Despite popular belief, financial advisors are not just for the rich and famous. Many individuals forgo using a financial advisor because they are deterred by the extra cost. It is easy to justify forgoing a financial advisor because you cannot afford it, but the real question you need to ask yourself is, “Can I afford not to have a financialadvisor?”
If you currently live paycheck-to-paycheck, have little retirement savings, and can’t seem to make it to the next level of your financial goals, think twice before you say that you cannot afford an advisor. With planning and advice from the right advisor, you are more likely to meet your financial goals.
Key Takeaways
- Hiring a financial advisor can seem like an unnecessary expense but they often save you money in the long run.
- If you choose to hire a financial advisor, make sure all their fees are transparent before you sign.
- A financial advisor is usually recommended when their fee is less than what they save for you.
- Financial advisors are not stock-picking wizards but may be able to help fortify your unique financial situation.
- Verify an advisor through a government website before paying for services or signing any documents.
Understanding Financial Advisors
The role of a financial advisor is to guide and advise their clients. Their priorities (should) lie in the best interests of their clients—not the company for which they work.
Financial advisors can help you with your retirement portfolio. But, they typically do more than that. They can also help you manage your finances—notably, difficult student loan repayments, proper estate planning, budgeting, paying your bills, making investment choices, and ensuring you have enough money for your children to attend college.
According to the Bureau of Labor Statistics (BLS), financial advisors are tasked with the following duties:
- Hold client meetings and discuss financial goals
- Go through their financial expertise and services
- Educate and advise clients about investments and any associated risks
- Make investment recommendations
- Plan for life events, such as education, retirement, and/or death
- Monitor client accounts and make changes as necessary
- Keep on top of investment research
A financial advisor should be one of the first people you contact if a spouse dies or becomes disabled, you earn an inheritance, the Internal Revenue Service (IRS) audits you, or are in the process of divorcing your spouse. Don’t wait until your financial situation is in the red before you seek out the help of an expert.
How Are Advisors Compensated?
Financial advisors get paid in different ways. Some are compensated with fees and/or commissions while others receive a percentage of the assets they manage. We discuss this more in detail below.
Fee-Only Advisors
There are essentially three types of financial advisors: fee-only planners, fee-based planners,and commission-based planners. With fee-based planners and commission-based planners, you pay less upfront.
However, these types of advisors work off of the commission of certain products. Because of that, their advice might be more biased. They might be pushier trying to get you to buy certain products and not always have your best interests in mind.
A fee-only advisor can cost you a lot more money upfront. If your advisor charges an hourly rate of $200, and it takes them five hours for your first meeting to set up your plan, it can be daunting to pay the initial $1,000. However, while the first two meetings with your advisor will be costly due to the amount of work they do to set up a personalized plan for you, your follow-up meetings and check-ins should be much shorter and inexpensive.
A fee-only advisor is much more likely to be a Registered Investment Advisor (RIA), meaning they must provide you with financial advice that is based on what would be the best for your unique financial situation, rather than give you advice that will help them sell products.
Percentage-Based Advisors
A financial advisor who charges a percentage based on the assets they manage may be another option. This fee can range from 0.5% to 2%. Advisors that charge a percentage usually want to work with clients with a minimum portfolio of about $100,000. This makes it worth their time and will allow them to make about $1,000 to $2,000 a year.
Again, this might seem like a huge price tag to pay per year once your portfolio is padded but these advisors can be more motivated to grow your investments. The more your investments grow, the more money they earn from their percentage.
Flat-Fee Advisors
You may want to consider hiring a flat-fee advisor for certain services, such as an estate plan or to draw up a will. If an advisor charges you a set rate for the service, you will not have to worry about them racking up hours or whether you need to make any simple modifications.
Robo-advisors usually offer the lowest management fees, but you won't be able to discuss investment strategy with a professional (until a certain amount has been deposited).
How Much a Financial Advisor Can Save You?
As we've highlighted in the previous section, hiring a financial advisor can be a major expense. When you already have a tight budget, it can seem like a waste of money. However, think about how much money a financial advisor can save you and make you in a year.
If you pay on average $1,000 to $2,000 a year on an advisor, but they allow you to save an extra $2,000 a year from careful planning and boost your retirement savings by $2,000 a year by diversifying your portfolio, then you stand to come up on top.
Calculate the benefits before completely ruling out hiring a financial advisor. Don’t be afraid to inquire about an information-only meeting that allows you to get a better understanding of what a financial advisor can do for you. Before you choose one, be sure to read reviews of any potential financial advisors or ask for recommendations from family, friends, and colleagues.
How Much Do You Pay a Financial Advisor?
Financial advisors are paid in different ways. Some take money upfront and consult on your financial situation on an hourly basis. This costs more initially, but can result in more savings down the line, especially if your financial advisor proposes a percentage-based fee and you are bringing a substantial amount to their firm.
Is It Worth Paying for a Financial Advisor?
You probably don't need a financial advisor for certain purposes like filing a simple tax return or opening an individual retirement account (IRA). If, however, you have some money you want to invest, maybe you run a business, or you come into an inheritance, a financial advisor is a good idea to help you navigate financial decisions. Their time might seem expensive, but consider the time you would need to spend to learn as much as they know. It also becomes obvious rather quickly why financial advisors charge for their knowledge.
How Do I Know My Financial Advisor Is Legitimate?
There is a search tool on investor.gov that connects you to the Security and Exchange Commission's (SEC) Investment Adviser Public Disclosure website. The Financial Industry Regulation Authority (FINRA) has a similar tool called BrokerCheck. As long as you know the name of your financial advisor, you can make sure they are permitted to act in such a capacity.
The Bottom Line
Paying for a financial advisor can be done in a few ways, and it usually comes down to how much you bring to the table and the focus of the planning. You may not make any investments at all, in which case the advisor would charge you by the hour. If you develop an investment portfolio, a financial advisor may structure their fees in a way that takes a percentage from the amount you allocate. Either way, work with a professional that you have verified through the links above.
