Hiring a financial adviser might even seem counterintuitive to someone struggling to make ends meet as it is. How can you possibly afford to hire an expert when you already feel financially strained? And how can you be sure that the cost of hiring a professional will be worth it in the long run?
Finding the right adviser for your needs can be the most difficult part of all. A May 2016 survey by financial advisory firm McAdam found that one-third of Americans don’t even know what a financial adviser does.
The good news is that financial advisers aren’t necessarily only available to the uber-wealthy. Many firms today allow their clients to choose services a la carte and pay flat fees or an hourly rate, making professional financial advice more attainable than ever.
Read on to find out what a financial adviser is and the pros and cons of hiring one for your financial needs.
What is a financial adviser and why might you need one?
A financial adviser is a blanket description for a professional who offers advice on how a person should manage his or her money. (Unlike a certified financial planner, a financial adviser does not need to be licensed to provide financial advice.) An adviser can help you establish financial goals and educate you on how to meet them. Financial advisers guide clients through a number of topics, including helping people make career choices based on how it will impact their finances, retirement planning, tax planning, and insurance needs. First and foremost, a solid financial adviser will also help you manage debt and create a budget that will help you meet your future goals.
A financial adviser can be helpful for anyone who is facing a major financial crossroad, such as getting married, having a child, starting a job, sending their child to college, or retiring.
“You don’t even need to have money set aside to invest,” says Gerri Detweiler, co-author of Invest in Your-SELF: Six Secrets to a Rich Life. “An adviser can help you find a way to start putting money aside, or provide that motivation [to save] or encourage you to start a side gig to save for future goals.”
Types of Financial Advisers
You’ve probably seen the titles of financial advisers, financial planners, stockbrokers, and insurance agents all used interchangeably. It’s important to know the differences between each to ensure you’re working with the right professional for your needs.
Planners: A financial planner is a kind of financial adviser who helps people set and meet their financial goals. Certified financial planners (CFPs) are licensed and regulated individuals who are required to stay up-to-date on financial planning through regular classes. They have a fiduciary responsibility to their clients, meaning they have to work in the client’s best interests. Along with investments, CFPs handle retirement, tax, insurance, and estate planning, and help clients to maintain and enhance personal cash flow.
Important note: New fiduciary rules issued by the Department of Labor will go into effect in April 2017 and will require that any adviser who provides retirement investment advice to 401(k) and IRA account holders abide by a fiduciary standard. That means they will have to put their clients’ best interests ahead of their own profits.
Stockbrokers: Stockbrokers only give advice on — you guessed it — stock investments. They can sell financial products to clients, and they do not have a fiduciary duty to them. Instead, stockbrokers operate under a “suitability standard,” which means they are only required to know enough about a client’s financial situation to recommend or sell investments that are “suitable” for that person. Stockbrokers also earn a commission for each product that they sell.
Insurance agents: Some insurance agents are also licensed to sell securities or investments, and they might call themselves financial planners. However, their investment options on offer may be limited, and they are not fiduciaries. Insurance agents either get paid by commission or through their insurance firm. Insurance agents sell different types of insurance to clients, which tends to make up part of a financial plan. They can represent one or multiple insurance agents.
How Financial Advisers Are Paid
Another thing to consider before entering into an agreement is the adviser’s pay structure.
Below are some of the different ways a financial adviser can be paid:
Fee-only: A fee-only adviser charges an hourly or flat rate for services. Fees vary by location, the experience of the adviser, and the complexity of the client’s needs. For example, Julie Ford, a fee-only financial planner based in New York City, offers several packages to her clients. Her lowest-cost package costs $450 and includes basic offerings like two 60-minute meetings to discuss financial goals, ask questions, and start a customized action plan.
For clients looking for more in-depth financial planning expertise, Ford offers an Ongoing Financial Planning package, which costs $500-$1,500 along with a monthly subscription fee of $80-$350.
Fee-only advisers have a fiduciary responsibility to their clients to act in their best interest. You should always ask an adviser how they are paid and whether they are a fiduciary upfront, Detweiler says. To find a fee-only financial planner in your area, check out NAPFA or a planning network like XY Planning Network or Garrett Planning Network.
Percentage-based: A percentage-based adviser charges a percentage of the amount of money being managed. You’ll most likely run into this fee if you are hiring a financial adviser who will help you manage your investment portfolio. This fee is charged in addition to any fees associated with the client’s underlying investments. Most investment adviser fees range from 1% to 2%.
Commission-based: A commission-based adviser earns money by buying and selling securities like stocks, bonds, and exchange traded funds (ETFs) or by selling clients insurance and annuities. Commission-based advisers might steer clients toward investments that would also benefit themselves because of how they are compensated.
Flat rate: A flat-rate adviser is a good option if you are looking for an adviser who can help you to complete a single task related to your finances, like setting up a retirement account. The adviser will help you establish a plan for that one aspect of your finances for a set amount of money that is not tied to the value of investment or insurance products that he or she may sell. Always ask an adviser for the flat rate upfront and confirm whether or not questions or follow-up meetings are included. A flat-rate adviser charges a single fee regardless of the time and amount of assets one owns.
Hybrid fee structures: Some advisers may offer a variety of services and have different payment structures. They often go by the term “fee-based” and they do sell financial products. Fee-based advisers make their money through compensation from fees paid by clients and fees or discounts from the products that they sell. They are not required to provide their clients with details on how they are paid.
Not Quite Ready to Call in a Pro?
You may not need a professional adviser to help you with basic financial tasks like creating a budget or paying down debt. There’s a bevy of free resources out there that can help track your daily spending, like Mint.com or Learnvest.
There are plenty of free resources online as well aimed at helping low-income people tackle debt and improve their finances.
Several renowned universities offer free money management courses. Coursera is another great source for free online courses in personal finance. Currently, the University of Florida is offering a free course on personal finance and family financial planning that begins Sept. 26. You might find free or low-cost financial planning seminars and workshops in your community.
Also, check your employer’s 401(k) plan perks. Some employees might be able to find financial counseling as a perk of a 401(k) plan.
Below are some pros and cons of hiring a financial adviser.
- They will hold you accountable. Once you come up with your financial plan, your adviser will make sure you stay on track.
- They will steer you away from making rash decisions with your finances and help you properly diversify your investments.
- They are there to protect you when the worst happens. They’ll make sure you’re saving enough for an emergency fund and that you have set up important documents like a will, a power of attorney, and other estate planning needs.
- There’s a potential for a conflict of interest on your financial adviser’s part, depending on their fiduciary status and fee structure. A simple way to avoid this is to ask if your adviser is held to a fiduciary standard and know upfront how they are paid.
- Hiring a financial adviser is expensive and usually costs upward of $1,000, according to AdvisoryHQ, a news media organization for the investment and financial adviser industries. Consider the cost versus the benefit of hiring a professional to manage your money for you.