you take the time to figure out your needs, and determine what type of advisor, if any, is the best fit for your situation. It may take some time to figure it out, but if you want the most bang for your buck, it could be worth it down the road.
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FAQ
Is it really worth having a financial advisor?
It can be worth having a financial advisor, but it’ll ultimately depend on each individual. Some people may not feel that an advisor is worth it, while others will say the opposite – there’s no clear, one-size-fits-all answer.
Does the average person need a financial advisor?
Whether someone needs a financial advisor depends on several factors, and while many “average” people feel they can handle their finances perfectly fine without a professional, others might not.
Do I need a financial advisor for my 401(k)?
You don’t necessarily need a financial advisor for a 401(k), but they may be helpful if you want to add an element of active management into the mix. That said, not everyone will feel that they need an advisor to oversee or help manage one retirement account.
Why don’t people use financial advisors?
Some people may not want to use financial advisors because they don’t feel that they have enough money or wealth to warrant it, and because they want to avoid the fees and costs associated with professional advice.
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