Today’s decision for your financial adviser can affect your ability to retire comfortably or struggle later in life—so no pressure, huh? Because of this reality, it is crucial that you devote more time and thought to this choice than most people do.
Before Hiring, Address this First
If you’re currently in debt, hiring a financial adviser should not be your initial priority.
In the long run, by eliminating your debt now you will be able to take full advantage of the service offered by a financial adviser. Once you have freed up cash flow, it’s easier to take advantage of all types of sound
recommendations that a financial adviser has for you—investing, budgeting, tax strategies, etc… thus it would be beneficial to use the same analogy as upgrading an automobile engine before racing it.
What is a Financial Adviser? (Simply Defined)
A financial adviser assists clients in making better financial decisions in many areas of life, including investments, taxes, insurances and planning for future events.
Some advisers focus on providing holistic strategies (often referred to as financial planners) while others work specifically with wealthy clients (wealth managers) and still others provide comprehensive services for clients.
One of the biggest mistakes clients make when using financial advisors is that they don’t ask enough questions about how the advisor is compensated.
There is a big difference between commission-based advisors and fee-only advisors. Commission-based advisors make their money by selling you products, and in many cases, the products they sell you will benefit them more than the benefit you will receive from the product.
Fee-only advisors will typically offer you advice from a neutral, “client-first” perspective. Although this is generally the case, you should always confirm with the advisor how they are compensated. If they do not answer your question honestly, that should raise a major red flag.
The fiduciary standard is one of the most important factors when selecting a financial advisor. Fiduciary advisors are obligated by law to act in the best interest of their clients, while suitability-standard advisors are not legally bound to have your best interests in mind. In other words, they can sell you products that are merely “acceptable” — whether you receive better results.
As such, it is prudent to confirm with every financial advisor which compensation model they use.
If you are trying to decide between two advisors with different compensation models, it may be wise to first determine which is the best fit for you based upon their experience. In the fiduciary advisory world, the dropout rate is staggering. Many advisors will quit after just a few years in business because building a client base is difficult.
Finally, with regards to experience — it is not uncommon for financial advisors to have little to no practical experience that is relevant to their work as an advisor. A financial advisor who has held a high position with a well-known financial institution for several years does not necessarily have the requisite practical experience to be a good financial advisor.
That’s why asking, “How long have you worked as an advisor?” is wise.
What is a good benchmark? Three to five years is a good indication of a financial advisor who will be around long term. You do not want your advisor to disappear halfway through your journey.
“Can’t I Do It Myself?” — Ultimately, Yes
Of course, you can manage your money on your own.
There are apps, books, and YouTube to assist in helping you learn the financial process.
The real challenge of managing your finances is not the lack of knowledge, but rather the emotions that come with them.
When the stock market drops, people tend to panic. When the stock market rises, people tend to become greed driven. Many people delay making decisions or make decisions based on the emotional reaction from the previous stock market experience.
A good financial advisor can act as a calming, rational voice when your emotions try to destroy your plan. In doing so, the advisor can potentially save you thousands of dollars or more.
So you’re Paying for More than Advice – You’re Paying for time
Yes, you could learn tax law, retirement rules, investment strategies, and financial planning on your own. However, do you want to invest your free time in doing so?
Hiring a financial advisor is about outsourcing the complexity of your lives to someone who operates within that area of expertise every day; and enables you to continue building your career, raising your family, and pursuing your hobbies!
How to Locate An Honest Financial Advisor
Certifications through an organization, such as a professional certification for financial planner (i.e., certified financial planner [CFP]) or other credentialed financial planner organizations are a good starting point for finding a qualified advisor.
You are looking for an advisor who:
- Looks at you as a whole and not just your investment account
- Is more than simply a salesperson for financial products
- Is honest, has experience, and is willing to explain things in a way that makes it easy for you to understand.
Working with a financial advisor is no guarantee to get what you want, but the right one’s overall influence on your life can be multiple times what you will achieve on your own.
You need a financial advisor if you can achieve your financial goals yourself. If you are debt-free, you are motivated to attain a clear financial future, and are engaged in a successful financial plan, having a qualified financial advisor should be an option you consider seriously. And, doing it better can outweigh doing it alone.
