The best financial advisor is one that takes the time to understand your financial goals while considering your needs and budget.
After working in the financial industry for the past eight years as Director of Client Operations, one thing is clear. Finding someone you can trust and feel genuinely comfortable with is a lot harder than some people think.
It's your money after all, and finding someone who cares about it just as much as you do, can seem like a daunting task.
When it comes to the financial world, you have a lot of different options to consider such as financial planners to investment advisors.
So how do you know what financial professional to choose? Here's a detailed guide on the types of help you can choose from, as well as the questions you need to ask.
INVESTMENT ADVISOR VS FINANCIAL PLANNER
The term financial advisor is very broad, meaning it can refer to anyone who helps clients manage their money. It's like an umbrella that other terms fall under.
Both investment advisors and financial planners are alike in that they both help you manage your assets, but the services they provide can be different in some fundamental ways.
INVESTMENT ADVISOR
An investment advisor, also known as a financial advisor or securities advisor, is someone who can help you manage your investments and help you make investment decisions.
For a fee, they can provide you with guidance and work with you to determine the best investments for your portfolio.
To get started, they must have a complete understanding of your financial situation, investment goals, and risk tolerance. From there, they will assess your portfolio and develop a recommended investment strategy based on your overall goals.
Investment advisors can be very knowledgeable and helpful by telling you what types of securities to invest in (like stocks or mutual funds), the risk associated with each kind of investment, and what you can expect for your rate of return.
For me, one of the most significant benefits of an investment advisor is that they can also tell you what types of taxable income your investments will generate and how to make your investments as tax efficient as possible.
WHAT ARE THE FEES?
Investment advisors can charge their fees in many different ways. You should also ask your advisor to explain how they are paid before engaging in their services. This could have a significant impact on your portfolio.
Percentage of the value of your managed investments: Depending on much much assets they are managing, their fees might differ. For example, the fee percentage may be higher for lower-value portfolios than for high-value portfolios. To put it plainly, the more money you have to invest, the lower the fees. These fees usually range from .2% to 2% of assets under management.
Hourly rate or flat fee: Depending on the level of engagement, they may provide minimal advice or comprehensive advice. Due to the nature of this fee structure, their services can be ongoing or may be one-time.
Commission-based advisors: If your advisor is commission-based, they earn their money from investment transactions. This means there has to be a transaction, like the sale of a product or a stock trade for a fee to be generated.
FIDUCIARY DUTY
There are two main differences between a fee-based advisor and an advisor who solely earns a commission, and that is a fiduciary duty.
There are a lot of people who don't understand the concept of fiduciary. For most people, they just assume that finance professionals do the “right” thing.
Fee-only investment advisors are bound by fiduciary duty to act in the best interest of their clients, meaning they have to put their client's interest above their own at all times. Not only that, but they must adhere to strict guidelines of loyalty and care. Up-front disclosures must be given to the client before any contracts are signed to provide investment advice.
Commission-only advisors are not bound fiduciary duty.
In my opinion and if it were me looking, I would find a registered financial advisor that is subject to the Investment Act of 1940 and operates as a fiduciary for their clients. There is a great comfort knowing that your advisor is putting your interests ahead of their own and not merely selling you products for the commission.
FINANCIAL PLANNER
Financial planners provide their clients with advice that will help them enhance their overall wealth.
Some have a CFP (Certified Financial Planner) designation, while some have Chartered Financial Cosultant (ChFC) designations.
They specialize in many different services such as retirement planning, estate planning, and insurance planning.
WHAT ARE THE FEES
Just like investment advisors, financial planners are fee-based, fee-only, or commissioned-based.
Most financial planners charge around $1,000-$3,000 for an overall financial plan. Prices will vary for fee-only, fee-based or commission-based planners.
Fee-only and fee-based planners earn money from the financial plans they create for you. Commission-based planners only make money if they sell you a financial product.
The cost of a financial planner also depends on if you want to create a one-time financial plan or if you want your financial planner to manage your financial plan on an ongoing basis. Of course, it will cost you more over time for on-going management than merely getting a one-time plan.
WHICH ONE SHOULD YOU CHOOSE?
It's true that both investment advisors and financial planners both help you reach your financial goals, but they differ in the types of services they provide and the rates in which they offer them.
If you are wanting to enhance your investment portfolio, and are unsure where to start with investing, an investment advisor might be a better choice.
If you are worried about your overall financial health, a financial planner might be better for you.
You need to ask yourself, do you need financial planning advice or portfolio management advice? A financial planner can help you avoid costly mistakes of poor planning and execution. A investment advisor can help you maximize your investment return potential by considering your risk profile and goals.
THE FINANCIAL COUNSELOR
As most of you know, I am an Accredited Financial Counselor®. The main difference between financial counselors and financial advisors is the target audience they serve.
When deciding what financial designation I wanted to pursue, I wanted to make sure it aligned with my true passions. Helping people who need it the most when they don't have access to a lot of the same resources is why I decided to obtain my AFC®.
Financial counselors tend to serve individuals with lower incomes. They can specialize in getting of debt, budgeting, and saving money.
We possess the in-depth knowledge of the financial difficulties that low-income households face. Financial planners tend to be more focused on helping people save for retirement and meet specific long-term financial goals.
If you need financial advice because you're having trouble paying the bills, need to sort out your debts, or are having trouble saving money, meeting with a financial counselor first, might be the best decision.
If you would like to know more about my Accredited Financial Counselor designation, you can find that information here.
HOW TO FIND THE RIGHT FINANCE PROFESSIONAL
Ask family or friends for recommendations: The first place I would start is by asking close family or friends. Naturally, if they have a had a long relationship with a specific financial professional, then it might be a resource for you to look into. Trust is a huge factor when deciding who you want to work with. Leaning on the recommendation from someone you trust, is a great starting point.
The Accredit Financial Counselor Website: If you are low to middle-income, and are having a hard time finding professional help, I highly suggest checking out afcpe.org for an Accredited Financial Counselor.
The National Association of Personal Financial Advisors (NAPFA): NAPFA is an excellent resource for finding exactly what you're looking for in your area. NAPFA is a membership group of fee-only advisors that require additional continuing education.
THE QUESTIONS YOU NEED TO ASK
At the end of the day, you are building a relationship with an individual(s) that will have a significant impact on your finances.
You should never work with a financial professional blindly. There are essential things you need to know before you can make an informed decision on who you want to work with.
Start the interview process and make sure that you let the advisor or planner know that you are interviewing others. This will make them aware that you will not be making an immediate decision.
If you are just getting started with your financial plan, they should be understanding of that. If they make you feel dumb or show little patience for your situation – walk away.
To help you get started on your decision-making process, I created a Financial Advisor Questionnaire. The questionnaire includes ten of the most important questions you need to be asking a potential financial advisor.
I have also included a rationale for each question, so you know exactly why you are asking each question. Just print it off and bring the questionnaire with you to potential financial advisor interviews.
It's important to ask these questions, but to also truly understand the answers that they give you. Click the button below to access my Free Resource Library and my FREE Financial Advisor Questionnaire.
Always remember, you are paying someone to help you understand your financial options. Ultimately, they are there to give you a clear understanding of your financial picture, not to make things more confusing.
