There are, quite literally, hundreds of thousands of people who say they provide financial advice. Many call themselves financial planners. Financial advisor and financial planner are terms used very loosely by advisors and their firms.
Sadly, many of these companies are little more than salespeople peddling proprietary products like insurance policies, high-cost mutual funds, and annuities. There are competent financial advisors at all companies. The problem is the sales culture that exists in many of these firms.
Do I Need a Financial Advisor
To answer that question, you first need to decide what help you need in managing your finances. What kind of financial advice are you seeking?
- Is it help with basic budgeting?
- Saving? Investing? Retirement planning?
- Income planning? Insurance review?
- Creating an estate plan?
- Paying off student loan debt? Refinancing or debt consolidation?
Competent financial advisors come in many shapes and sizes. Deciding what you want them to do for you is the key to finding the right advisor. The answers to the above questions are where you should start. If you just want investment help, there are inexpensive options to consider (more on that shortly). If you want a comprehensive plan that covers all of the areas, that’s another type of advisor.
The bottom line—Before searching for or interviewing any financial advisor, know what it is you want them to do for you.
Finding the Right Financial Advisor
Hiring financial planners is a big decision. It’s one you need to get right. Not doing so can cost you – a lot.
Here are four traits we believe your financial advisor should have:
- Independent – Experience tells us that it is difficult to limit the conflicts of interest in firms that have a sales culture. A firm committed to putting their clients’ interests first; not just in what they say, but in how they operate
- Experience – Knowledge, and experience are essential when it comes to choosing a financial advisor. Firm leadership should have industry experience. The best firms have a mentorship or apprentice type of program to train their younger advisors.
- Quality – There are industry designations that indicate an advisor’s commitment to a high standard of advice. The CFP® designation (certified financial planner) is the most accepted mark for those seeking comprehensive financial advice. That’s not to say an advisor has to be a CFP® to give good advice. However, it is a standard that shows the seriousness of the firm and its advisors.
- Fee Structure – Financial advisor compensation is a vast area of debate in the media and the industry. There are several ways to pay for financial advice. Commissions, a percentage of assets under management, fees, and commissions, and fee-only are some of the ways advisors get paid. We believe the fairest and most easy to understand structure is the fee-only structure. That can be a flat fee or a monthly, quarterly, semi-annual, or annual fee.
Services a Financial Advisor Should Offer
The best firms and their advisors offer a menu of services, from a comprehensive financial plan to needs-based services. For example, maybe you just want a second opinion on your investment portfolio. Maybe you want them to analyze whether it’s better to take a lump sum rather than income for your pension plan.
Or, at the other end of the spectrum, are those who want a financial advisor who can help you set goals, help with budgeting, plan your retirement, and manage your investments. In other words, offer you a comprehensive plan.
Here is a list of the planning services clients should be offered from their financial advisor:
- Free initial consultation
- Goal setting
- Cash flow and net worth analysis
- Retirement expense analysis
- Retirement income analysis
- Social Security analysis & recommendation
- Tax planning
- Life expectancy modeling
- Scenario modeling
- Retirement plan analysis (401(k), 403(b), 457, IRA, Roth, etc.)
- Investment account analysis and recommendations (asset placement)
- Detailed risk profile
- Portfolio Stress Testing
- Asset allocation recommendations
- Investment management
- Life insurance analysis and recommendations
- Health insurance analysis and recommendations
- Property and liability insurance analysis and recommendations
- Estate planning analysis & recommendations
- Implementation plan
- Unlimited meetings (in person, phone, virtual, etc.)
Clients can choose from the services they need and want. Good financial planning firms have a fee structure that allows them to do that at a reasonable fee.
Financial Advisor Compensation
There are several ways a financial advisor gets paid.
- Commission only – advisors receive commissions on products they sell. That can be mutual funds, individual stocks, and bonds, annuities, and other products. Having your advisor’s compensation based on what they sell you would not be the first choice.
- Fees and commissions – As the name suggests, your financial advisor gets paid both on commissions of products sold and fees based on how much money they manage for you. That fee might be a percentage of the assets they manage, an hourly, or a flat fee.
- Fee-only – In the fee-only model, you pay your advisor a fee for the services they provide. The longest-standing fee-only model charges based on the amount of money invested with them. That eliminates many smaller investors who don’t have large enough portfolios to warrant the services they need. Firms that charge an hourly fee, flat fee, or a monthly subscription fee can service a much larger range of clients than the percentage of assets model.
In looking at the three models, most people feel the fee-only model not tied to how much money someone has to invest is the fairest model.
What Type of Financial Advisor?
Deciding on the type of financial advisor you want is where things can get tricky. There are several kinds of advisors. Here are some of them.
Everything seems to be going digital these days. Your financial advisor will likely offer some type of digital service to manage your money. Digital investment management entered the arena a few short years ago.
These digital advisors fall under the category of robo advisors. For the most part, robo advisors are firms that do investment management digitally. They use an algorithm to build and manage your investments. After completing a short questionnaire to determine risk tolerance, they come up with a recommended investment portfolio.
Robo advisors use exchange-traded funds (ETFs) to build your portfolio. ETFs are offered at a very low cost. Fees for robo advisors are based on a percentage of the assets they manage for you. That fee varies from a low of 0.25% to as high as 1% (though that is rare).
Pros and Cons of Robo Advisors
Robo advisors are among the lowest cost money management available. If you are a DIY investor, you can certainly do it less expensively. However, you would build your own portfolio, do your own research, rebalancing, and tax management. Most of the better robo advisors do that as part of their services. It’s one of the lowest cost ways to have your investments managed for you.
The downside of robo advisors is the lack of additional services. Competition forced them to expand their services outside of investment management. Many offer access to CFPs for an additional fee. However, the services of these professionals are limited in scope.
If investment management is all you need, robo advisors may be a good option for you.
The Traditional Financial Advisor
When most people think about a financial advisor, the big-name firms come to mind – Merrill Lynch, Smith Barney, JP Morgan Chase, Goldman Sachs are among the most recognized.
Advisors at these firms go by a lot of different names – stockbroker, financial advisor, registered investment advisor, financial planning, wealth managers to name a few. To add to the confusion, these descriptions often come with a variety of designations – certified financial advisor (already discussed) chartered life underwriter (CLU), chartered financial consultant (ChFC), accredited investment fiduciary (AIF), certified investment management analyst (CIMA), and many more.
In most cases, advisors in these firms offer a variety of services. They may offer financial planning services as part of their offerings. If you work with a financial advisor at one of these (or any) firms, be sure you understand how they get paid. Conflicts of interest often come with the compensation model.
For example, someone paid on commissions has a bias to sell products in which they get paid a higher amount. That’s not to suggest that they will do that, but it’s best to find someone with as few conflicts as possible.
If the firm is also a registered investment advisor, you should ask if, when working with you, they are acting as a fiduciary. Fiduciaries must always act in their clients’ best interests. Though that may seem obvious, it isn’t. To protect yourself, always ask.
A Virtual Financial Advisor
Like robo advisors, many firms now offer virtual financial planning services. Rather than having in-person meetings with your financial advisor, you would meet in an online conference (Zoom, Skype, etc.). Virtual financial advice is becoming more and more popular.
The best virtual advisors offer all fo the services that a traditional financial advisor might offer. The only difference is that they do it virtually. Investment management may include the services of robo advisors. It may also be managed by a team of advisors at the firm.
Typically, the virtual advisor offers their planning services on a flat fee, hourly, or subscription model.
Virtual Financial Advisor Firms to Consider.
The three firms below have all the characteristics listed earlier – independence, quality, services, and fee structure.
Facet Wealth is a great choice for a financial planning firm.
Based in Baltimore, MD, Facet Wealth operates in all fifty states. Clients of Facet Wealth get a dedicated CFP® as their financial advisor. Other firms often have a senior advisor start the plan with a junior advisor, or a client services person takes over the account. At Facet, you have a dedicated relationship with the same planner from the start. That’s a big plus right out of the gate.
They also realize that not everyone is a fit for their firm. If a client doesn’t think Facet can do an excellent job for them, they won’t pay a fee. It’s an open, fair, and transparent process we believe sets them apart from their competitors. The first step in the process is to talk to one of their Certified Financial Planners.
XY Planning Network
The XY Planning Network is a national organization with firms across the country as members. They have a natural selection process that starts with what you’re looking for an advisor to do (a recurring theme). You enter those criteria into a search box and recommended firms come up. You can likely find a firm in your area. If not, many can work with you remotely. Firms accepted must be fee-only. Their ideal clients are Gen X and Gen Y clients. They have no minimum requirements. They offer a flat fee, retainer, and subscription-based fee structures.
Garret Planning Network
The Garret Planning Network has been around since 2000. Like XY Planning, they require advisors to be fee-only, financial planning focused firms. Searching for an advisor is also a smooth process. You can search by specialty from things like advice by phone or web, military, professionals, portfolio management, real estate investing, etc. Once chosen, the second choice breaks it down even further. For example, under the professional category, the options are engineers, legal, and medical professions.
Advisors agree to charge clients based on an hourly basis. They must also offer investment management services. It’s not clear from the website whether that includes advisors who charge an AUM fee.
Choosing a financial advisor is one of the most important decisions you can make. Stories abound about people who have been misled by people calling themselves advisors. We hope this post guides you through a process to help you determine the best advisor for you.
Remember, it starts with what you want an advisor to do for you. Without that, you’re more likely to make the wrong decision. With the goal in focus, following the process laid out here will help you make the right choice.
Our top three recommendations are Facet Wealth, XY Planning, and the Garret Network.
Fred started the blog Money with a Purpose in October 2017. The blog focused on three primary areas: Personal Finance, Overcoming Adversity, and Lifestyle. During his time at Money with a Purpose, he was quoted in Forbes, USA Today and appeared in Money Magazine, MarketWatch, The Good Men Project, Thrive Global and many other publications.
In April 2019, Fred, along with two other partners, acquired The Money Mix website. To focus his time and energy where he could be the most productive, Fred recently merged Money with a Purpose with The Money Mix. You can now find all of his great content right here on The Money Mix, along with content from some of the brightest minds in personal finance.
I have been following the cryptocurrency industry for over 5 years now and have written many articles on the subject. I have also given talks on the topic at various conferences. My aim is to make complex concepts accessible to a wider audience and help people understand this new and exciting world.