This is a new series on finding, selecting, and working with financial advisers and planners. A few days ago, a friend asked me on Twitter whether I had any articles on this topic. While I had a few old posts marginally related to financial advisory, I didn’t have anything in-depth.
People consider working with financial advisers for a variety of reasons. Some individuals are aware that in the near future they will be receiving more money than they are accustomed to dealing with. Some are having financial difficulty and want to work on a solution. Others are looking for an expert to help them confirm the decisions they’ve made are valid when planning for their future. Even more are preparing for an upcoming life change and are looking for guidance about what financials issues they should be concerned with. Some customers of financial advisers want someone to manage their investments.
Financial advisers come in different flavors, and it’s important to make sure once you start looking at your choices that you’re looking at the right group of professionals. Some of these professionals focus on selling investments and insurance, while doling out financial advice as they go about their sales pitch. Others have a role just to advise, providing you the information that is in your best interest, while leaving the final decisions up to you.
- Investment and insurance salespeople are often called financial advisers, but can also be called brokers, insurance agents, financial managers, and investment advisors. Walk into any major bank branch and they might have a few on staff. They will offer financial advice, but they will steer you towards their company’s products and other products for which they receive commissions.
- Financial planners fall into another category of financial advisers. Their goal is to help you make decisions, and they will help you evaluate at your entire financial picture, not just your investments. They often, but not always, carry a designation from the Certified Financial Planner Board of Standards, Inc. A future article in this series covers this designation and others.
- Asset managers are also called investment managers, wealth managers, wealth advisers, or Registered Investment Advisors. You hand them your money and sit back. They may not call themselves financial advisers, but they’re worth noting to help alleviate confusion. Asset managers will make investments for you — and if you have enough money, they might include your funds on investment opportunities not typically available to the public. They could have a focus, like private equity or hedge funds, or they could place your investments in index funds — something you could do on your own.
With the last group of professionals, you take your money out of its current investments and turn them over to your investment manager. Asset managers usually take a percentage of your assets, such as 1% or 2%, each year. If you’re just looking for financial advisement, this is not the approach to take. You’ll want to work with someone in the second category above. The key word to look for is “fiduciary;” this is the requirement of a financial adviser to base their advice only on what’s best for their clients, not what will earn them most money through commissions.
Not all who call themselves financial advisers have fiduciary responsibility. Some have suitability responsibility, which means that their advice needs to meet a lower standard — their suggestions need to be an appropriate choice, but not necessarily the best choice. it’s important to determine whether the professional with whom you plan to work has fiduciary responsibility.
It’s best to avoid commissions-based advisers completely. Salespeople work on commissions. Financial advisers who have your best interests in mind usually work on a fee basis — perhaps an hourly fee, a flat fee for each session, or if you have a short-term need, a fee for one project. Rates of $100 to $250 an hour are not uncommon, and your geographic area will strongly influence your rate. If you foresee a long-term relationship with an adviser, some may prefer to be on retainer. Some financial advisers also charge a percentage of your assets, but there is an increasing trend to work with “fee-only” planners, who limit their fees to a flat rate.
Even though a financial adviser or planner can have a fiduciary responsibility to you, the individual who cares the most about your financial situation is you. No one else can fully understand and appreciate your life’s particular situation. While you can do well by working with an effective financial professional, whether or not you succeed with your financial goals is mostly up to you. Even financial planners have something to sell, so keep this in mind when approaching your discussions with a professional.
Next article in this series: Demystifying Financial Adviser Certifications.
Updated March 29, 2011 and originally published March 18, 2011.
{ 18 comments… read them below or add one }
Great to see this series. What are your thoughts/experiences on working with estate planners? It seems like many people who invest for “the future” are really talking about estate planning (retirement savings, insurance, wills, etc.). Do estate planners generally have enough experience to advise on asset allocation, retirement savings forecasting, etc.?
Estate planners do not have the experience to manage the investments. Their expertise is in seeing that your assets are distributed according to your wishes in a tax efficient way.
I like managing my own money, and know little about professional advisors. Should I decide to change and go that route, this is really good information. Thanks for spelling it all out.
I am looking forward to this series! I have always wondered if a financial advisor or CPA was really worth the cost. I hope your series will enlighten me and the other readers in this area.
I was always under the impression that there were 2 kinds of financial advisers, fee and commission. I now realize there are variations and some provide different services. Thank you for the explanantion.
I did an internship at SmithBarney during college and the #1 thing I learned was the stock brokers are, in my opinion, glorified salesmen. Unlike a real financial adviser or financial planner, stock brokers don’t have a fiduciary responsibility. That means they aren’t required to work in your best interest. Working there really opened my eyes about how much BS was being sold to people about their finances and investments.
Hi, I hope I didn’t accidentally send this twice. Anyway Flexo, your timing was great as was your article (and I’m a long-time fan, btw). I recently sat thru a retirement seminar. One of the speakers was asked how to pick an advisor and said a little about certification, hourly rates etc. but then insisted that the really good advisors just don’t make enough money that way and so charge a commission, typically 1 or 2 %. He added (as seems to be typical) that (ha ha) ‘if you don’t make money, we don’t. That just didn’t sound right to me. Afterward, I asked a few questions and was shocked (though maybe others are more comfortable with this) when he said they’d have to be able to access my standing accounts — as a Fed, I have one of the lowest expense 401-k type plans there are, and then a small Vanguard, also low expense without his kind intervention. And the reason I asked him all this to begin with, was because I’d run into a similar situation a few years back. A guy with a company where I had an IRA offered ‘free consultation’ about overall planning. Never answered my Qs such as whether to prepay my mortgage but kept eagerly urging me to fill out a huge sheaf of papers so he could ‘oversee’ my Vanguard money — in his case, for a 3 or 4% fee?! When his asst sent all the paperwork …and the guy had not followed up on anything else….I mused a bit, called up Vanguard and had all my money from the rain-maker transferred to them in about 15 minutes, the fellow at the other end doing most of the work. Have found their reps actually quite good and capable of giving advice in my best interest, one time actually advising me to open a money market at my bank vs. rush into opening an account with them as I hadn’t had time to do any research. But I’ve been reluctant to pursue an advisor because of these 2 individuals, and I really would like to talk with one. You have empowered me, Flexo! Thank you! :”}
thanks drcassie8, i appreciated this story. i have never used an advisor, and i am not sure if i ever will. i have put time into learning all that i have, and i do not think i would be happy not “knowing” all that i have learned. that is not to say one can not have some knowledge and pass the work to someon who “knows better,” but i have so many in my circle who have no understanding of the financial world or their finances in general, and that thought scares me. to just hand a blank check to someone and say make me money.
othet than that concern, after taking so much time to reduce my fees and work for a a portfolio that i am very pleased with, i just do not want to hand everything over to someone for a fee who “may” do better than i have been.
Even though I am younger and just starting out. I did happen to meet with an certified financial planner through my girlfriend’s work about two years ago. It was a great experience that pushed me to start and fully fund my Roth IRA since then, and I have zero regrets about working with them to start off on the right foot.
tbork84 — How wonderful that you acted on that and are balancing ‘today’ needs and tomorrow’s — just keep reading Flexo as well and you will be in a superb place to have a great ‘old age’ money-wise (and hopefully otherwise as well :) !
What’s the saying? Trust no one!
Myself… Then probably a fee-only CFP certificant. That way I know that they do not make a commission selling me products and services I don’t need.
If you are looking for investment help you want a fee only Registered Investment Advisor (RIA). Whether or not they are a CFP has nothing to do with it! If they are not an RIA they are a broker/dealer (Smith Barney, Merrill Lynch et.al.). A broker/dealer is not a fiduciary.
How can you know the difference? Ask for a copy of their ADV. Actually RIAs are required to give potential clients a copy.
I worked in finance for many years. That being said, I do believe that seeking the advice of someone more knowlegable does make sense. I also believe you need to completely understand what you are being told – even if this means waiting and doing your research – no one takes care of or cares about your money more than you do – TRUST ME! Do not let anyone pressure you – if they try walk away and don’t look back.
I am glad we have access to financial planners through my husbands job. He works for a financial planning company but not as a planner. But honestly I have never sought out their help. I may need advice sometime but ultimately I want to keep on top of what is going on with my accounts and not just turn it over to someone else.
Regarding Asset Managers – 1-2% management fee is ridiculously high. Never pay 2%, or even 1%. You can find many reputable managers who will charge .5% on down, depending on your total portfolio.
Keep in mind, this fee comes directly out of your pocket, so you might as well deduct 1-2% from your total return.
With the advent of the internet and a still bright mind (hopefully this will last) I have never seen the need for someone else to research options for me. My money, my choices. It’s one of the responsibilities that comes with being frugal.
It’s unfortunaat how naive and biased this article is. I especially love the part where the author makes no mention of fees when talking about “planners”…when in FACT, every financial “planner” charges TWICE the amount as a typical run-of-the-mill “advisor”. Whant to challenge me on that? Consider this: The financial “advisor” gets paid 1% per year on the balance of your mutual funds. The financial “planner” charges you 1.5%+ per year PLUS the underlying fees of the mutual funds…another 1 – 3%!!!
I can care less whom you do business with, but I am sick to death of articles painting these “planners” as people who somehow charge nothing for their services. The next time you visit your “planner”, be sure to ask him what the mutual funds’ expenses are. If he tells you zero, go to Morningstar.com, look it up yourself, and then fire his [email protected]@.