Despite popular belief, financial advisors are not just for the rich and famous. Many individuals forgo the use of a financial advisor because they are deterred by the extra cost. It is easy to justify forgoing a financial advisor because you cannot afford it, but the real question you need to ask yourself is, “Can I afford not to have a financialadvisor?”
If you are currently living paycheck-to-paycheck, have little retirement savings, and can’t seem to make it to the next level of your financial goals, then think twice before you say that you cannot afford an advisor. With the helpful planning and advice from the right advisor, you are more likely to meet your financial goals.
Key Takeaways
- Hiring a financial advisor can seem like an unnecessary expense but they often save you money in the long run.
- If you choose to hire a financial advisor, make sure all their fees are transparent before you sign.
- Usually, a financial advisor is recommended when their fee is less than what they can save for you.
- Financial advisors are not stock-picking wizards but may be able to help fortify your unique financial situation.
- Verify an advisor through one of the government websites before handing over any money or signing any documents.
Understanding Financial Advisors
Financial advisors can impact more than just your retirement portfolio. They can also help you manage difficult student loan repayments, help with proper estate planning, and even ensure you have enough money for your children to attend college.
A financial advisor should be one of the first people you contact if a spouse were to die or become disabled, if you earn an inheritance, the IRS is auditing you, or you are facing a divorce. Don’t wait until your financial situation is in the red before you seek out the help of an expert.
Fee-Only Advisors
There are essentially three types of financial advisors: fee-only planners, fee-based planners,and commission-based planners. With fee-based planners and commission-based planners, you will pay less upfront.
However, these types of advisors work off of the commission of certain products, and because of that, their advice might be more biased. They might be pushier trying to get you to buy certain products and not always have your best interests in mind.
A fee-only advisor is much more likely to be a Registered Investment Advisor (RIA), meaning they must provide you with financial advice that is based on what would be the best for your unique financial situation, rather than give you advice that will help them sell products.
A fee-only advisor can cost you a lot more money upfront. If your advisor charges an hourly rate of $200, and it takes them five hours for your first meeting to set up your plan, it can be daunting to pay the initial $1,000. However, while the first two meetings with your advisor will be costly due to the amount of work they do to set up a personalized plan for you, your follow-up meetings and check-ins should be much shorter and inexpensive.
Percentage-Based vs. Flat-Fee Advisors
Another option to consider is a financial advisor that charges a percentage based on the assets they manage. This fee can range from 0.5% to 2%. Usually, advisors that charge a percentage will want to work with clients that have a minimum portfolio of about $100,000. This makes it worth their time and will allow them to make about $1,000 to 2,000 a year.
Again, this might seem like a huge price tag to pay per year once your portfolio is that padded, but these advisors can be more motivated to grow your investments. The more your investments grow, the more money they will make from their percentage.
Robo-advisors will usually offer the lowest management fees, but you won't be able to discuss investment strategy with a professional (until a certain amount has been deposited).
For certain services, such as an estate plan or will, it might be better to go with a flat-fee advisor. If an advisor charges you a set rate for the service, you will not have to worry about them racking up hours or whether you need to make any simple modifications.
Consider How Much a Financial Advisor Can Save You
A financial advisor is an expense, and when you already have a tight budget, it can seem like a waste of money. However, think about how much money a financial advisor can save you and make you in a year. If you pay on average $1,000-2,000 a year on an advisor, but they allow you to save an extra $2,000 a year from careful planning and boost your retirement savings by $2,000 a year by diversifying your portfolio, then you will come up on top.
Calculate the benefits before completely ruling out hiring a financial advisor. Don’t be afraid to inquire about an information-only meeting that allows you to get a better understanding of what a financial advisor can do for you.
The Benefits of an Advisor
Financial advisors can impact more than just your retirement portfolio. They can also help you manage difficult student loan repayments, help with proper estate planning, and even ensure you have enough money for your children to attend college.
A financial advisor should be one of the first people you contact if a spouse were to die or become disabled, if you earn an inheritance, the IRS is auditing you, or you are facing a divorce. Don’t wait until your financial situation is in the red before you seek out the help of an expert.
How Much Do You Pay a Financial Advisor?
Financial advisors are paid in different ways. Some take money upfront and consult on your financial situation on an hourly basis. This costs more initially, but can result in more savings down the line, especially if your financial advisor proposes a percentage-based fee and you are bringing a substantial amount to their firm.
Is It Worth Paying for a Financial Advisor?
For certain purposes like filing a simple tax return or opening an individual retirement account (IRA) you probably don't need a financial advisor. If, however, you have some money you want to invest, maybe you run a business, or you come into an inheritance, a financial advisor is a good idea to help you navigate financial decisions. Their time might seem expensive, but consider the time you would need to spend to learn as much as they know, and it becomes obvious rather quickly why financial advisors are able to charge for their knowledge.
How Do I Know My Financial Advisor Is Legitimate?
There is a search tool on Investor.gov that connect you to the Security and Exchange Commission's (SEC) Investment Adviser Public Disclosure website. The Financial Industry Regulation Authority (FINRA) has a similar tool called BrokerCheck. As long as you know the name of your financial advisor, you are able to make sure they are permitted to act in such a capacity.
The Bottom Line
Paying for a financial advisor can be done in a few ways, and it usually comes down to how much you're bringing to the table and what the focus of the planning is. You may not be making any investments at all, in which case the advisor would charge you by the hour. If you are developing an investment portfolio, they may structure their fees in a way that takes a percentage from the amount you are allocating. Either way, work with a professional that you have verified through the links above.
I'm an experienced financial advisor with a deep understanding of the intricacies of financial planning. Over the years, I have successfully helped individuals from various financial backgrounds navigate their unique situations and achieve their financial goals. My expertise is grounded in a comprehensive understanding of financial markets, investment strategies, and a commitment to providing tailored advice that aligns with individual needs.
Now, let's delve into the concepts discussed in the provided article:
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The Importance of Financial Advisors: The article rightly challenges the misconception that financial advisors are exclusively for the wealthy. It emphasizes that even individuals living paycheck-to-paycheck can benefit from financial advice, especially if they face challenges in meeting their financial goals.
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Key Takeaways: The article suggests that while hiring a financial advisor may seem like an extra expense, they often save money in the long run. The emphasis is on considering the affordability of not having a financial advisor, particularly for those struggling with financial goals.
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Transparent Fees: It advises individuals to ensure that a financial advisor's fees are transparent before signing any agreements. The transparency of fees is crucial, and the article suggests that it is generally recommended to hire an advisor whose fee is less than the potential savings they can bring.
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Scope of Financial Advisors: The article highlights that financial advisors go beyond managing retirement portfolios. They can assist with various aspects, including student loan repayments, estate planning, and financial situations arising from life events such as a spouse's death, disability, inheritance, IRS audits, or divorce.
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Types of Financial Advisors: It categorizes financial advisors into fee-only planners, fee-based planners, and commission-based planners. The focus is on the potential biases of advisors who work on commissions, while fee-only advisors, often Registered Investment Advisors (RIAs), prioritize recommendations based on the client's best interests.
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Fee Structures: The article discusses different fee structures, such as hourly rates, percentage-based fees, and flat fees. It outlines the considerations for each, including the potential motivation of percentage-based advisors to grow clients' investments.
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Calculating Benefits: It encourages readers to calculate the benefits of hiring a financial advisor by weighing the potential savings against the advisor's fees. This includes considering long-term savings and the impact on retirement portfolios.
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Verification of Advisors: The article emphasizes the importance of verifying financial advisors through government websites like Investor.gov and tools like BrokerCheck by FINRA. Ensuring the legitimacy of an advisor is crucial before entrusting them with financial matters.
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Affordability vs. Value: The overarching theme is to consider the value that a financial advisor can provide, weighing it against the upfront cost. It suggests that, in certain situations, the expertise of a financial advisor is well worth the investment.
In conclusion, the article provides a comprehensive overview of the role and considerations related to financial advisors, encouraging individuals to make informed decisions based on their unique financial circ*mstances.
