Managing your personal finances well takes time and energy—sometimes more than we can spare. Sure, we can create a financial planning checklist or learn the basics of investing, but sometimes getting into the weeds is too much of a time-sink. So, how can you make the most of your finances if you’re in a knowledge or time rut?
Hiring a financial advisor is a prudent way to have an expert look over your financial situation and make recommendations, balance your stock portfolio or simply guide your financial actions towards better decisions.
If you’re thinking of hiring a financial advisor, understanding their role is the first step in deciding to work with one. We’ll detail what a personal financial advisor does, questions to ask, how to pick one and much more below.
What Is a Financial Advisor?
A financial advisor is a professional who is trained to help individuals, families and/or businesses make the best financial choices they can given their situation. This typically means offering advice on investments, mortgages, financial planning, risk tolerance levels and big financial decisions.
A financial advisor also recommends certain investments based on your life goals, familial (e.g. married, single) and financial situations. They can also help with estate planning and budgeting. In short, a financial planner is a financial educator, guide and accountability partner.
Although the term financial advisor may sound like a catch-all phrase, some specialize in different areas such as financial risk management or retirement strategies. Financial advisors typically work with businesses, individuals and families and may have asset requirements for you to work with them.
Financial Advisor vs. Financial Planner: What’s the Difference?
All financial planners are financial advisors, but not all financial advisors are financial planners.
A financial advisor is someone who, broadly speaking, helps you manage your money. This is done by buying and selling investments for you, offering advice on your financial health or creating estate or tax plans. Someone can only be called a financial advisor if they have passed the Series 65 Exam administered by FINRA. Though a financial advisor is a broad role, individual advisors may come from different backgrounds or have different specialties, such as insurance or mortgage advice.
A financial planner, however, is someone who helps consumers and businesses create and follow through on financial strategies to help them accomplish their goals. These could be goals focused on saving, education, retirement, or tax planning, among others. It’s important to note that FINRA states that almost anyone can call themselves a financial planner, and they come from a variety of backgrounds. That said, a common designation to watch out for is the Certified Financial Planner (CFP) marker. Someone with this designation has passed the CFP Exam and meets other rigorous qualifications.
When choosing between the two, keep in mind that there are instances where a financial planner or a financial advisor would be the better hire. Generally, if you need assistance with creating financial goals and coming up with a financial plan, use a financial planner. If you want advice on investments, to have someone manage your portfolio or to advise you on insurance or mortgage decisions and the like, a financial advisor may be a better fit.
Key Financial Advisor Duties and Services
What can financial advisors do for you? Now that we’ve outlined the role of a financial advisor, let’s review their core responsibilities and duties.
Manage Your Investments
A financial advisor can help you manage your investments from start to finish. They will typically ask questions about your risk tolerance level to get an idea of what types of investments (e.g. stocks, bonds, mutual funds) fit your profile. They’ll also compare these investment types to your overall goals to make sure they line up.
Once they’ve created a portfolio for you, they will continually manage it to meet your goals and give you advice during turbulent market periods. An advisor also rebalances your portfolio so you don’t incur too much—or not enough—risk based on your risk profile.
Help Minimize Your Tax Liabilities
Because an advisor has a detailed picture of your entire financial life, they can provide tax advice to help you or your business reduce your tax bill. Some advisors may also file your tax returns for you, too. Note that financial advisors who offer tax-related services typically have tax professional designations such as Certified Public Accountant or Enrolled Agent.
Provide Retirement Planning Advice
By analyzing your income levels, retirement goals, spending patterns, savings and other financial markets, an advisor can help you plan for retirement in a way that suits your needs. They’ll also regularly meet with you to update your retirement plan as your life goes on or if your priorities change.
Help With Estate Planning
Usually working with an estate attorney, a financial advisor can help you create an estate plan that fulfills your wishes and takes care of those you love most when you’re gone. In practice, this could mean assisting with the creation of a living trust, preparing payable on death forms for insurance or updating your beneficiaries on your insurance plans.
Assist You in Paying off Debt
In addition to helping you save or invest, a financial planner can also help you pay off and manage your debt. This is done by creating a debt payment plan and potentially restructuring the debts you currently have. In some cases, they may advise you to start a debt management plan.
Help Create a Budget
While you can create a budget on your own, an advisor can help you see patterns in your spending habits, allowing you to focus on reducing unnecessary costs. They’ll also create a budget that matches your overall financial goals and objectives.
How Much Does a Financial Advisor Cost?
When it comes to choosing a financial advisor, cost should be one of the factors you take into account. Financial advisors are paid in multiple ways, which can seem confusing at first. Here’s a breakdown of how a financial advisor may charge you and their general costs.
- Assets under management (AUM) fee: An AUM fee is a percentage of the total value of the investments your advisor manages for you, charged on an annual basis. A typical AUM fee is anywhere from 0.6% to 1.2% and may be higher depending on your situation. For example, if you have $100,000 of investments with an advisor that charges a 1% AUM fee, you would pay $1,000 per year.
- Hourly rates: Advisors may charge an hourly rate of $100 to $400 an hour depending on the type of work required.
- Flat fees: For work that is easier for an advisor to estimate, they may use flat fees to charge clients. For example, an advisor might charge $1,000 for a simple budgeting plan or savings plan. But a comprehensive retirement and estate plan could be closer to $2,400.
- Commission-based fees: Some advisors may not have any fees upfront, but instead earn a commission on the types of products they sell (e.g. insurance, certain mutual funds).
It’s important to note that advisors usually operate under two different fee structures: fee-only and fee-based. Fee-only advisors do not charge commissions on any products they recommend as part of their services, but they do charge fees like other ones we noted above.
Fee-based advisors do earn a commission on the investments or products they recommend to you, potentially in addition to other fees such as their AUM or hourly rate.
How to Find a Financial Advisor
When picking a financial advisor, it’s important you find someone you can trust first and foremost. After all, you don’t talk to just anyone about your finances, especially in great detail.
Finding a trustworthy advisor can be done in many different ways, but asking those around you who have used an advisor is usually a good first step. They can give you insights that online reviews and research sometimes cannot (e.g. how an advisor treats their clients).
You can also easily find an advisor online by searching through various associations, such as:
Once you have an advisor in mind, make sure to check their background, history and any potential disciplinary actions with FINRA’s BrokerCheck. This service can give you a quick peek into a broker’s practice.
Fiduciary vs. non-fiduciary advisors
When deciding on an advisor to work with, make sure to ask them if they are a fiduciary advisor. A fiduciary is someone who is legally obligated to act in your best interests. While a non-fiduciary advisor may still recommend plans and investments that are a good choice, they are not bound to do so. In some cases, it’s better to go with a fiduciary as trust is baked into the relationship by a legal duty.
Questions to Ask a Financial Advisor
A key part of finding the best financial advisor for your situation is the interview process. Here are some questions you can use to help steer you in the right direction. Remember, trust is critical when hiring anyone who advises you. If you have some reason not to trust a potential advisor before you hire them, that’s a red flag.
- What services do you offer and how can they help me with my financial goals?
- How do you charge for your services (fee-only or fee-based)?
- Can you provide references or case studies of clients you’ve worked with?
- What is your approach to financial planning and how do you make decisions?
- Are you a fiduciary?
- What are my total costs if I work with you?
- What is your educational background?
- Do you work with other experts, such as accountants, lawyers, etc.?
- How often do you meet with your clients?
Are Financial Advisors Worth It?
If you’re wanting to level up your personal finances without doing the research, portfolio rebalancing, financial goal setting and retirement planning on your own, a financial advisor could be a good fit. While financial advisors do come with a cost, having professional guidance for the long term can pay dividends for years to come.
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