Trusting a stranger with your money is a big commitment. Who you hire influences your financial strategy, expenses, and portfolio gains. Do you know what to look for in a candidate to make the right decision?
What Kind of Financial Adviser Do You Need?
There are several types of financial advisers to choose from.
Robotic Adviser
A robo-adviser might be right for you if you have few investable assets and a small budget. Simply fill out a questionnaire, and an algorithm automatically invests based on your answers. It’s cheap — sometimes free — and easy to use. However, you get little to no human interaction. Also, the service isn’t exactly personalized.
Chartered Financial Analyst
A chartered financial analyst (CFA) is a great alternative. This designation requires over 1,000 hours of study, four years of experience, and three rigorous exams, so you know you’re getting what you pay for. This highly qualified expert is a fiduciary, meaning they legally have to put your best interests above their own. They must recommend the investments best for you — not the ones that will pay them the highest commission.
While CFAs haven’t mastered every finance topic, they have a broad understanding of most services. They can handle a wide variety of finance-related issues. It’s important to know that while you don’t need a lot of investable assets to hire one, some have high minimum investment thresholds.
Investment Adviser Representative
An investment adviser representative (IAR) works for a type of investment firm called a registered investment adviser (RIA). These licensed planners offer personalized investment advice after passing exams certified by the Financial Industry Regulatory Authority (FINRA). Like CFAs, they have a fiduciary duty to you.
Certified Financial Planner
A certified financial planner (CFP) designation is the gold standard. The Standard Pathway requires candidates to work with clients for 6,000 hours, logging a maximum of 40 hours weekly. They must also pass the rigorous Uniform CPA Exam administered by a state’s board of accountancy. They can prepare your tax returns and advise you on minimizing your tax burden.
How to Choose a Financial Adviser That’s Right for You
Although choosing an adviser is a highly personal process specific to your goals and financial situation, you should follow this general guideline for the best outcome.
1. Ask Yourself What You Want Out of It
Ask yourself why you’re hiring an expert. Do you want to get out of debt? Are your taxes too confusing? Do you need help investing? Are you planning for retirement? Since investment policies and specialties vary from person to person, you must determine what you want from this service before moving forward.
2. Pick Which Type of Adviser You Want
Depending on your goals, you may need a specialist. For example, few advisers are well-versed in cash benefit plans because they aren’t as common as other tax strategies and retirement plans. Do your research to see whether an IAR, CFP, CFA, robo-adviser, or other professional is right for you.
3. Review Your Budget to Set Expectations
How much does a financial adviser cost? For example, various fee structures — commission, performance-based, or asset-based — affect your total. However, most charge between 0.25% and 1% of assets managed. This gets you asset management services and annual updates to your plan. Some may even throw in tax planning or legal services for free.
4. Vet Your Financial Adviser’s Background
Although licensed professionals must adhere to strict ethical codes, many people operate in the gray areas, calling themselves gurus, influencers, or coaches. While providing advice for a fee without a license is generally illegal, there are loopholes. Make sure the person you pay has proper credentials.
4 Mistakes to Avoid When Finding a Financial Adviser
Make sure to show up prepared. An expert can only help you if you bring information on your finances and goals. Considering only four in 10 people in the United States bother to keep a budget, this may be a big ask. A working knowledge of basic finance-related terminology can help you keep up, but any quality pro will explain concepts if you ask.
While most advisers have ethical and legal obligations to guide you in the right direction, some don’t. When in doubt, go with a fiduciary — they have to declare their conflicts of interest and make the best recommendations, regardless of whether it benefits them or not. If you’re unsure whether someone is one, ask them directly or check their credentials online.
Even if they are fiduciary, you don’t want to hire the first person you meet. Rushing the process won’t get you to your goals faster if you don’t find the best fit for you. Although pros will be upfront about their strategy being incompatible with your needs, some will take you on as a client, no questions asked.
Another mistake to avoid is accepting an offer as soon as you wrap up a meeting. Even if you’ve met multiple people and feel like you’ve finally found the right fit, tell them you need to think it over for a few days. If they begin rushing you or their attitude instantly sours, they may have ulterior motives — as in they’re being paid hourly or by commission.
How Do You Know You Can Trust a Financial Adviser?
Your financial adviser should be as transparent as your doctor — not as a used car salesperson. If they’re being secretive or rushing you, they may not be legitimate. Scammers entice you into investing with the promise of wealth. If they say unbelievably high returns are “guaranteed” or have “no risk,” they are misleading you.
If it sounds too good to be true, it is. Anyone who promises returns over 12%-15% is likely scamming you. The typical stock market return has been 9.5% for decades. Besides, licensed professionals are prohibited from making specific price predictions or guaranteeing you won’t lose money.
Another red flag to watch out for is the initial method of contact. Legitimate professionals use established networks or referrals to find clients. If you’ve received a cold call or email from someone offering their services, be wary — they’re someone with ulterior motives at best and a scammer at worst. Seek someone worth your time and money.
Researching specialties, certifications, and strategies can help you determine whether your future adviser is trustworthy or not. There are many ways to check their qualifications online. For instance, you can use the free search tool on the Securities and Exchange Commission’s Investment Adviser Public Disclosure website.
How Much Does It Cost to Hire a Financial Adviser?
Remember, most pros charge 0.25%-1% of the total assets they manage — not the gains. If you invest $10,000 upfront, you will have about $76,122 after 30 years of 7% annual compounding interest. Say your adviser charges 1%. You will lose 26% to yearly fees, leaving you with $56,331 — a nearly $20,000 difference.
Seemingly small fees add up, especially if you have a long-term relationship. Because of this, many people fall somewhere in the middle, asking for roughly 0.5%. In other words — 1% is the upper limit. Unless you’re paying for a specialized service or have a massive amount of investable assets, aim for somewhere under that 1% expense ratio.
Questions You Must Ask Before Hiring an Adviser
Even though you’re more prepared now than before, you must still ask several key questions before trusting someone else with your money.
How Often Will We Interact?
Knowing your adviser’s approach to client communication can help determine your relationship with them. Will you meet once a year or check in every few months? Will you have to schedule meetings, or can you call them if you have questions?
What Is Your Fee Structure?
A fee structure is how experts charge for their services. You must understand it — otherwise, your portfolio gains may become their commission payments. Ask whether they charge the 0.25% to 1% asset-based fee or work on commission.
Don’t get confused by similar-sounding fee structures. While fee-only professionals charge per service, fee-based ones earn commissions on products — mutual funds, annuities, or insurance policies — they sell. A flat fee is a fixed rate charged per service.
What Are Your Credentials?
You need to know how long this person has been in the industry and what credentials they have to determine whether they’re trustworthy. This can also help you determine whether their fee structure is a good deal.
Have You Ever Been Formally Disciplined?
State agencies and FINRA keep records of licensed professionals’ disciplinary history. Check whether your would-be adviser has done anything unethical or illegal. Examples of misconduct include misrepresenting, defrauding, or embezzling money from clients.
How Much Control Will I Have?
Does the adviser serve as an educator to instill financial discipline, or do they make all the money decisions for you? While they only get complete control if you give it to them — look for the word discretionary in any agreement you sign — you want an idea of how they usually work.
The Bottom Line of Hiring a Financial Adviser
You’ve got to put a lot of thought into hiring a financial adviser. Although searching for an industry expert may be time-consuming and tedious, the literal payoff will be worth it. Make sure you do your research and don’t rush your decision.
