Listen in on Episode 315 of the Dough Roller Money Podcast, where Rob talks about investment fees and whether or not they matter:
When it comes to your personal finances, there are hundreds of products, services, and individuals who claim to make things better–for a price. Knowing whether or when to pay for these things can be difficult. It’s no different when it comes to the question of whether or not to pay for a financial advisor.
Let’s go through what a financial advisor does, and then we’ll talk about when their services might (or might not) be a worthwhile investment.
What is a Financial Advisor, Anyway?
There are all sorts of titles in the world of money management that include the word “advisor.” You’ve got investment advisors. Estate advisors. And financial advisors. And then there are other terms, including financial planner. All of these terms may sound the same, but they actually aren’t.
Of these terms, financial advisor is probably the broadest, since advisors can touch on long-term plans, tax and estate planning, and investing advice. Financial advisors generally operate independently or in a group of financial advisors. In general terms, financial advisors are around to give you advice on your finances.
The types of advice you’ll get can vary from practice to practice. But the very best financial advisors will act as a partner and educator about your finances. They can help you figure out how to get out of debt, decide when and how to invest your money, and learn about options for managing your tax burden.
Financial advisors generally look at the big picture when it comes to your finances. They can help you map out a plan for where you want to go with your money in the future. This could be a relatively short-term five-year plan to buy a home and start investing. Or it could be a 30-year vision for leaving a legacy to your heirs.
Financial Advisor vs. Investment Advisor
One thing many people confuse is a financial advisor versus an investment advisor. Some financial advisors are also Registered Investment Advisors (RIA), which are certified by either the Securities and Exchange Commission (SEC) or a state securities authority. But if they go by the title of financial advisor, their focus is generally going to be broader than just your investments.
Really, this will come down to the focus. Some investment advisors will also help you sort out other aspects of your financial life, but they’ll focus primarily on your investments. And many financial advisors will also hone in on your investments, but they’ll be part of your larger overall financial plan.
Services a Financial Advisor Might Offer
A financial advisor can typically provide you with overall financial planning and help in reaching your financial goals. These services can include:
- Budgeting advice and help
- Planning for getting out of debt
- Retirement planning
- Investment help and advice
- Insurance coverage inspection and planning
- Setting savings goals
- Figuring out what type of mortgage to get
- Advice to improve your credit score
- How to best plan for taxes and improve your tax situation
- Planning for emergencies and setting emergency savings goals
- Saving for your kids’ college educations
Financial advisors can also help you weigh the pros and cons of major life decisions that are related to your finances, such as whether and when it makes sense to downsize as you approach retirement. The best financial advisors will help you create and document financial goals and plans for every aspect of your life so that you can be more successful financially–whatever that looks like for your circumstances.
Types of Fees for Financial Advice
Financial advisors charge for their services in a variety of ways. Some charge an hourly rate, while others charge a flat fee for specific projects. They might also charge quarterly or annual retainer fees for ongoing services.
Advisors who also manage investments and assets on your behalf will often charge a fee as a percentage of the assets they manage for you. The more assets they manage, the lower the fee will typically be. These fees usually range from .5% to 2% per year.
Other financial advisors get commissions from the financial or insurance products you buy through them. Some advisors get commissions in addition to the other fees they charge.
Regardless of how your financial advisor gets paid, you’ll want to be sure you clearly understand the arrangement. A completely commission-based option may seem cheap, but those advisors may also steer you away from financial products that are ultimately in your best interest so that they can get a higher commission.
When You Might Need a Financial Advisor
You’re most likely to need a financial advisor when you’re at a crossroads in your life. They can help you successfully navigate issues like divorce, marriage, having a new baby, and starting a new career with a big pay bump.
However, having steady financial advice might also make sense for you over time if your financial situation is fairly complex. When you have a lot of assets, there’s more to think about. For instance, high net worth individuals have a lot more to worry about when it comes to taxes and estate planning. If you’re in this territory, you might benefit from steady, long-term financial advice from someone you trust.
When You Don’t Need a Financial Advisor
On the flip side, if you don’t have a lot of assets, a financial advisor could be an unnecessary expense for you right now. You might look at affordable options for one-time financial advice if you need help formulating a plan to get out of debt or improve your credit score. However, there are lots of great resources you can use online for free to help you create your own plan.
One-off financial advice can help give you direction and goals no matter where you are in your financial life. But if you’re not worrying about huge investments or a lot of assets and complex taxes, you may not want to budget for ongoing financial advice.
In these cases, a robo-advisor service could save you money and make sense for your investments. And you can use online resources to formulate your own plans for setting financial goals and getting out of debt. Here are some recommended robo-advisors: Betterment, Wealthfront, M1
Read More: Best Robo Advisors – Find out which one matches your investment needs.
What to Look for if You Hire a Financial Advisor
If you do decide to hire a financial advisor, here are some of the things you need to look for during the process:
- A fee-only structure. If possible, it’s best to avoid financial advisors who can gain financially when you choose certain financial and insurance products. Fee-only structures show you that your financial advisor is free to give you truly neutral advice that is in your best interest.
- A certification. There is literally a whole alphabet’s worth of financial advisor certifications. Some common ones to look for include Certified Financial Planner (CFP) and Personal Finance Specialist (CFP). Ask any potential advisors where they’re certified, and then do some research to ensure that those certifications are legitimate and up to date.
- Flat fee is preferable. Obviously you want to avoid an advisor with a questionable fee structure or obvious conflicts of interest. But you may want to lean towards a flat fee for service model, which lets you know exactly what services you’ll be getting and exactly what fee you’ll pay for those services.
- A good fit. Again, different financial planners have different specialties. You literally cannot specialize in every possible area of personal finance these days, as taxes, estate planning, investing, and other topics are so complicated. So be sure the financial advisor you choose is a good fit for your particular needs. And be sure that they are a good personality fit, too. You should feel like your financial advisor is someone you can trust and lean on, whether you’re looking for a one-time financial plan or a long-term partner in reaching your financial goals.
The Easiest Way to Find a Financial Advisor
Finding an excellent financial advisor is hard. Think about it–you’re trusting someone else with your financial future. Why wouldn’t you be a little tentative? Furthermore, you often have to take a shot in the dark on who that person is unless you know a good financial advisor already.
That’s why we are loving SmartAdvisor right now. SmartAdvisor (by SmartAsset) will help you out by discovering, vetting, and serving up qualified advisors who will get in touch with you almost instantly. There’s no cost to you for using the service.
After you take a brief survey, you’ll be matched with up to three different financial advisors through SmartAssets’ in-house concierge team. After that, the advisors will get a notification that you’re a match for their services and be in touch with you as soon as they can. This allows you to narrow down the field of who you want to work with without committing completely.
We also recommend taking the same steps with Paladin. This is also a free service that connects you with three highly-rated financial advisors that match what you are looking for. Paladin will email you their suggested matches within 24 to 48 hours after filling out their online form. From there, you can interview your matches and find out if you think one of them fits well with your financial needs.
Learn More: Best Online Financial Advisors
Regardless of where you are in your financial life, a financial advisor can bring some peace and clarity to decisions you need to make. And they can help you set goals for the future. You just need to be sure you’re making the right investment in this person at the right time.