But what is a financial advisor, and how do they differ from others giving investment advice? Make sure you know the difference between an accredited professional and someone who may not have your best interest at heart.
A financial advisor is essentially anyone who provides financial advice. There isnât a lot of oversight, which means anyone who claims to have knowledge about money can call themselves a financial advisor.
Sally Brandon, a senior vice president at investment management firm Rebalance, said itâs an unregulated title.
âThe term âadvisorâ is problematic,â Brandon said. âJust about anybody who sells stocks or insurance products to earn a commission can claim to be a financial advisor.â
Brandon suggested hiring a registered investment advisor (RIA) to manage your money. âIf you hire an RIA, you have hired a person or a firm that is a fiduciary, which means that person or firm is required by law to act in your interests ahead of their own,â Brandon said. âNo crazy hidden fees and no misguided investment ideas that donât fit your needs just because they get a commission out of it.â
Having a fiduciary means a financial specialist is working in your best interest â not their own.
Brandon also suggested hiring a Certified Financial Planner (CFP). CFPs can help you analyze where your money will be put to its best use: investments, retirement or even saving for your childâs education. CFPs donât just help with investing; they help with money management. While you donât need to find someone who is both an RIA and CFP, consider what your financial needs are and what you hope to get out of the relationship before deciding who to hire.
Your advisor is meant to serve as your money friend. They should discuss which investments are best for you, what each type of investing could be most beneficial and how best to manage your money. The best kind of advisor makes sure youâre making worthy investments for you â not for them.
When you work with a financial advisor, theyâll go over how much money you need for your different investment interests, such as stocks, bonds and mutual funds. For example, talking to an advisor â as opposed to simple money management â could help you strategically navigate a large amount of money youâve recently come into. Depending on what you need, talking to a real person may be a better option than a robo-advisor.
A robo-advisor is exactly what it sounds like: a robotic financial advisor. Instead of a human managing your money, algorithms and computer programming can automatically set up and manage your investments.
When you sign up for a robo-advisor, youâll answer a few questions about your investment preferences. Your portfolio is then selected based on your specific requests and needs.
Many robo-advisors still offer access to a CFP, but Brandon said some companies forget that real humans matter. âMost robo-advisors are too heavy on the âroboâ part,â Brandon said. âThereâs nobody there to talk to, and if you do get a number itâs a distant call center, not your advisor.â
Not all robo-advisors are the same, but if you prefer human interaction and want to speak with someone, you may not like robo-advisors. However, robo-advisors do typically charge lower fees so youâll need to consider the trade-offs.
The less money you dedicate to paying someone else, the more will be invested. But regardless of who helps you manage your investments, theyâll come with an extra cost.
Advisors can earn their paycheck in a few different ways:
The specific costs can vary depending on the firm you choose and how your money is handled. For robo-advisors, fees might run 0.3% of your assets up to 2% for human advisors, according to Brandon.
âI know 2% doesnât sound like much money, but itâs 2% of your total retirement savings, not 2% of your gains in any given period,â Brandon said. âSome years you can pay the advisor more in fees than you make in returns, and that can run into thousands of dollars.â
Many firms charge a percentage of your total investments, also known as assets under management (AUM). There might be fixed, hourly, commission or performance fees that are tacked on. The amounts can vary depending on your firm or company choice, so itâs wise to do the math before committing.
For example, if you have $100,000 in assets and a firm is charging 2% of AUM, thatâs $2,000 a year. If you set up a financial plan, those fixed fees might cost another $1,000. If youâre talking to someone for a financial consultation, that could average about $200 an hour.
Before you know it, your investment cash has taken a hit. Itâs hard to avoid fees completely but try to find companies that keep your costs as low as possible.
Due to the lack of major oversight on what it means to be a planner or advisor, youâll need to take the vetting into your own hands.
Itâs worth your time to make sure your advisor is who they say they are. You can check a firmâs licensing by going to BrokerCheck, and you can look up a specific advisor or planner in the SECâs Action Lookup. If someone has had court orders against them, itâll be in the database.
If youâre choosing a local financial advisor, check your stateâs securities regulator. Here, you can find and verify licenses.
Itâs also perfectly normal to ask advisors for their Form ADV. This is how advisors register with the U.S. Securities and Exchange Commission (SEC) to verify their companyâs practices. Companies must tell customers about the companyâs offerings, the advice they give, fee schedule and conflicts of interest. Theyâre also required to give an update to customers every year as new employees are hired and changes occur. Feel free to look up an advisorâs Form ADV as well.
Donât be scared to ask a potential advisor any questions you have, especially when it comes to their expertise. Ask if they are a fiduciary and have your best interest in mind. Find out how often they talk to and consult with clients. See how they earn their money and if theyâve ever had any legal trouble. Doing your homework is encouraged â your advisor could make or break your entire investment strategy.
If youâre not sure if you need a financial advisor or not, ask yourself a few questions before you settle on one.
Regardless of which type of investing help you choose, make sure youâre choosing the right one for you. Talking to a financial planner, advisor, broker or other investment specialist is a great way to make sure youâre on the right track with your money. But make sure you donât pick one who isnât clearly a specialist or expert in their field.
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