Financial advisors can help you manage your money, which may include budgeting, creating a plan to save or pay down debt or offering advice on how to invest. When you need help mapping out your financial future, working with a financial advisor is one option you can pursue if you’re looking for something beyond a DIY approach.
We’ll delve into what financial advisors do and how they can help you achieve your financial goals to help you decide if working with one is right for you.
Financial advisor is a general term that can be used to describe professionals who offer financial advice and guidance to individuals, businesses and/or other entities. The services and advice a financial advisor provides can vary based on the type of advisor.
Working with a financial advisor in person may be the most comprehensive option, in terms of the range of services they may provide. For example, your financial advisor may assist with college and retirement planning, insurance planning, legacy planning and/or investment planning.
Financial advisors that offer these types of services can take a narrow or broad approach. An investment advisor, for instance, provides advice about investments for clients who need help building a portfolio. Financial planners, on the other hand, may help with a broader range of services, including investments, insurance, retirement planning, taxes and estate planning.
Working with a financial advisor in-person can offer advantages. For instance, a human advisor can help guide investment decision-making during periods of stock market volatility, or offer recommendations for insurance products that could be helpful for rounding out your financial plan. (Keep in mind that an in-person financial advisor needn’t work with you literally in person; you can have a relationship that is mostly based on video chats and phone calls as well.)
Robo-advisors offer investment advice with little or sometimes no interaction with a human financial advisor. Instead, your investment strategy is guided by the robo-advisor platform’s unique algorithm. Generally, these algorithms take into account specific factors, such as your age, risk tolerance and time horizon for investing to create a portfolio management strategy.
Robo-advisors charge a range of fees that may be less than working with a human advisor, but there are some potential downsides. For example, a robo-advisor’s algorithm wouldn’t be able to offer personalized advice about how to adjust your portfolio in an unstable market the way a human advisor could, and it cannot offer detailed, holistic financial planning.
Online financial planning services can offer a more personalized approach to advice than a simple robo-advisor, acting as a hybrid of automated and comprehensive planning services. Human interaction is typically limited to phone calls, emails or live chats with a professional advisor.
Online financial advisors can take a holistic approach to planning. Vanguard Personal Advisor Services, for instance, can help with retirement planning, estate planning, creating a goal-centered strategy, managing your finances and more. Though you won’t meet with an advisor in-person, online financial planning services can offer a similar level of financial advice. There is an account minimum of $50,000 for the Vanguard service.
Robo-advisor Betterment also offers a hybrid service with access to certified financial planners (CFP), but you have to invest $100,000 to get the Premium plan that allows access to human advisors.
In addition to what do financial advisors do, another important question to ask is how much they charge for their services. The costs to hire a financial advisor can vary based on the type of advisor and the services they offer.
The amount you’ll pay for an in-person financial advisor depends largely on whether they are fee-based or commission-based.
Fee-based: A fee-based advisor may take fees from third parties along with charging you a fee, in contrast to fee-only advisors, who are solely paid through fees for services. Both fee-based and fee-only advisors can charge by the hour, as a percentage of assets under management or as a flat rate.
A report by Advisory HQ found that average financial planner fees can range from $6,000 to $11,000 per year for a retainer, depending on the advisor, the location and how complex your financial needs may be. Your rate may also decrease the larger your portfolio is.
Commission: Commission-based advisors charge nothing to their clients in terms of fees for services rendered. Instead, they earn commissions from financial institutions for purchasing specific investment or insurance products on behalf of their clients.
One risk of working with a commission-based advisor (or a fee-based advisor who uses a combination of fees and a commission structure) is that they may recommend products you don’t need in order to earn compensation. They may also encourage frequent trades to earn commissions, a practice known as churning.
Robo-advisors usually charge their fees as a percentage of assets under management. These fees are typically charged on an annual basis and the amount you pay can vary from advisor to advisor and by account balance. Some robo-advisors may also charge commission for making investment trades.
Wealthfront and Betterment, for instance, both charge a basic digital portfolio management fee of 0.25%. SoFi, on the other hand, charges no annual management fee and instead charges fees based on the expense ratios of running the ETFs in your portfolio.
Online financial planning services can base fees on a percentage of assets under management, though they may apply an hourly or flat rate fee instead. Similar to robo-advisors, annual management fees may decrease as you accumulate more assets under management.
Vanguard Personal Advisor Services, for example, charges 0.30% for accounts up to $5 million but just 0.05% for accounts of $25 million or more (which, of course, will not apply to the vast majority of investors).
Wondering whether you need a financial advisor? Here are five signs that it’s time to get professional help with managing your money.
When looking for a financial advisor, you may start your search online but you can also ask friends and family for recommendations. In comparing advisors, be sure to ask questions about the types of services they offer, the typical kinds of clients they work with and how they’re paid. Specifically, be sure to ask whether they’re a fee-only fiduciary or a commission-based advisor, as that can influence the type of advice they offer and how much you’ll pay for their services.
When comparing advisors, you can check for each one’s Form ADV. This form will indicate how they collect their fees, any potential conflicts of interest, the types of services they offer, their assets under management and more. You may also be able to find financial advisors who specialize in serving certain groups, such as women or business owners.
Like some in younger generations, you may decide that a robo-advisor is best for you at this time, or you may want to consider a hybrid advisor that offers both automated and human-touch services. Consider every factor before you make your decision, and understand that you can always switch up your strategy when your life circumstances change.