Registered adviser, fiduciary, independent adviser, investment adviser representative, RIA, licensed, designated, unbiased, what does it all mean? As an investor seeking an adviser, it can certainly be confounding.
Various types of licenses, designations, financial industry jargon and affiliation options are a lot for anyone to digest. Twenty-two years of helping people understand it all has led me to a profoundly simple list of questions to help you decide if an adviser is right for you. Here it is:
- Do you know them? (Where they introduced through a trusted friend, family member or other adviser?)
- Do you like them?
- Are they patient with you?
- Is s/he a CFP® professional?
- Does s/he have at least 10 years of experience?
Five yeses to these questions will likely lead to a long-term successful relationship. It can be that simple.
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For those seeking deeper knowledge and insight, good news! I’ve broken it down here. Here are five additional aspects to consider as part of working with a financial adviser.
1. Registered Rep, IAR or both
A representative who is registered with the Financial Industry Regulatory Authority (FINRA) brokers investments and is associated with a broker-dealer (a firm). Investments implemented by a broker are generally commissionable products, such as an A share or C share mutual fund, variable annuity, 1031 exchange product, non-traded real estate investment trusts, variable life insurance, oil and gas partnerships and real estate limited partnerships. The advice they give must meet the suitability standard, meaning the investment must be suitable for the investor, but not necessarily the best (or least costly) choice for them.
An Investment Adviser Representative (IAR) generally works for a flat fee for planning and advice or for a percentage of assets under management. There is no commission involved, and the IAR works as fiduciary, meaning the adviser has an ethical duty to recommend the best investments for you.
An IAR can be associated both with Registered Investment Adviser and maintain a license with a FINRA registered broker-dealer. Or, with a stand-alone RIA that does not have a FINRA registration and therefore the adviser does not have a FINRA license (see explanation 2 below).
2. Series 6 & Series 7
Now that we know to ask if an adviser is FINRA licensed and whether s/he is an IAR for a broker-dealer’s RIA or stand-alone, it’s time to evaluate an adviser’s FINRA license, if applicable. This is public information and can found by entering his/her name on the Broker Check site: https://brokercheck.finra.org/ (opens in new tab). Two common licenses obtained to implement investment solutions are the Series 6 and Series 7. If an adviser has his/her Series 6 then they can deal with variable investments (investments tied to the stock markets) but are limited to mutual funds and sub accounts inside variable insurance products.
A Series 7 licensed professional registered with a broker-dealer will be able to offer a substantially wider scope of investments, including individual stocks & bonds, exchange-traded funds, private placements, non-traded REITs, and stock options. The suitability standard applies to those operating under the Series 6 and Series 7 license.
3. Series 65
What licensure is required by investment advisers (IARs)? Unlike the Series 7 and the Series 6, an individual does not need to be “sponsored” by a broker-dealer to take the required exam. The Series 65 exam was designed by the North American Securities Administrators Association (NASAA) (opens in new tab) and administered by the Financial Industry Regulatory Authority (FINRA). The Series 65 is an exam and license required by anyone intending to provide financial or investment advice on a non-commission basis. Those advisers passing the Series 65 exam operate under the fiduciary standard.
4. Certified Financial Planner
Let’s talk financial planning. Where does a CERTIFIED FINANCIAL PLANNER™ professional fit in with all this licensure info? In the realm of comprehensive advice and working across disciplines, the CERTIFIED FINANCIAL PLANNER™ designation is commonly held in the highest regard amongst industry professionals. Becoming a CFP® certificant is one of the most stringent processes and one of the hardest designations to obtain in terms of the financial advice industry. It requires years of experience, successful completion of standardized exams, a demonstration of ethics, a formal education and ongoing continuing education. A CFP® professional active in the practice of charging clients for advice will at least have his/her Series 65 and operates as a fiduciary.
5. Compliance Considerations
There have been steps taken to curb bias and unsuitable recommendations from FINRA registered representatives. One sweeping legislation was Reg BI, which can be read about on FINRA’s website (opens in new tab). These stringent regulations have influenced many advisers to drop their Series 7 and work only as an IAR through an independent RIA.
It is arguable that there is less oversight of RIAs by the SEC or the states, and therefore there are fewer compliance eyes on the recommendations and solutions being offered. While IARs still want to bring advanced solutions to their clients that have traditionally been vetted by a significant due diligence team at a FINRA registered broker dealer, smaller RIAs may not have the financial capacity or legal experience to vet investment offerings as thoroughly. Be certain to inquire about the legal and due diligence process involved in vetting any specific investment, especially those that aren’t open to everyone in the investing community.
Hiring an adviser with the intention that he/she and their team eventually earn the role of your trusted adviser is an important one. Whether you take the profoundly simple list of questions to ask yourself and the potential suitor or take a much deeper approach, having some knowledge will be helpful and should add value in assisting with your decision.
Jeremy DiTullio is a registered representative of Lincoln Financial Advisors Corp., a broker/dealer (member SIPC) and registered investment advisor. Cleveland Financial Group® is a marketing name for registered representatives of Lincoln Financial Advisors Corp. CRN-4636401-032322
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Question: My financial advisor has made one trade this entire year and has left $7,500 in cash in my Roth IRA since January. I had $600,000 in assets at the start of the year. Some minimal reallocation would have been appropriate, right? And at a minimum I shouldn’t have any cash in my Roth, right? What should I do?
Answer: It sounds like you’re overdue for a sit down with your adviser to review your portfolio strategy and to get first-hand answers to your questions. Indeed, an adviser should make clear to you under what circumstances they’ll make changes to investment accounts and what their firm’s process is for making sure money isn’t sitting in cash and is getting invested, says certified financial planner Daniel Forbes of Forbes Financial Planning. “Ask the adviser to clarify these questions,” says Forbes. (Looking for a financial adviser? This tool can help match you with an adviser who might meet your needs.)
That doesn’t mean your financial adviser should be tinkering with your accounts all the time. Indeed, Vanguard recommends rebalancing every six months or so, while Morningstar’s Christine Benz says to do it every year, though others recommend monthly. And some pros say it’s common for some advisers to only rebalance on an annual basis. “More than anything, I suggest you ask your adviser for a discussion or an explanation,” says certified financial planner Steve Zakelj of Flatirons Wealth Management. That all said, again, your adviser was remiss in not communicating his or her strategy to you.
Have an issue with your financial adviser or looking for a new one? Email picks@marketwatch.com.
Here’s the other question: How much would the rebalancing have benefited you — or not? “Surprisingly, there is so much correlation between stocks and bonds this year that there isn’t nearly as much opportunity to rebalance as one might think. If bonds were up, or even flat, there might be some chance, but as bonds are down as well, the opportunities are limited,” says certified financial planner Charles Green of Springboard Asset Management. (Looking for a financial adviser? This tool can help match you with an adviser who might meet your needs.)
And as certified financial planner Jarrod Sandra of Chisholm Wealth Management notes: “When everything moves in tandem, it doesn’t provide a lot of opportunity. If the portfolio only consists of 3 to 5 funds, then perhaps they haven’t moved outside of the ranges to allow for reallocation or rebalancing,” says Sandra.
So what about that cash in your Roth? Some pros say it isn’t necessarily concerning that there was cash in your Roth IRA, depending on your exact circumstance: “Are you saying you had $600,000 in your Roth IRA? Or are there other accounts? If you have a $600,000 Roth IRA with $7,500 cash, I’m not sure I’d be upset,” says Zakelj. Indeed, many firms or advisers like to, or are required to, maintain a 1-2% cash balance at all times. “Given that stocks and bonds are down this year, having money in cash was most likely the best place to be,” says Zakelj.
Zakelj also adds that he would want to know if the other account is a taxable account where rebalancing may create negative tax consequences. “What assets are you invested in? Some investments don’t allow for shorter-term rebalancing,” says Zakelj.
It also may depend on the age of your Roth, some pros say. There’s a 5-year rule on Roth conversions that requires you to wait before withdrawing any converted balances, contributions or earnings, regardless of your age; so depending on your other cash reserves, it might have been prudent to keep a modest amount of this investment as cash because you would be able to access these funds in case of emergency, pros say.
“If you have other sufficient emergency assets, these funds should be invested. That said, holding it as cash has probably saved you some money this year,” says certified financial planner Danna Jacobs of Legacy Care Wealth. And certified financial planner Charles Sachs points out that, “Since RMDs are not required for Roth’s, I would think that account would be invested to hold the highest expected return asset within your portfolio.”
But this still comes back to the question of communication with your adviser: You didn’t know what he or she was doing and why, and that’s a problem. If you can’t remedy that situation to your liking, find someone new. (Looking for a financial adviser? This tool can help match you with an adviser who might meet your needs.)
Have an issue with your financial adviser or looking for a new one? Email picks@marketwatch.com.
Questions edited for brevity and clarity.
Welcome back to "Ask an Advisor," the advice column where real financial professionals answer questions from real people. The syllabu can be anything in the world of finance, from retirement to taxes to wealth management — or even advice on advising.
This week, we're taking a different approach: Our question comes not from an investor, but from an advisor. A certified financial planner in Virginia tells us he's been advising a married couple to the best of his abilities, but he's beginning to wonder if their problems go beyond his purview. One spouse is handling money in a way that not only violates their financial plan, but raises questions of marital trust and honesty.
As various advisors responded, one term that came up again and again was "financial infidelity." While definitions vary, the term generally refers to a situation where someone lies or keeps secrets about money from their significant other. It's a behavior that can break relationships — according to one latest study, 42% of U.S. adults think financial infidelity is just as bad as "physical cheating."
So is this problem just about money, or something deeper? Here's what our CFP in Virginia wrote:
Dear advisors,
When do you draw the line between a couple's need for an advisor or a marriage counselor?
The example I am encountering is that I have been working with a household where we all agree on the action items of a plan, but then one spouse continues to go off and do their own thing with the household finances. I'm talking about taking out six figures in personal loans in order to place options trades to make up losses from prior options trades that didn't pan out. Our meetings started as creating a unified vision and set of goals for the family and implementing action items. Over time it has turned into navigating uncomfortable conversations when the other spouse and I find out about the personal loans at the same time. We are having more conversations about marital trust than about their finances and I am beginning to think we are at that point. I welcome your thoughts.
—Not a financial therapist
And here's what advisors wrote back:
Whether you’re a new parent or expecting to retire shortly, your financial situation requires attention, knowledge and care. While Googling answers or asking a friend for help can answer basic questions, a financial advisor can provide holistic services that protect your wealth and help you make wise decisions. Financial advisors can help you navigate the process of creating a financial plan and getting your money to grow. Here’s when to hire a financial advisor.
What Are Financial Advisors?
Financial advisors are professionals skilled at managing money and assets. They can assist with financial planning, investing, taxes, estate planning and more. While financial advisors usually have general knowledge of an array of financial subjects, they can also specialize in a specific area. For example, a financial advisor might concentrate on retirement planning for working families or work with high-net-worth individuals.
Although anyone can call themselves a financial advisor without completing mandatory training, these professionals usually have qualifications such as certified financial planners (CFP) or chartered financial analysts (CFA). These certifications require hundreds of hours of coursework and multiple exams to earn.
What Financial Advisors Do
Financial advisors offer a range of services that help you optimize your finances. So, whether you need assistance with managing a large inheritance or diversifying your investment portfolio, a financial advisor can provide expertise and clarity.
In addition, services can be as general or specific as you want. For instance, you can authorize your financial advisor to make investment choices on your behalf at a moment’s notice. On the other hand, you can require your financial advisor to obtain your approval for any change they want to make to your portfolio.
Furthermore, financial advisors frequently help with taxes because of the complexity of tax law and the uniqueness of each person’s tax circumstances. As a result, a financial advisor can help you take advantage of your tax situation to the fullest extent, reduce taxes owed and maximize your refund.
Aside from the services mentioned above, financial advisors can also help with the following:
When Should You Hire a Financial Advisor?
Waiting for a financial emergency before hiring a financial advisor isn’t recommended. Instead, you preempt financial straits by hiring a financial advisor in these specific situations:
Significant Life Changes
Life moves quickly and financial habits from college or early professional life may not translate well to managing wealth as a couple or affording childcare. Marriage, divorce, salary increases, retirement and launching a business have financial ramifications an advisor can help you handle.
Investing in the Stock Market
Purchasing assets always involves risk and a myriad of investments are available for those looking to grow their wealth. However, the sheer amount of information and decisions associated with investing can be overwhelming, even if you’re solely looking at buying stock in Fortune 500 companies. A financial advisor can help you set investment goals and select assets that fit your priorities and risk tolerance.
Creating a Financial Plan
Whether you want to retire at a specific age, send your child to college without taking a dime of student loans or start spending less than you make, a financial plan can streamline your efforts. A financial advisor can craft a detailed, personalized financial plan oriented toward your goals.
Struggling with Debt
Debt can be among the most stressful, challenging financial issues to handle. A financial advisor can help you approach your debt with a can-do attitude and provide the best strategies to rid yourself of debt as soon as possible. For example, a financial advisor might develop a plan in which you repay your smallest or high-interest loans first. Plus, they might find wasteful spending in your budget you can allocate toward debt payments.
Limited Time and Financial Knowledge
Retirement plans, monthly budgets and investments can become increasingly complex as time goes on. Sitting down to pay the bills can seem like a huge effort, let alone tinkering with your portfolio or finding the best way to save for higher education. Each facet of the financial world has sufficient depth for financial advisors to specialize in – so don’t worry if you’re feeling overwhelmed. Professionals with expertise on your financial needs can help you optimally manage your wealth.
Lack of Agreement with Your Partner
It’s possible that you and your partner have different financial habits and priorities. Meticulous savers can become irritated with enthusiastic spenders and an essential purchase to one might seem like a waste to the other. However, a financial advisor can facilitate communication, concretize a set of shared priorities and help opposing family members harmonize.
Benefits of Hiring a Financial Advisor
Hiring a financial advisor can bring you the following advantages:
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Ability to work with an advisor once for a specific need or hire one long-term.
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Advisors specializing in any financial syllabu are available.
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Can provide logic and wisdom during emotional situations.
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Can save time and costly mistakes with investments and taxes.
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You can find a fiduciary financial advisor, meaning the law requires they put your financial interests above their own.
Cautions When Hiring a Financial Advisor
However, it’s wise to remember to be cautious about several things when looking for and hiring a financial advisor:
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If your advisor does not have fiduciary status, they might buy and sell assets in your portfolio to earn commissions instead of providing the best returns
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Your advisor might make suboptimal, expensive choices you don’t have the expertise to recognize, such as investing your money in funds with high management fees that perform worse than an index fund.
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Not every professional relationship is a perfect match and the first financial advisor you find might not have the personality or approach that resonates with you.
How to Select a Suitable Financial Advisor
Remember, your financial advisor works for you, not the other way around. Therefore, it’s crucial to find one that suits your preferences. Use these tips to ensure you find the right one:
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Hire a Fiduciary: A fiduciary is obligated by law to make choices that benefit you rather than themselves. For instance, a compliant fiduciary would choose an investment fund with low commissions and high returns instead of one with high commissions and middling returns.
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Ask About Certifications: Asking about an advisor’s educational background and qualifications is vital. Certifications such as certified financial planner (CFP) or investment advisor representative (IAR) signify that the advisor is a well-trained fiduciary. In addition, an advisor’s credentials can help you tell if they can meet your specific needs. For example, if you want to focus on taxes, you might want to seek a certified public accountant (CPA) or enrolled agent (EA).
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Clarify Payment: A financial advisor should welcome all the questions you have – and one of them should be about how they’re paid. Generally, it’s a good idea to pick an advisor who receives a percentage of assets managed or set fees as payment.
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Find an Advisor Who Takes Fees: An advisor who makes a living on fees from clients is more likely to give reliable, quality advice. Instead of hawking their firm’s expensive products or sitting on your wealth, your advisor makes money solely by providing useful information during meetings.
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Choose a Straightforward Communicator: A financial advisor who is rude or abrupt when communicating won’t help you reach your goals. In addition, if they don’t answer your questions directly and leave you feeling confused, it’s a sign to work with someone else. Your relationship with your advisor is key to building wealth and feeling in control of your finances.
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Distinguish Between Robo-Advisors and Financial Advisors: Having grown in popularity in latest years, robo-advisors are digital tools that use algorithms to invest your money. Instead of meeting with a person, you’ll submit financial and personal information to a robo-advisor, which passively manages your investments. The benefit is that robo-advisors generally charge less expensive fees.
The Bottom Line
A financial advisor can help with all sorts of financial situations. Because life is full of intricate financial issues and situations, it’s wise to consult with one as you make more money or grow your family. Remember, it’s best to choose a financial advisor with fiduciary status and certification that matches your needs.
Tips for Hiring a Financial Advisor
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If you’re struggling to build a financial plan, a financial advisor can provide critical insight and help you come up with a plan to grow your wealth. If you don’t have a financial advisor, finding one doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
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Robo-advisors are cost-effective financial tools that can help you if you aren’t ready for a human advisor but want to grow your investments. To help you understand the implications of choosing one, it’s a good idea to distinguish between robo-advisors and financial advisors.
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Do you need help managing your money? If you’re like many Americans, you might need a hand. According to the National Financial Education Council, a lack of personal finance knowledge costs the average American $1,200 a year.
Finding a good financial advisor can help you avoid these costs and focus on goals. Financial advisors aren’t just for rich people—working with an advisor is a great choice for anyone who wants to get their personal finances on track and set long-term objectives. Follow these steps to find the right financial advisor for your needs.
Related: Find A Financial Advisor In 3 minutes
1. Decide What Part of Your Financial Life You Need Help With
Before you speak to a financial advisor, decide which aspects of your financial life you need help with. When you first sit down with an advisor, you’ll want to be ready to explain your particular money management needs.
Keep in mind that financial advisors provide more than just investment advice. The best financial planner is the one who can help you chart a course for all your financial needs. This can cover investment advice for retirement plans, debt repayment, insurance product suggestions to protect yourself and your family, and estate planning.
Depending on where you are in life, you may not need comprehensive financial planning. People whose financial lives are relatively straightforward, like young people without families of their own or significant debt, might only need help with retirement planning.
People with complex financial needs, however, may need extra assistance. They could be looking to establish college funds or trusts for their children, navigate aggressive debt payment situations or solve tricky tax problems. Not all types of financial advisors offer the same menu of services, so decide which services you need and let this guide your search.
2. Learn About the Different Types of Financial Advisors
There’s no federal law that regulates who can call themselves a financial advisor or provide financial advice. While many people call themselves financial advisors, not all have your best interest at heart. That’s why you have to carefully evaluate potential financial advisors and make sure they are good for you and your money.
Part of learning about the different types of advisors is understanding fiduciary duty. Some, but not all, financial advisors are bound by fiduciary duty, meaning that they are legally required to work in your financial best interest. Other people who call themselves advisors are only held to a suitability standard, meaning they only must suggest products that are suitable for you—even if they’re more expensive and earn them a higher commission. (The SEC is trying to regulate this, though, by limiting the use of “advisor” to those who hold themselves to a fiduciary standard.)
Regardless of which kind of advisor you choose, you should make sure you know how they earn money. This helps you determine if their recommendations are actually better for you—or for their wallets.
Here’s how to think about the different types of financial advisors:
Fee-Only Financial Advisors
Fee-only financial advisors earn money from the fees you pay for their services. These fees may be charged as a percentage of the assets they manage for you, as an hourly rate, or as a flat rate.
Almost all fee-only advisors are fiduciaries. Generally speaking, they have chosen to work under a fee-only model to reduce any potential conflicts of interest. Because their income is from clients, it’s in their best interest to make sure you end up with financial plans and financial products that work best for you.
Financial Advisors Who Earn Commissions
Some financial advisors make money by earning sales commissions from third parties. Among financial advisors that earn sales commissions, some may advertise themselves as “free” financial advisors that do not charge you fees for advice. Others may charge fees, meaning they derive only part of their income from third-party commissions.
Either way, financial advisors who earn third-party sales commissions derive some or all of their income from selling you certain financial products. If you choose to work with a financial advisor who earns sales commissions, you need to take extra care.
Commission-only advisors are not fiduciaries. They work as salespeople for investment and insurance brokerages, and are only held to suitability standards. In contrast, some fee-based financial advisors are fiduciaries, though it’s important to determine if they’re always acting as fiduciaries or if they “pause” fiduciary duty when discussing certain types of products, like insurance.
Related: Find A Financial Advisor In 3 minutes
Keep in mind, commissions aren’t bad in and of themselves. They’re not even necessarily red flags.
Some financial products are predominantly sold under a commission model. Take life insurance: A fee-based planner who receives compensation for helping you purchase a life insurance policy may still have your best interests at heart when advising on other financial products.
“To be clear, there’s nothing wrong with paying the commission for life insurance,” says Karen Van Voorhis, a fee-based certified financial planner (CFP) and Director of Financial Planning at Daniel J. Galli & Associates in Norwell, Mass. “That’s how the structure of that industry works.”
Purchasing financial products via financial advisors that earn commissions may be a matter of convenience, especially if someone will receive a commission regardless of where you buy the product. What’s important is understanding the difference. And if you work with a fee-based financial advisor, understand when they are acting as a fiduciary, especially when they help you purchase financial products.
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Registered Investment Advisors
Registered Investment Advisors (RIAs) are companies that provide fiduciary financial advice. RIAs employ Investment Advisor Representatives (IARs), who are bound by fiduciary duty. An RIA may have one or hundreds of IARs working for it.
IARs may call themselves financial advisors, and may be fee-only or fee-based. Some may have additional credentials, including the certified financial planner (CFP) designation.
“The certified financial planner designation is really the gold standard in the financial planning industry,” says Van Voorhis. A CFP designation indicates a financial advisor has passed rigorous industry exams covering real estate, investment, and insurance planning as well as has years of experience in their fields.
Because of their wide range of expertise, CFPs are well suited to help you plan out every aspect of your financial life. They may be particularly helpful for those with complex financial situations, including managing large outstanding debts and will, trust, and estate planning.
Robo-Advisors
Robo-advisors offer low-cost, automated investment advice. Most specialize in helping people invest for mid- and long-term goals, like retirement, through preconstructed diversified portfolios of exchange traded funds (ETFs).
“For younger people who are really tech savvy, a robo-advisor just to manage retirement funds could be a perfect solution,” says Brian Behl, a CFP at Behl Wealth Management in Waukesha, Wisc. “I don’t think they’re going to get as in-depth advice on insurance and retirement and taxes.”
People with complex financial needs should probably choose a conventional financial advisor, although many robo-advisors provide financial planning services a la carte or for higher net worth clients.
“While the robos have really disrupted the industry…I do think there’s still a place for human advisors right now,” says Corbin Blackwell, a CFP at robo-advisor Betterment.
Betterment, for example, allows clients to purchase individual financial advising sessions, and Personal Capital, Wealthsimple, and Betterment provide regular financial planning for clients with higher account balances for a management fee.
3. Choose Which Financial Advisor Services You Want
Services offered by financial advisors vary from advisor to advisor, but advisors may provide any of the following:
- Investment advice. Financial advisors research different investment options and make sure your investment portfolio stays within your desired level of risk.
- Debt management. If you have outstanding debts, like credit card debt, student loans, car loans, or mortgages, financial advisors will work with you to chart a plan for repayment.
- Budgeting help. Financial advisors are experts in analyzing where your money goes once it leaves your paycheck. Advisors can help you craft budgets so you’re prepared to reach your financial goals.
- Insurance coverage. Financial advisors may examine your current policies to identify any gaps in coverage or recommend new types of policies, like disability insurance or long-term care coverage, depending on your financial situation.
- Tax planning. Tax planning involves strategizing ways to decrease the amount of taxes you may pay, like by large charitable donations or tax-loss harvesting. Keep in mind that not all financial planners are tax experts and that tax planning is different from tax preparing. You will probably still need a CPA or tax software to file your taxes.
- Retirement planning. Financial advisors can help you build funds for the ultimate long-term goal, retirement. And then, once you’re retired or nearing retirement, they can help ensure you’re able to keep your money safe.
- Estate planning. For those who wish to leave a legacy, financial advisors can help you transfer your wealth to the next generation, whether that’s family, friends, or charitable causes.
- College planning. If you hope to fund loved ones’ educations, financial advisors can craft a plan to help you save for their higher education.
In addition to investment management and financial planning, financial advisors also offer emotional support and perspective during volatile economic times. During the beginning of the coronavirus pandemic in March of 2020, for instance, client demand for financial advisor contact increased by almost 50% .
Related: Find A Financial Advisor In 3 minutes
“I think that during these times, we can be a source of reason,” says Blackwell. “We can weather the storm. We’ve built this portfolio for a reason.”
When choosing a financial advisor, make sure they offer the services you’re looking for in your financial and non-financial lives.
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4. Decide How Much You Can Pay Your Financial Advisor
It used to be that financial advisors charged fees that were a percentage of the assets they managed for you. Today advisors offer a wide variety of fee structures, which helps make their services accessible to clients of all levels of financial means.
Commission-only advisors may seem free on paper, but they may receive a portion of what you invest or purchase as a payment. These “free” financial advisors typically are available through investment or insurance brokerages. Remember, these advisors may only be held to suitability standards, so they may end up costing what you would pay for a similar financial product suggested by a fiduciary financial advisor—or more.
Fee-only and fee-based financial advisors may charge fees based on the total amount of assets they manage for you (assets under management) or they may charge by the hour, by the plan, through a retainer agreement, or via a subscription model. Common average financial advisor fee rates are listed in the table below:
5. Research Financial Advisors
Because financial advisors come in many forms with many different specialties and offerings, you need to thoroughly research potential advisors. You want to make sure the person guiding your financial decisions is trustworthy and capable.
You can find good financial advisors a couple of ways. Ask friends, family and peers for recommendations. Alternatively, look for financial advisors online. Many professional financial planning associations provide free databases of financial advisors:
When evaluating advisors, be sure to consider their credentials as well as research their backgrounds and fee structures. You can view disciplinary actions and complaints filed against financial advisors using FINRA’s BrokerCheck. And remember, just because someone is a part of a financial planning association, that doesn’t mean they’re a fiduciary financial advisor.
Questions to Ask a Financial Advisor
In your first meeting with a financial advisor, make sure you learn the answers to these questions and that you’re comfortable with their responses.
- Are you a fiduciary?
- Are you always acting as a fiduciary? (Some fee-based advisors may not always act as fiduciaries when selling commission-based products.)
- How do you make your money?
- What is your approach to financial planning?
- What financial planning services do you offer?
- What kind of clients do you normally work with?
- Do you have any account minimums?
- Do you have any conflicts of interest in managing my money?
- What information do I need to bring for you to look at when developing my financial plan?
- How many times and how often will we meet?
- Will you collaborate with my other advisors, like CPAs or attorneys?
Related: Find A Financial Advisor In 3 minutes
The Bottom Line
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“So much of what I do in a life-centered approach to financial planning and wealth management is walk out life with people,” says Wes Brown, a CFP at CogentBlue Wealth Advisors in Knoxville, Tenn. “I think there’s value in an ongoing relationship where somebody can help you walk through the various waypoints you’re going to come to.
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“I was dumbfounded when I saw that we’d gone backwards,” HILDA survey deputy director Roger Wilkins said.
Respondents aged 45 to 54 and 55 to 64 scored highest with 4.1. But that was still lower than the 4.2 both age groups scored in 2016.
Survey participants were asked these five questions:
- Suppose you put $100 into a no-fee savings account with a guaranteed interest rate of 2% per year. You don’t make any further payments into this account and you don’t withdraw any money. How much would be in the account at the end of the first year, once the interest payment is made?
- Imagine now that the interest rate on your savings account was 1% per year and inflation was 2% per year. After one year, would you be able to buy more than today, exactly the same as today, or less than today with the money in this account?
- Do you think that the following statement is true or false? ‘Buying shares in a single company usually provides a safer return than buying shares in a number of different companies’.
- Again, please tell me whether you think the following statement is true or false: ‘An investment with a high return is likely to be high risk’.
- Suppose that by the year 2024 your income has doubled, but the prices of all of the things you buy have also doubled. In 2024, will you be able to buy more than today, exactly the same as today, or less than today with your income?
Answers: 1. $102 2. Less 3. False 4. True 5. Exactly the same
Mr Wilkins noted that the decline coincides with falling rates of high school students studying economics in Australia. The Reserve Bank of Australia (RBA) found a “dramatic” 70 per cent decline in Year 12 Economics enrolments in the three years to 2020.
A 2017 study from the RBA found fewer than 10 per cent of NSW Year 12 students studied economics in 2016, down from 40 per cent in 1991, when economics was the third most popular subject after maths and English.
There had also been a surge in “magic thinking” around money which coincided with relatively favourable economic conditions – at least until 2020, Mr Wilkins said.
“Young people haven’t had the exposure in latest years to these pitfalls that we all-too-easily take for granted, as people who work in this field.”
He gave the example of the concept of diversification in investing. Although it may be intuitive to those in the industry that spreading investments across several stocks and assets lowers risk, to many Australians, the concept of investing across many things may seem more risky as it is more areas to monitor.
Economics and law student at the University of Sydney, Grace Lagan, said regressing levels of financial literacy concerned her “a lot”.
The 20-year-old student, who grew up chatting about economics and current affairs with her two journalist parents, panic that her generation had been inundated with products such as buy now, pay later that could make it harder to form good financial habits.
She also believed young people faced significant barriers in getting into the housing market, but education on finances was lacking in schools.
Ms Lagan was drawn to economics after her mother gave her an explainer book about economic principles titled Whatever Happened to Penny Candy? when she was eight years old.
But she knew her experience was not typical.
“In terms of information [around money], a huge amount of it came from my family,” she said.
However, she also learnt a lot from an economics teacher who helped her and her class understand the challenges of credit card debt, and how to choose a superannuation fund when they got their first job.
Although she thinks schools might struggle to adapt financial curricula to keep up with financial products and trends, Ms Lagan said embedding at least some learning in schools was key to improving young people’s financial literacy.
“I don’t think that you can have a compulsory super scheme and then not give people any information on how to make sure you’re directing all of your super into that account,” she said.
“It does concern me that a group of people have less financial literacy than the generation above us would have had. And I think that even though you are young, there are still decisions that have lifelong ramifications.
“The amount of my friends who move from casual job to casual job and never consolidate their super really concerns me because they have eight different super accounts.”
