Everybody wants to have financial security, but sadly, most Americans live paycheck to paycheck and are only one rainy day away from serious financial problems. By working with a financial advisor, you can safeguard yourself from financial insecurity, set yourself up for long-term success and, ultimately, find financial freedom.
Most people think that financial advisors are only for the rich, but this is simply not true. In fact, the opposite is the case. The best way to become rich is by working with a financial advisor who can help you save, invest, and make smart financial decisions. But how can you find a trustworthy financial advisor?
This article will answer that question and explain everything you need to know about working with a financial advisor, including the benefits of hiring a financial advisor, the different types of services they offer, how they get paid, and much more.
Why Work with a Financial Advisor
A good financial advisor can provide valuable advice about things such as saving money, creating investment portfolios, and planning for your retirement. In other words, a financial advisor can help you achieve financial security, which can dramatically improve your overall quality of life and help you attain your goals.
Decide What Part of Your Financial Life You Need Help With
So, let’s look at some of the main services that financial advisors provide their clients in more detail, so you can decide if working with a financial advisor will be the right choice for you at this particular point in your life.
1. Financial Planning
Financial planning is a broad term that covers a bunch of different things, all with the goal of reaching your personal and financial goals. Generally speaking, financial planning involves helping you map out your financial future with a saving plan. Doing so will not only set you up for success, but also give you a better understanding of what your next steps and long term goals are. For some people, that means buying a house; for others, it means traveling the world. Everyone is different, and financial advisors consider you as a unique individual when crafting your personal financial plan.
2. Investment Advisory
One of the primary functions of a financial advisor is advising clients on financial investments. Having a diversified investment portfolio is one of the best ways to increase your wealth while at the same time protecting yourself from market volatility and an ever-changing landscape of shifting economic conditions. By having a diversified portfolio, you can grow your money exponentially, and this will almost certainly help you reach your goals much faster than just depositing money into a savings account.
3. Retirement Income Planning
People often seek the help of a financial advisor when planning for their retirement. As people get older and retirement looms on the horizon, this usually becomes a top priority. When you work with a financial advisor, you can craft a custom retirement plan that will allow you to save for this critical life change while ensuring that you’ll have financial security when you retire, and if all goes according to plan, you may even be able to retire a few years earlier.
Seek Financial Advisors with Reputable Credentials
Some people think that anyone working at a financial institution with the title of a financial advisor is a qualified expert, but this is definitely not the case. There are many financial institutions that allow their sales staff to pay a small fee and essentially grant them some sort of credential that allows them to call themselves financial advisors. That said, these salespeople almost never have the true expertise to guide their clients in the right direction.
Qualified financial advisors in the United States will have one of three professional accreditations. They will either have a “Certified Financial Planner” (CFP) status, a “Personal Financial Specialist” (PFS) designation, or a “Chartered Financial Analyst” (CFA) accreditation. Make sure that you always do a background check to verify the credentials of anyone saying they are a financial advisor, and make sure they have one of the designations mentioned above before you ever consider hiring them.
Know How Financial Advisors are Compensated
Different financial advisors charge fees in different ways. Typically, there are three distinct fee structures used by most financial advisors, and these vary from person to person. Therefore, let’s briefly go over the different types of fee structures commonly charged by financial advisors now and understand each option.
1. Fee-only Financial Advisors
Some financial advisors work on a fee-only basis, meaning that they don’t charge any sort of commission rates. That said, these fees can be high depending on the balance of your account.
One benefit to working with a fee-only advisor is that they are essentially retained, meaning that they charge this fee whether you use their services once, not at all, or multiple times, so whenever you need financial advice or want to change your financial plan, you are free to contact them because they have already been paid.
2. Financial Advisors Who Earn Commissions
Some financial advisors who charge fees also earn commissions, and as such, they often charge a lower percentage of the account as their fee, hoping to make more money in the long run from commissions and incentives. For example, if you asked a commission-based financial advisor to open an investment portfolio for you, they might only charge a 0.3% fee as opposed to a 0.8% fee, but they could charge a 10% commission on any profits in the account. These are made-up numbers, but the principle is sound, so always do your homework and understand exactly how a financial advisor plans to charge you before hiring them.
3. Hourly-Rate Financial Advisors
The vast majority of financial advisors either charge a fee or charge a fee and commission, as described above. In almost all cases, this fee is a percentage of the amount of money that you have in the account that the financial advisor is managing for you.
As such, most financial advisors will require that you have a minimum account balance before they agree to work with you. Oftentimes, $100,000 is the minimum amount of money you’ll need to work with a financial advisor, although many financial advisors have a higher minimum threshold, such as $500,000 or even $1,000,000.
However, there are also financial advisors who work with people who are just getting started and may not have a significant amount of money just yet. This sort of financial advisor will likely charge an hourly rate for their services or will otherwise bill you a flat fee for consulting with them and acting as your financial advisor in this capacity.
What Questions Should You Ask?
There are a few important questions you should ask any financial advisor before working with them; this is so that you can figure out what type of financial advisor they are and what they specialize in. Here are some of the best questions to ask a financial advisor before hiring them.
1. What Type of Clients Do You Typically Work With?
One of the most important questions to ask a financial advisor before hiring them is what type of clients they normally work with. This is because financial advisors offer different types of services, and usually, they only specialize in one area. For example, if you wanted to create an investment portfolio, you wouldn’t want to work with a financial advisor that primarily works with retirement planning clients and vice-versa.
2. Are You a Fiduciary?
A fiduciary is a financial advisor that has a legal and ethical duty to consider their clients’ finances above everything else, meaning that they are not allowed to earn any kind of commissions or incentives from managing client finances or investment holding. This can be good or bad, depending on your personal opinion of the matter.
Some people like to know that their financial advisor is earning a commission on their investment holdings because it means that the advisor has an incentive to ensure that the portfolio performs well. Others prefer to know that their financial advisor is acting objectively and has no personal interest in their financial holds. It really is a matter of personal preference, but nevertheless, this is a good question to ask upfront before hiring a financial advisor.
3. How are You Compensated? And How Much Will I be Charged for Your Services?
Of course, you should also ask what type of fees they charge, what percentage of the account they will retain, whether or not they charge commissions, what the minimum account balance requirement is, and when they will take their money. These are all important factors that you should be aware of before signing any contract, as you don’t want to be surprised after entering into an agreement with them.
Conclusion & Recommendation
Life can be difficult and has a way of throwing a wrench into even the best plans. By working with a financial advisor, you can grow and protect your money so that you’ll have the financial means to survive in the event of an emergency. Plus, by working with a financial advisor, you’ll be able to make winning investments that will pay off in the long run and plan for a prosperous, worry-free retirement.
In most cases, financial advisors are inexpensive, especially considering that their whole job is to grow your money. So, if you don’t already have a good financial advisor looking out for you and your family, then you should shop around, interview a few, and ultimately hire one. This is sure to be one of the best financial decisions you’ll ever make.
Frequently Asked Questions
1. When should you talk to a financial advisor?
Ultimately, you should talk to a financial advisor whenever you feel you need sound financial advice. This can be when you decide to create a financial plan when you want to open an investment portfolio and whenever you decide to start planning for your retirement.
2. How much should you pay for a financial advisor?
There is no one correct answer to this question as it depends on a ton of different factors, including how much money you have in the account that the advisor will be directing, how often you plan on using their services, what type of fee structure they charge, and many other factors. However, some general guidelines to keep in mind are as follows.
If you have around one million dollars in your account, then you can expect to pay your financial advisor about 1%. However, if you have less money, then the fee will likely be higher, and if you have several million dollars, then you can expect to pay much less. Generally, the more money you have in the account, the lower the percentage fee charged by the financial advisor.
3. How much money do you need to consider a financial advisor?
The vast majority of financial advisors have minimum thresholds. Meaning you must have a certain amount of money in your account to work with them. This typically starts at about $100,000. However, some financial advisors don’t have high minimum thresholds and will work with people just starting out on their financial journey. But, in most cases, financial advisors that don’t require you to have a minimum balance will charge high hourly rates, or else they will charge you a fairly expensive flat fee for consulting with them.