When I meet new people, I think I’m going to stop telling them that I’m a personal finance blogger.
It isn’t the question of “are you sure that’s a real job?” that gets me. Okay, sometimes it does.
When I hear that, though, I kindly explain that it is a real job.
The problem is that too many people start confusing me with someone who can give them actionable financial planning advice.
I’ve had questions like:
“I’m 20-something, single, and have an extra $4,000 per month to invest, what exactly should I be doing with that money?”
“I want to retire by the time I’m 55 and leave money behind for my children, how do I do that?”
“What’s the best investment strategy to help me save for retirement while setting aside money for my two-year-old’s college fund?”
Each of those questions requires a considerable amount of personal guidance. I might write about personal finance online, but I’m not a financial advisor, and I don't charge for personalized financial advice.
Need a financial advisor?
Alright, the need might not be the right word, but if you want the type of plan those people are asking for, then they might benefit from finding a financial advisor.
Financial advisors have had some pretty negative attention this past decade – there are so-called financial coaches (this is not an advisor) or even actual advisors who are running scams. Did you know that in March of 2019 it will have been a full decade since Bernie Madoff pled guilty to 11 federal felonies related to his Ponzi scheme disguised as a wealth management company?
He scammed so many people, including Kevin Bacon and Steven Spielberg, that he’s probably left a stain on the financial advisor name for years to come. All the more reason why you shouldn’t be asking randos if they can help you come up with an investment strategy.
Who benefits from a financial advisor?
Not everyone, but a lot of people probably could benefit from a financial advisor. The thing is, they can be expensive, so you’ll want to know what to look for in a financial advisor before agreeing to work with someone and making that investment.
I’ll admit that I don’t have one… yet… but I know that they can provide some serious value when you find a good one.
A financial advisor or planner is a professional… this is important here… who knows the best ways to save, invest, and grow your money. They take your financial goals, like planning for retirement, and build a plan that looks at the micro and macro aspects that will help you achieve that goal.
Here’s what to look for in a financial advisor:
1. Ask about their and certification.
The #1 reason why I’m ill-equipped to answer those types of questions I mentioned above is because I am not a certified financial planner. Plain and simple.
A financial advisor SHOULD have a Certified Financial Planner (CFP) designation behind their name. That means they’ve completed the education and extensive certification process, as well as continuing education, that is required to help you design a plan that helps you reach your financial goals.
Beyond just financial planning, if a financial advisor is going to sell you insurance, securities or products like mutual funds, stocks, etc., they will need proper licensing to do so.
2. Ask about the types of clients they work with.
There is a lot of space in between a millennial who’s just entered the workforce and a 50-something getting serious about retirement. That space can make the difference between a financial advisor who is or isn’t right for you.
If they’re only used to working with the 50 and up crowd or high-net-worth individuals, then they might not be a great fit for someone who is just starting out. That isn’t to say that they won’t be able to help you, but because there are so many different situations out there, you want someone who knows the best options for your current and eventual lifestyle.
3. Ask if they are a fiduciary.
Beyond their qualifications, knowing that your financial advisor is a fiduciary is probably one of the most important characteristics to be aware of. A fiduciary means that they always have your best interest in mind.
As you start looking for financial advisors, you’re probably going to run into a lot of them who work for banks or brokerages, who work on what’s called a suitability standard. This means they might recommend things that are only suitable for you, not necessarily what’s best. This is often to sell products that will make them more money, but that’s not enough.
Helping someone achieve their future life goals is serious business, and you want to know that your financial advisor holds your ideas over their own. A fiduciary will recommend products and services that will work best for you, not just what will make them the most money.
To put it simply, a fiduciary has pledged to always act in their client’s best interests at all times.
4. Find out how they get paid/what are their fees.
Hiring a financial planner is going to be an investment itself, and as you make money, they are going to be making some money. This is why you need to know what the cost structure is going to be like before going in.
There are a few different ways financial advisors are paid, such as fee-only, on commissions, or fee-based. The difference between these pay structures is what might save you money or even help you make more of it.
If your financial advisor is commission-based, they’re going to be pushing products that might earn them a cut. I’d probably avoid that if I were you.
There are also fee-based and fee-only advisors and while they are similar, you will need to know the difference to make the best choice.
A fee-only advisor acts as a fiduciary and is only paid by clients. Payment may be in the form of a flat fee (from $1,000-$3,000), an hourly rate ($100-$400 per hour), or percentage of assets under management (typically 1% or less).
A fee-based advisor is paid in the same way, but their rates may be slightly lower because they also make money through commissions and from other products their customers purchase.
Simply put, a fee-only advisor is going to have fewer conflicts of interest but may cost more.
5. Ask about their investment philosophy.
With all of the perceived chaos that’s been happening in the market these past few months, you want an advisor who knows how to react in the way you want them to.
Like, if I were looking for a financial advisor right now, I’d want one who believed as strongly as I did about holding tight to my investments and riding out the storm.
Other things to think about are how cautious or aggressive you want to be with your investment strategy and whether or not a financial advisor will be on the same page. You want to feel comfortable with their strategy and trust their philosophy, so don’t neglect to ask about it when looking for a financial advisor.
6. Ask about how your relationship will work.
Just like any good relationship, your relationship with your financial advisor will require good communication, and you want to know what that will mean before going forward.
Are you only meeting for scheduled appointments? Can you call or email them when you’re feeling nervous about the market?
I’d say that the best financial advisors are going to offer a combination of reports, emails, and calls that keep you fully aware of how your assets are performing. Some clients are naturally going to be a little more hands-off, but you still want to know how much access you will have to your financial advisor when you need them.
7. Ask about their custodian.
If you are hiring a financial advisor who isn’t working directly for a brokerage, you’ll want to know who they are investing your assets through.
Typically, advisors who work for registered advisory firms are going to have a larger brokerage who holds their clients' assets, like Charles Schwab for example. If that’s the case, your advisor doesn’t hold your assets, Schwab would.
This is a transparency issue that will help you trust the advisor you are going with because that money is yours – you should know exactly where it is.
8. Find out who exactly you’ll be working with.
Think about when you’re looking for a doctor, dentist, or even barber. You typically aren’t going for the overall practice or business, you’re going for one specific person. They know your history, your personality, and you know the same things about them.
There might be times when you have to meet with someone else, but when looking for a financial advisor, you want to know exactly who that will be.
Or, if you know that you might be working with a variety of advisors at a firm, then it would be important to know the rest of the people who will be advising you.
9. Run a background check on a potential advisor, or at least ask them if they’ve ever been under investigation.
This isn’t as ridiculous as it sounds, and if we’ve learned anything from the financial scandals in the past few decades it’s that you have to be diligent about really knowing who is helping you manage your money.
To give you even more peace of mind, you can ask for referrals from clients whose goals and finances are similar to your own.
10. Walk away from market braggers.
One of the best tests you can give to a potential financial advisor is asking them whether or not they can beat the market for you. If they promise they can walk away.
A reputable financial advisor is never going to make a guarantee like that. If they’re promising they can, they might be willing to make some questionable recommendations and decisions on your behalf.
Finding the best financial planner is going to require some research and leg work.
I bet you could meet with five different financial advisors and they would all have slightly different answers to the questions above. The bottom line is that you want to do your homework and find someone who is the best fit for you.
Don’t rush your decision either, because your money is your future.