How to Hire a Financial Advisor
Decide whether you need an advisor. Financial advisors are an added expense, and many people do not hire one. But the decision to manage your own finances is a risky one. Deciding whether to hire a financial advisor involves carefully assessing your own abilities.
- If you have a working knowledge of investing and asset allocation and feel comfortable handling your own financial future, or if you have a financial plan that offers free investment advice, you might be able to forego a financial advisor.
- You will also need time and discipline in order to monitor your portfolio and make changes when market conditions shift.
- However, if the cost of having a financial advisor is not an issue for you; and/or if you have a complicated financial situation, have recently come into a large amount of money and need help managing it, or need help planning for retirement, a financial advisor can help you make the right choices to maximize your savings. One study found that 401(k) investors who had a financial advisor earned 3.32 percent higher on their investments than those who did not.
Choose the type of advisor you need. The type of advisor that you need depends on the complexity of your needs. Of course, a good advisor will help you understand your needs, but in general, you can assess what you're hoping to gain from a financial advisor and then have a better idea of what type to look for.
- A Certified Financial Planner® (CFP®) must have a significant amount of experience and pass numerous exams to earn the CFP® title. This person will be trained in financial planning, taxes, insurance, employee benefits, estate planning and retirement. CFPs® are also required to maintain their certification with continuing education, meaning his information will be up to date. A CFP® is comparable to a master's degree in financial planning. To find a CFP® in your community, go to: http://www.cfp.net/search
- A Registered Investment Advisor (RIA) works with high-net-worth investors (usually someone with a net worth over one million dollars). Your RIA will look at your long-term goals and offer advice while managing your portfolio. They charge a fee of about 1% of your invested assets per year, sometimes less.
- A Chartered Life Underwriter® (CLU®) specializes in life insurance and estate planning. A CFP® who wishes to set herself apart in these areas will earn a CLU® designation, which requires additional education and the successful passing of eight exams.
- A Chartered Financial Consultant® (ChFC®) requires the same education as someone with a CFP®, but there is no board exam.
- Robo-advisors are offered by online firms. This is just what it sounds like — instead of working with
another human, an automated algorithm is used to help you manage your portfolio. You cannot use this service for estate planning or taxes.
- Someone who goes by the title investment counselor, wealth manager, or investment advisor should not automatically be considered the same as a CFP® or RIA. Without those designations, they do not have the combined education, experience, and certifications of these other professionals. In order to give advice on investing in securities in exchange for payment, they must be registered with the Securities and Exchange Commission, but be aware that general titles (like "wealth manager") don't tell you much about the person's qualifications.
Learn the difference between commission-based, fee-based, and fee-only advisors. Financial advisors are often called brokers or dealers if they work for a financial company and earn their incomes based on commissions. On the other hand, independent, registered financial advisors have no company affiliation or sales quotas and charge annual or monthly fees based on the amount of money they are managing for their clients. Fee-only financial advisors provide financial advice are compensated by fees only, and do not receive commissions. Some broker-financial advisors, who advertise themselves as "fee-based", get the best of both worlds (for them) by receiving both fees from their clients and commissions from products they sell. These salesmen are the worst of all possible worlds for the investor, since paying fees to a salesman receiving commission from selling products does not eliminate conflict of interest, but just allows him to be paid twice.
- Commission-based brokers and dealers are often more affordable because they take a commission, not annual or monthly fees, though costs are relative to the results. Until very recently, brokers and dealers were not legally obligated to work in your best interest (in other words, they did not fill a "fiduciary" role); they could sell you a product (such as stock) that was not optimal for you. As of April 2016, brokerage firms must act under a fiduciary standard — they must act with your best interests in mind when it comes to tax-advantaged retirement accounts (such as a 401k). The rule will take full effect in 2018.
- A fee-only, independent advisor might be more expensive, especially if you are managing a very large amount of money. But many experts think that the service provided by an independent advisor is higher quality, since she can never relax. She has to make sure the client is always satisfied, year after year, or her fee will vanish with the client. Fee-only advisors claim that this arrangement could be expected to lead to a better performance by your investments.
- A "fee-based" advisor both charges fees to the client and receives commissions from selling investment products. It offers the worst of all possible worlds: high expense and conflict of interest.