According to the Financial Educators Council, 254 million American adults lack financial literacy. This negligence comes at a price. In 2020, monetary losses amounting to more than $415 billion can be traced back to people’s insufficient knowledge on how to go about crucial money matters. This is where the importance of hiring a financial advisor comes in.
Financial advisors offer an array of services to their clients. The counsel they provide revolves around financial planning.
With a financial advisor on your side, it will be easier to achieve your financial goals. More importantly, you can aptly prepare for eventualities that will require you to spend on emergency expenses. The worst thing that can happen to someone who’s a member of the labor force or the business sector is to work as hard as a person can without a financial safety net.
If you’re considering hiring a financial advisor, here are the things you need to know but are not often talked about.
1. Financial advisors come in different names
Consider the title “financial advisor” as an umbrella term. It covers different types of professionals. They may have varying academic and professional backgrounds, too. On your journey towards financial health, you might encounter the following, among others:
- Tax professionals
- Investment professionals
- Financial planners
- Wealth managers
All of those titles fall under the profession of financial advising. They only differ on specialization. Yes, financial advisors are akin to medical doctors. You have surgeons and gynecologists and oncologists. They are all called physicians. But they differ in the type of medicine they practice.
When it comes to financial advisors, your best bet is to partner with one who can juggle multiple types of financial services. Now, that’s not something you can or should expect from a doctor.
2. Financial advisors do all sorts of things
Ideally, a financial advisor won’t give you generic financial advice. They’re not supposed to mimic a fortune cookie with financial platitudes you need to decipher like a code for it to make sense. A financial advisor that’s worth their salt does any or all of the following:
- Retirement planning
- Tax planning
- Estate planning
- Heath and long-term care planning
Consider a financial advisor as a money doctor. Their main goal is to manage your wealth in such a way that you’ll be spared from financial cancer called bankruptcy.
3. Financial advisors follow different ways of charging clients
The services offered by financial advisors don’t come for free. So it’s best to plan how you want to spend on the expertise of a financial advisor. For that, you don’t need to hire another financial advisor. If you do, the whole situation will turn into a chicken-and-egg conundrum.
At the very least, know the most common payment terms expected by financial advisors.
- Fee-only – Your financial advisor might charge you an hourly rate. That ranges between $120 and $300. Or they could ask for a flat fee every month. Some financial advisors work on retainers. They might demand a percentage of the asset they manage. That typically falls between 0.5% and 2% of total asset value.
- Fee-based – Some financial advisors will ask for a commission from assets they manage while also charging a flat hourly, monthly, or retainer rate.
- Commission-only – This usually happens in investment management. A financial advisor gets remuneration from a percentage of whatever value you invest.
4. You need to choose a financial advisor wisely
Again, financial advisors are not cut from the same cloth. Some are real experts in the financial sector, with a proven track record in the business. Others might be career shifters, who are in it because the job’s currently trendy and lucrative. The latter might not have the level of experience you require.
This is where research proves crucial. You can’t hire the first financial advisor that shows you interest. Think of it like online dating. You swipe right many times to find your match. And you narrow down your matches by beta-testing them via a date or two.
Make sure to ask the right questions. Consider the following:
- What services do you provide?
- What do you love about your profession?
- What is your financial philosophy?
- How will we communicate about my finances?
- How do you get paid?
- How will you measure and evaluate my financial state?
- Can you tell me why you stopped working for the last client you severed ties with?
The answers to these questions should be enough to give you a hint of how a financial advisor operates. If you’re sold on the answers they provide, then sign above the dotted line. If not, continue swiping.
5. Financial advisors might sell you out
Financial advisors are not saints. They are professionals working for money. Still, it’s possible to land a financial advisor who will be earnest and sincere in teaching you how to handle your finances. That’s the kind of financial advisor you need to have on your side. The opposite scenario is falling prey to a financial advisor whose only goal is to sell you out.
Look for a financial advisor who operates as a teacher. And you should feel good under their tutorship. If they make you feel iffy in any way, run for the exit.
6. Financial advisors have their values and beliefs
Financial advisors are not robots either. They do not operate based on computer codes. Just like you do, they base their financial decisions on long-held values and beliefs. You need to find a financial advisor whose values and beliefs you can get behind. And vice versa.
For instance, consider yourself ending up with an investment planner who’s too risk-averse. Meanwhile, you’re the type who likes to play aggressively and you pride yourself in knowing when to play aggressively, too.
Your financial advisor will most likely veto whatever investment decision you come up with if they deem it precarious. The two of you will never be on the same page. So from the outset, get to know the advisor’s financial mindset and decide if you can form a partnership.
7. Some financial advisors are learning as they go
One only needs to pass an insurance and investment exam to be a certified financial advisor. And because the job is popular these days, many people get into it even without an extensive background in the financial sector. They learn as they go. And if you end up with this kind of financial advisor, you’ll be their training wheels. If you’re okay with that and you’re amenable to growing with your financial advisor, then by all means do not discriminate.
However, if you’re dealing with considerable wealth and estate that’s difficult to manage, it’s in your best interest to partner with a financial advisor who knows what they are doing. You do not want your finances to fall into the hands of an apprentice. You need an expert.
8. Some financial advisors will work for sellers behind your back
If your financial advisor keeps on alerting you about new products like bonds and stocks and other investment opportunities, get real with them. The truth of the matter is some financial advisors receive a commission for the products they sell to clients. There’s an obvious conflict of interest here if the person who’s supposed to protect your finances is bent on ripping you off for added income.
Consider an overly salesy financial advisor as a red flag. Sure, you expect advice on where and how to invest. But they should come from a place of pure motive–that is your financial health, not someone else’s interests.
9. Financial advisors need to get their finances straight too
Don’t be stingy to your financial advisor. Remember that they know what you’re worth. They know your capacity to pay. If you pay them disproportionately based on the asset they manage for you, you’ll end up with uninspired services. Keep in mind that your financial advisor most likely works for other clients. And if those clients pay better, they will understandably receive more attention.
Financial advisors have their own finances to worry about. Help them a little by paying them what they deserve and more.
10. Some financial advisors tend to overpromise
You want an advisor who knows the ins and outs of the financial sector. You do not need a financial advisor who makes false promises. For example, if they tell you that they can beat the stock market, don’t fall for it. No one can beat the stock market. A financial advisor who claims they can is either lying through their teeth or is completely misguided. Either way, you’re better off with someone else.
11. Not all financial advisors work under a fiduciary oath
A financial advisor working under a fiduciary oath will have the best interest of a client in mind. That’s because if they did not, they could get in trouble with the law. Unfortunately, not all financial advisors are fiduciaries.
When you look for an advisor, you can’t go wrong with limiting your options to fiduciaries. That means you can sleep soundly at night knowing your finances are taken care of by someone who is legally mandated to be truthful and honest to you.
12. You only need to hire a financial advisor when you’re in dire straits financially
Financial advising is a preventive measure. The goal is to ensure that your financial health is at its best. Ideally, the moment you start earning money from a job or business or both, you hire an advisor to guide you through financial decisions.
If you hire a financial advisor because you’re going through a rough patch financially, chances are they won’t be able to do anything to reverse your financial state. The best they can do then is give you counsel on how to pay off debts with whatever assets you can liquidate.
13. It’s okay to hire a financial advisor for a specific need
If you’re a regular citizen without diverse assets to look out for, it’s fine to partner with a financial advisor to help you with a specific goal. For example, if you’re planning for retirement, and that’s the bulk of your financial concern, feel free to hire an advisor that specializes in retirement plans. That means you won’t have to worry about an exorbitant service charge.
14. Consider Robo-advisors
In this age of automation, even some aspects of financial advising have been relegated to AI. The technology provides automated investment advice. If you’re fine with trusting software with your money, this is an option worth exploring. Just don’t expect to get a free mug of coffee while on consultation.
Financial advisors come in different iterations. If you want to maximize your investment through a financial advisor’s services, it is best to hire one whom you can call a jack-of-all-trades.|
Ideally, they can provide you with expert advice on how and where to invest. They can also enlighten you about tax matters and ensure that you do not neglect tax compliance, which can get you in trouble with the law. And, of course, they are knowledgeable enough finance-wise to manage and plan your wealth.
Yes, you will have to spend money on the services of a financial advisor. But the price you pay is surely worth it. So, if you’re already an active member of the workforce, or you run a business you wish to grow within your preferred timeline, talk with a financial advisor. Rest assured that this professional partnership will benefit your financial future.