Are Financial Advisors Worth It?
You’re finally earning money, contributing to a 401k or IRA and are wondering “Why do I need a financial advisor?” In your 401k you might pick a target date fund, aligned with your retirement date and decide that your investment plan is secure. But, if you’re wondering, “Do I need a financial advisor?” and are unsure of the types and functions of financial advisors, fees, benefits and where to find a financial advisor near you, continue reading. You’ll learn what a financial advisor offers, reasons to hire a financial advisor, questions to ask, and ultimately whether financial advisors are worth it, for you.
This article may contain affiliate links which means that – at zero cost to you – I might earn a commission if you sign up or buy through the affiliate link.
Financial advisors go by many names; financial consultant, financial representative, financial planner, financial coach, stockbroker and wealth manager. Add to the laundry list of financial advisory titles, you’ll find that financial advisors carry an abundance of certifications, education and experience. Learn how financial advisors make money, what their credentials mean and the investment and financial advisory services they offer.
What Does a Financial Adviser do?
A financial advisor helps you set financial goals, in accord with your short- and long-term goals. The financial planner can:
- Create a financial plan
- Manage your investments including choosing the appropriate asset allocation
- Help you save and invest for college expenses
- Devise strategies to save for a home down payment
- Plan for retirement
- Help manage your pension or 401k
- Invest for tax minimization
Although financial advisors can perform many services, each financial consultant might offer a distinct menu of services. The fees, investment management strategies, and services of financial advisors vary.
There are countless varieties of financial advisers with many types of designations. Retail brokers, not to be confused with a “fee only financial planner”, sell investment products and are compensated by commission on the sales. They only get paid when you buy or sell a financial product. A retail investment broker has an inherent conflict of interest as he or she only gets paid when you make a transaction.
Independent, fee-only advisers manage investment funds and are legally required to act as fiduciaries to their clients, according to Dan Goldie, co-author of The Investment Answer. This adviser holds your funds in an account with a third-party custodian, with the advisor only having limited authority to manage the account. The adviser manages your account to grow and is usually paid a percent of assets under management. That way, your interests are aligned with those of the adviser.
What are the Types of Financial Advisors and Their Fees?
Certified Financial Planner (CFP) – A CFP has undergone work experience, and a rigorous study and testing process spanning a wide range of investment and money topics. Investing with a CFP gives you a degree of confidence in their training and expertise. Unfortunately, many CFP financial advisor, require $100,000 or more for their clients.
CFP’s typically charge a percentage fee for the assets they manage. Fees range from 0.50% to 1.50%.
Financial Consultant – A financial consultant is a general term, without an attached credential. You might encounter a Financial Consultant at a major investment broker such as Fidelity, Schwab or the investment department of your bank. Financial consultants may have passed the required securities sales certifications such as a Series 7 license. Others might have a ChFC or Chartered Financial Consultant certification, which is similar to a CFP and requires work experience, college level coursework and examinations.
If you have a substantial sized portfolio, you might access a fee-free financial consultant at your investment brokerage firm. Other financial consultants might charge a percent fee for assets managed or a commission, based on the investment products you purchase.
Wealth Manager – A wealth manager serves high net worth clients with a range of investment, estate planning, tax and financial planning areas. The wealth management firm might employ not only financial planners but also attorneys and accountants. You’ll typically encounter CFP’s, Chartered Financial Analysts (CFA) another prestigious finance and investment designation, requiring the most rigorous study and three levels of examinations and other types of certifications.
Fees are typically higher at a wealth management firm, due to the greater breadth of services. As assets grow, the fee for assets under management will typically decline.
Link $100k or more in investable assets and talk to a financial advisor about your goals. Receive a free personalized financial plan that’s yours to keep.
Financial Coach – A financial coach deals with basic money literacy including budgeting, spending, saving and paying down debt. On occasion, a financial coach can assist with rudimentary investment advice. Financial coaches can receive the Accredited Financial Counselor, or AFC certification from the afcpe.org.
The fees are typically per service or appointment and will be lower than most highly credentialed Certified Financial Planners and Advisors.
Robo-Advisor – Robo-advisors are a category of investment managers whose portfolios are based upon computer algorithms. After completing a short questionnaire including your age, risk tolerance level and goals the robo-advisor will create a diversified investment portfolio that fits your specifications. Many robo-advisors provide financial advisory access as well.
Robo-advisory fees are typically based upon assets under management or a monthly subscription fee. Fees are typically lower than those of a CFP money manager and can range from zero to 0.89% for the Empower comprehensive Wealth Manager. Wealthfront offers a stellar digital financial advisor, designed to answer more than 10,000 financial questions for a low 0.25% of assets under management.
Should I Use a Financial Advisor or do it Myself?
My personal bias is that most people who have a modicum of interest can read a book or two, learn index fund and asset allocation basics and manage their own investments. Here are two resources to get you started, The Elements of Investing (Malkiel and Ellis) or How to Invest and Outperform Most Investment Pros (free – sign up required). For those who want to give it a try, here’s a path to simple money management.
Financial advisor or do it myself? Simple DIY financial planning:
1. If available, sign up to contribute as much as you can to your workplace retirement fund. If you don’t have one, open an IRA account at a discount broker such as Fidelity, Vanguard or Charles Schwab. Choose a target date retirement fund and start contributing a set amount monthly. This is a fund which takes into consideration when you expect to retire and adjusts the percentages allocated between stocks and bonds so that the fund becomes less volatile, the closer you get to retirement.
This simple plan sets you up for retirement saving. If you need additional assistance or are seeking a financial advisor for your 401k or pension, you’ll typically find guidance through the 401k plan manager or the IRA Investment brokerage company.
2. Another option is to open a robo-advisor account. The robo-advisor will set up and rebalance your investments in line with your goals. Some, like Fidelity Go, offer financial coaches after your assets reach a certain level. Schwab Intelligent Portfolios offers fee free investment management if you are okay with holding 10% or so in cash, in your portfolio. The Schwab Intelligent Advisory robo-advisor charges a low monthly subscription fee and provides unlimited access to CFP financial advisors.
3. Any cash you will need for the short- or intermediate-term (1-5 years), invest in short term CDs, money market mutual funds or a high yield cash account.
4. After investing for retirement, consider setting up an index fund portfolio in a brokerage account, for additional wealth building.
Still not sure about going using a financial advisor or doing it yourself? Find out how to choose a financial consultant and the questions to ask a financial advisor.
How do I Choose a Financial Advisor? Questions to Ask a Financial Advisor
Let’s assume you decide you want to engage a financial adviser. Here are some general guidelines and questions to ask the financial advisor.
1. What are your certifications, credentials, educational level and qualifications? Check his or her credentials and make sure the adviser has a well know designation such as Certified Financial Planner or Personal Financial Specialist or Chartered Financial Analyst.
2. Have you received any client complaints? Visit BrokerCheck to determine whether there have been any legal actions against the investment broker.
3. Ask friends for referrals. Use this list of questions to ask a financial advisor when interviewing the prospective financial planner.
4. What are your services? Be clear on what assistance you are looking for. Ask the adviser about their services and make sure what they offer matches up with your needs. Some advisers are actually insurance salespeople or financial services sales people with their own agendas. Be critical.
5. How have your after fee returns compared with comparable unmanaged indexes? Do not be impressed with returns and fancy charts. Look under the surface and always find out how the managers returns’ compare with unmanaged benchmark indexes. For example if the S & P 500 stock index goes up 12% in one year and your adviser touts her one year 11% return, you need to know that the advisers return is in less than the return of a low fee index fund that you buy on your own.
6. Interview at least three advisers before choosing one. Ask to see their credentials.
7. Are you a Fiduciary? Ask whether the financial consultant is a Fiduciary. A Fiduciary is required by law to invest with your interests in mind, first and foremost. This means considering what is best for you, not what is best for the financial advisor.
Be aware that hiring an adviser is not a set it and forget it proposition. You need to check in and monitor the advisers progress and know about the investments he is choosing and how their returns compare with those of comparable unmanaged benchmarks. You need to understand the adviser’s strategy and make sure you are comfortable with the investments that she is choosing.
How do Financial Advisors Make Money?
Understand how the adviser is paid. Fee only usually means the adviser is paid a percent of the money he or she is managing. Thus, if you do well, the adviser does well. Fees are typically set up on a sliding scale with reduced fees for larger portfolios. Fees can range from 0.50% on up to more than one percent of assets under management.
Some advisers may charge for a particular service, such as creating a financial plan. Others offer their services on an hourly basis. These options are great if you’re seeking a portfolio check up or answers to specific money management questions.
Empower offers a free investment check up and retirement planning tool when you link your investment accounts:
Some financial professionals are paid by commissions, based upon products or services that you buy. Be aware when financial consultants are paid by commission and only get paid when they sell you particular investment products. I believe this sets up a conflict of interest as the advisor may be more interested in selling high commission products (ie proprietary mutual funds and annuities) and less interested in low commission index funds. Do not be afraid to thoroughly question the adviser.
Many large brokerage firms higher financial consultants and pay them a salary. These professionals might also be compensated with bonuses if they refer you to other services, such as wealth management, within the company.
Find a wealth advisor near you with our partner WiserAdvisor:
Do I Need a Financial Advisor Wrap up
Only you can decide if a financial advisor is worth it for you, or not. We’ve covered the reasons why you might need a financial advisor, the services you can expect and the fees. If you have no interest in managing your investments and planning for your financial future, then hiring a financial planner can be a good decision.
Although, spending a few hours educating yourself about index fund investing and setting up an automatic transfer of your salary into a retirement account can lead to long term wealth. Investing isn’t that complicated and crafting a simple investment strategy can be done on your own..
But if you have complex tax issues, and a high net worth, then you might need to hire a financial advisor.
A middle ground between a full service CFP and do it yourself investing might be to hire a low fee robo-advisor to keep your investments diversified and well balanced.
FAQ
A financial representative is a broad title that can include many types of professionals such as a financial advisor, consultant or planner. Their duties will vary, based upon who the financial representative works for. Sample financial representative job duties include:
-Help the client set money and financial goals including retirement and college planning
-Provide investment and financial advice and recommendations
-Manage the client’s investment portfolio
-Answer investment and financial questions
A broker is someone who acts as a go-between between an investor and a securities exchange. Also known as an investment broker, these individuals usually work for large financial firms. They typically hold a Series 7 and other securities trading licenses. The financial broker will usually buy and sell individual investment products and securities on the client’s behalf.
If you want help setting financial goals, selecting investments and managing an investment portfolio, then you might need a financial advisor. Before selecting a financial advisor, learn about the services that the advisor provides as well as their credentials and fees. Learning about investing, before hiring a financial advisor might also give you the confidence to manage your own investments.
Related
Disclosure: Please note that this article may contain affiliate links which means that – at zero cost to you – I might earn a commission if you sign up or buy through the affiliate link. That said, I never recommend anything I don’t believe is valuable.
Empower compensates Barbara Friedberg Personal Finance for new leads. Barbara Friedberg Personal Finance is not an investment client of Empower.
M1 Disclosure: This content is not a solicitation, is not endorsed by M1, and was not reviewed by M1; the opinions expressed are solely those of the authors and do not reflect M1’s views. Information presented is accurate as of the video posting date; for the most up-to-date information, please refer to m1.com. Before making any investment decisions, consult your personal investment, legal, and tax advisors, as this content is for informational purposes only and not intended as investment recommendations.
