A Guide to Determining If You Should Work With A Financial Advisor [Part I]

At times, it can feel as if the odds of being financially stable are stacked against you. Between bills, college loans, rising home costs, and a challenging job market keeping your head above water can be overwhelming.

A top source of stress for many is the challenge to save money for retirement. At a close second is not having enough in an emergency fund. The key takeaway: an inability to save money, not having enough saved for retirement, and not knowing how to draw down your assets in retirement, are key drivers behind financial stress. But despite these anxieties around saving enough, saving is the most important element of planning for retirement.

When it comes to making decisions about how to manage, save, and invest their money, however, most people will say they feel undereducated and ill-equipped to take on this challenge. Interestingly though, while the majority of people will admit they don’t have the knowledge to adequately manage their finances, most don’t seek professional financial help.

There are a number of reasons why people don’t seek out financial help, but perhaps the most prevalent is a lack of knowledge on the benefits of such a relationship. In this three part series, I will explore some common misconceptions about financial planning, shine some light on the different types of advisory relationships out there, provide tips for choosing an advisor, and get an inside look into what this type of partnership can and should look like.

Why Seek Out Financial Help?

Regardless of age, we can all benefit from some guidance when making big financial decisions. However, the good news for is that you are in a unique position to affect your financial future, because there is no better time than today to make a positive change in your life. However, it can be difficult knowing when (and who) to ask for professional assistance.

Here are a few reasons to consider seeking professional financial advice:

You are looking for ways to manage and reduce debt such as college loans, credit card debt and/or mortgage or car payments
You want to better understand how to save for retirement, how much to contribute to a retirement account, or if you’re saving enough
You have life goals you want to achieve and don’t know how to finance such as buying a house, taking care of parents or relatives, purchasing a car, or taking a trip
You are getting close to retirement (10 years or less) and want to know how & when you can retire
You are retired and want to get a better handle & understanding of your household finances
You want to make sure that you are invested appropriately to meet your short-term & long-term goals
You have recently inherited money or acquired a significant sum or money and aren’t sure how best to invest it
You would like to help your children, younger siblings, nieces and nephews, or another family member with college savings

Financial advisors can work with you to identify your short- and long-term financial goals, help educate you on your investment options, and provide you with a personalized plan for reaching them.

[1] Breaking Down Misconceptions

If you find yourself in one of these situations but have yet to consider the services of a financial advisor, it may be due to some common misconceptions about financial planning. Here are three that you may be able to relate to.

Misconception #1: A financial advisor just offers stock picks and executes transactions for me.

If you are unclear about what a financial advisor actually does, you are not alone. There are so many types of titles: financial advisor, wealth manager, stock broker, investment advisor, financial planner, financial consultant, financial coach, the list goes on. Then there different ways in which each are compensated: commissions vs. fees. It’s hard to justify paying for something when you don’t even know what you’ll get from the relationship! Because there are so many different types of advisors — practically one for every type of need — distinguishing between them can be challenging.

The fact is, while most advisors do in fact help you pick investments and execute transactions, many do much more than that. Broadly, an advisor looks at your financial situation and suggests strategies and investment products to help you achieve your financial goals. They work with you to understand your current financial picture, set goals for your future, and provide a roadmap to help you reach those goals.

For example, if you are starting a new job and your employer contributes to your 401(k), an advisor may recommend you max out your contributions this year to make sure your company contributes the highest amount. Or if you are carrying multiple loans, an advisor may recommend adjusting payments to each in order to minimize the amount you pay in interest.

Another reason it can be hard to know what an advisor does is because the Financial Industry Regulation Authority, Inc., (FINRA)—one of the primary regulatory agencies governing the industry—currently lists hundreds of designations that apply to professional financial advisors.

Looking at the advisors’ accreditation (the letters after their name) can help ensure you find the right fit for your needs. Advisors can help you manage specific investments and financial accounts or provide a wide range of services to encompass every aspect of your financial picture. Depending on the complexity of your financial situation, you may want to seek out financial professionals with specific expertise in various areas. For example, a Certified Tax Specialist (CTS) can assist with complex tax issues such as tax credits, tax regulations, LLCs and S corporations, business income and home businesses and other topics. While a Certified Financial Planner^TM (CFP®) is required to demonstrate that she has extensive experience in financial planning and is generally well-versed all in areas of financial management from analyzing and evaluating client data and goals to developing and presenting financial recommendations.

Misconception #2: Financial advisors are only for the rich.

It’s a common misconception: If you’re not part of the one-percent, you won’t be able to benefit from a financial advisor.

Yet, the truth is, while there are financial advisors that do work exclusively with the ultrawealthy, the majority work with everyday people.

If the cost to work with a financial professional seems like a barrier to entry, remember there are discount and fee-only advisors who specialize in helping those just starting out with investing or are just beginning to amass wealth.

Similarly, just as there are financial advisors to fit any need, there are also payment structures to fit different budgets. For example:

Fee-only: These are registered investment advisors who charge only for their time and do not receive commissions from the investments they recommend. They may charge a flat fee or take a percentage of the total assets they manage for you. Sometimes these advisors operate on a tiered fixed-fee schedule based on the value of your assets under their management.
Fee-based: These advisors typically charge you a fee for their advice as well as receive commissions for the products they select to implement that advice. Their fees may be lower than fee-only advisors because they are recouping some of the difference in the commissions and incentives they receive from product sales.
Commission only: This pay structure typically applies to an investment advisor or broker who works for a large firm. The advisor (and thus the firm) earns a commission each time a client makes an investment transaction. The more transactions the advisor conducts for his clients, the more earnings he receives.

Misconception #3: A financial advisor is just interested in getting paid and doesn’t operate with my best interests in mind.

Since this is your hard-earned money, finding an advisor you trust and one that will work with you in a true partnership is key. In addition to the fee structure your advisor operates within, there are several factors you should consider when determining if an advisor is going to be someone you can trust and partner with. Before you meet with one, here are a few things to keep in mind:

Reputation: Check out online if the advisor is reputable; if they have online reviews, are they positive/negative?
Testimonials: If the adviser has recommendations or client testimonials on their site or literature, are they recent? Do they seem trustworthy?
References: Some advisors will be able to give you a list of names and contact info for references whom you can speak with to get a sense for the advisor’s style, track record, and overall approach.

Another potential consideration is to find out if your financial advisor acts as fiduciary. In simplest terms, an advisor that operates as a fiduciary is bound legally and ethically to operate in the client’s best interest—essentially putting their clients’ interests above their own. Likewise, an advisor who is operating as a fiduciary must disclose to you if they receive any compensation from the provider of a specific account, such as a mutual fund, for recommending it to you.

With the fiduciary rule, even if an advisor does receive money from a provider, they must also be able to show that they are acting in your best interest by recommending that investment to you.

While fiduciaries are legally bound to operate in a client’s best interest, many advisors who do not operate as fiduciaries still hold themselves to the same values. Ultimately choosing a reputable advisor (fiduciary or not) who understands your unique financial goals and is committed to helping you achieve them is essential. You should be the judge of whether your selected advisor fits the bill for your specific needs and is someone you can trust to act in your best interests.

Click here for [Part II]…

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