Those who manage their own investments will invariably wonder from time to time if they should seek the services of a financial advisor. While most financial advisors agree there’s no set amount of assets that dictate the use of a financial professional, there usually comes a time or an event that sends an investor in that direction. That event could be something such as receiving a large inheritance or having to take minimum distributions from an IRA or 401(k) account.
At this point, many feel they lack the experience to manage a large sum of money and become afraid they’ll make a grave mistake. After all, many times, the money represents their retirement funds, so it’s critical that it’s handled properly and that it lasts for the duration of the time it’s needed.
While hiring a financial advisor isn’t a requirement and you can certainly manage your money on your own, you’ll want to consider whether you have the expertise to handle it. After all, it’s not likely you’d attempt a complicated repair on your home or car if you didn’t have the expertise to handle it, so why would you expect a different result with a large sum of money? Understanding even just the basics of personal finance and estate planning will take lots of time and learning. For the average individual, it’s not practical to consider doing it alone, which is why when you are doing that mid-year financial review, it may make sense to start considering hiring a financial advisor.
As you age, your earning power becomes greater and you acquire more assets, making things a lot more complex and critical. Having a financial advisor can help you make the right decision at the right time. In addition, having a financial planner will help you stay the course even during the rocky times, and it’ll make sure you don’t procrastinate and lose opportunities. Having someone looking over your shoulder who knows what he or she is doing is always a good idea.
How Do Financial Advisors Operate?
Advisors who work in the financial field are bound by guidelines the industry lays out to protect the interests of clients. Advisors who operate on a fee-only basis are only paid by the client directly, just like tax accountants and lawyers. They don’t receive commission on products they sell. This is an important distinction and one that you should fully understand before hiring an advisor.
Paying an advisor a percentage of your assets every year may give you pause, but you should consider what you’re getting in return for the fee. As your assets grow, so will your need to seek financial advice, so a fee based on how much money your advisor is helping you manage makes sense. It makes even more sense when you consider the importance of the task of preparing for your retirement or sending your kids to college.
What’s the Difference Between a Fee-only Advisor and Other Types of Advisors?
There’s something in the business of financial management called a fiduciary standard. This means that the advisor must legally act and advise in the best interests of the client. You would think that all financial advisors would be held to this standard, but that’s not necessarily true. In fact, most of the financial advising that happens in this country is considered to act under what’s called a suitability standard. This means that the advisor is only required to make recommendations that are suitable and appropriate to your financial situation and long-term objectives. This means that the adviser has the opportunity to choose between products that may be equally suitable but also choose the one that pays the highest commission to him or her. As long as the choice is considered suitable, it doesn’t necessarily need to be the best choice for you.
Fee-only advisors operate as fiduciaries. This means they’re legally required to act in their clients’ best interests. That’s why it’s important to ask any advisor you’re considering hiring if he or she operates as a fiduciary or on a suitability standard. The right choice will be one that operates as a fiduciary.
One caveat to be aware of is the application of a new law that went into effect in 2017. With the new law, the fiduciary responsibility will apply to advisors who advise clients on their retirement accounts, regardless of how they earn their fees. Investments that are outside of retirement accounts won’t have the new law applied. This will make it more of a challenge for clients to find an advisor that suits all their needs.
How Will My Fee-only Advisor Be Paid?
Your fee-only advisor must receive his or her compensation from you, the client. He isn’t allowed to receive monies from companies such as brokerage firms. This assures that the fee-only advisor remains loyal to you and not to someone else.
Your fee-only advisor will likely charge you a fee in the form of a percentage. This percentage will be based off the dollar amount of investments he or she is managing for you. Fees are generally paid on a quarterly basis, but sometimes on an annual basis, especially if they’re being paid as a pre-negotiated flat fee. Sometimes, financial advisors are paid on an hourly basis.
You may assume that the term fee-based is the same as fee-only. This, however, is not the case, so you should exercise some caution if you hear that term from a financial advisor you’re considering.
If financial advisors describe themselves as fee-based, this means that not only can they receive a fee from the client, but they can also receive commissions from a brokerage house, insurance company, or other company whose products they sell. It’s required that advisors inform clients of these fees and their amounts.
Many advisors who work on a fee-based system will talk to clients about what’s called a managed account. This means that the advisor will not only receive a fee from managing your investments, but will also receive potential incentives from the companies that offer the investments inside the account. For this reason, the advisor may be influenced by these incentives and choose investments for you based on which pay the highest incentive. Therefore, while fee-only and fee-based advisors may both receive a fee that’s based on a percentage of the money and investments they manage for you, it’s quite possible that the investments they choose for the accounts will not be the same. Since fee-only advisors are obligated by their fiduciary responsibilities, they’ll usually choose investments for you that don’t carry many expenses, such as no-load mutual funds, stocks, and bonds.
The important thing to remember is that financial advisors differ greatly in what they have to offer regardless of how they’re paid by the client. You must decide, through your own self-assessment, what types of services you require in order to hire the right financial advisor.
How Do I Find a Fee-only Advisor?
When looking for a fee-only advisor, there are a number of ways to go about it. First, you can check with the National Association of Personal Financial Advisors (NAPFA). Only fee-only advisors are allowed to join the association, so you’re sure to find only that type of advisor. To find one near you, utilize the search function on the website.
The best way to locate a good fee-only advisor is through a personal recommendation. If an advisor has worked with a close friend or family member for a long time who’s happy with the results, you’d be wise to consider that advisor, as there’s an element of inherent trust to fall back upon. It’s important not to confuse financial planners with those who trade stocks. In addition, financial planners are usually not CPAs, so be sure to verify any moves made to avoid paying income tax with a tax professional.
Be sure your financial planner is certified as indicated by the CFP designation after his or her name. A certified financial planner (CFP) has received extensive financial training and had to sit for a qualifying test given by the Certified Financial Planner Board of Standards. CFPs are also required to complete continuing education each year to keep their certification. Therefore, the CFP designation is a good indication that the financial advisor you’re considering is well qualified and will do a good job for you. However, there’s no substitute for due diligence when it comes to finding the right financial planner for your specific needs.
Another place to look when searching for the right financial planner is in the Garrett Planning Network. This group consists of only certified financial planners who work on smaller accounts and do it for an hourly fee. This might be a good option for you if your needs are limited or if you only have a few questions you need answered.
How Do I Decide Which Financial Planner Is Right for Me?
As discussed, the planner’s fee structure should be a big part of the decision-making process for you. You want to make sure that the financial planner always has your best interests in mind and isn’t focusing on how much he or she can make on the individual investments.
However, while fee-only advisors are only paid a percentage of the total portfolio they manage, they may discourage you from withdrawing or liquidating your portfolio for fear of seeing their fee reduced. Ultimately, you have to remember that you’re in charge of your own money.
If your current amount of assets is small, you might want to consider hiring a financial planner on an hourly basis. Many times, these planners are just beginning their practice and take on hourly clients as a means to build their business. Since they’ll have fewer clients, you may benefit from personal attention.
As a safety precaution, you might want to run a background check on any financial planner you’re considering. You’ll want to know if any have ever been investigated or convicted of a crime, especially one related to finances. In addition, asking for a list of references from current and past clients is a good idea. It’s important for the financial planner to have experience dealing with your level of financial situation.
Another step you’ll want to take as a precaution is to verify the credentials the advisor is claiming to have and to make sure they’re current. You can make calls to the associations and regulatory bodies to verify the validity of credentials. Also, be sure to see if any disciplinary actions have been taken against anyone you’re considering.
Take notice and caution if you hear a potential financial planner claiming to have 100% success or huge returns on behalf of clients. No one can pick winners 100% of the time, and no one can make guarantees of a return on investment. You don’t want a planner that’s going to take unnecessary risks with your money either. The planner should be giving you, the client, a realistic expectation of what you can hope to earn on your investments and how soon you can reasonably expect to reach your financial goals. He or she should also be asking you questions about your tolerance for risk and advising you about what’s an appropriate level based on your age and your goals.
Finding the right financial planner for your needs may take a little time and patience. However, with the right due diligence, you can find a good fit to help you reach your financial goals and dreams. Just be sure to understand the important aspects of financial planning and the difference in fee structures, and ensure you’re considering a planner with the right credentials.