How to Hire a Financial Advisor Who Will Not Deceive You

Let’s face it: money management is tricky and most of us are not as good at it as we could (or should) be. From taxes to investing and debt cancellation , a lot goes into financial planning. And while we’re all in favor of learning how to do this on our own, there are a number of reasons to enlist the help of a counselor.

That’s when you might need it, where to find it, and how to make sure you pick the one that suits your needs.

When is it time to hire a financial advisor?

The basics of personal finance are not that hard, and with a little research, you should be able to tackle financial milestones like paying off debt or even investing . But there are a few specific cases in your life when it makes sense to hire an advisor:

• You recently got married. You will likely have a lot of questions about merging accounts, your responsibility for another person’s finances, communicating about money, filing your tax return, and so on. A financial advisor can lay out the basics and help you manage your finances as a married couple.
• You are starting a new business. Or you started freelancing. Instead of navigating the convoluted maze of how self-employment taxes work on their own, seek the help of a financial advisor and save a lot of time and headaches. When you decide to go into self-employment – be it freelancing or starting a business – it’s a good idea to talk to a financial advisor.
• You are changing careers. Financial advisors can help you prepare for the transition and stay afloat during the transition.
• Your family has grown. As a parent, there are many financial considerations to consider. How will your taxes change? How to start saving for college? Do you need a real estate plan? A financial advisor can help you answer these questions and more.
• You are planning a major purchase. A common example – buying a home – is a complex process that requires many small details to be considered. A consultant will tell you where is the best place to leave your savings or how to prepare for the mortgage process.
• You are in great luck. Maybe you’ve won or inherited a huge amount of money – more than ever before – and you don’t know how to start managing it.
• You are approaching retirement. A financial advisor can help you make decisions about accessing and using Social Security, retirement funds, Medicare, and your retirement accounts, and how to manage your income during retirement.
• You just need a professional opinion. If you’re feeling overwhelmed by the idea of ​​planning your finances, or don’t have the time or the brain to manage your money, an objective third party can help you get on track.

These are some of the most common scenarios, but you may have your own reasons that are not related to any important life event.

Again, it’s great to research and craft your own financial plan, but an advisor can save you a lot of time and energy. If you are feeling lost, the homemade approach is stressful for you, or you are just very busy, there are many good reasons to seek help.

The Difference Between an Advisor, Planner, and All Other Financial Professionals

You’ve probably heard that the terms “ financial advisor” and “ financial planner” are used in the same context, so what is the difference between them?

Simply put, financial advisor is a generic term for any professional who gives you financial advice. And it can be used to describe a number of different financial professions, from asset managers to financial life consultants. Unfortunately, there is no single standard of what those who call themselves “financial advisors” can and cannot say, do or suggest.

On the other hand, the Certified Financial Planner® is a little more specific: it is a professional certified by the Certified Financial Planner, Inc. – not everyone can call themselves CFP. And you probably want a qualified CFP to handle your finances because they have fiduciary responsibilities , meaning they are legally required to act in your best interest.

It’s huge. The stockbroker, wealth manager, or any other non-certified consultant or planner is not required to meet this standard (a rule requiring them to do so, at least for retirement advice, was enacted in 2016 but canceled in 2018 ). This does not necessarily mean that all these professionals are not worth their salt, but CFPs are usually very picky about their titles, and understandably so: their certification shows that they are reliable. If they are wrong, they lose this certificate.

To further confuse the situation, there are also CPAs – Certified Public Accountants. Most people know that CPAs help prepare taxes, but they can do more and some of them may offer consulting services. In general, however, a CPA is primarily hired for tax-related financial tasks, while a CFP can take over most of your financial planning.

How much does an advisor cost

The cost of the advisor varies depending on which one you choose. Again, financial advisor is a fairly general term, so its cost will range from free to $ 300 per hour. Some consultants may charge a flat fee ranging from $ 1,000 to $ 3,000 .

Some brokerage firms, such as Fidelity or Vanguard, offer financial advisory services for free or at a discount. Of course, you get what you pay for, and they’ll ask you to buy your own funds in the first place. It’s not always a bad thing, but treat their services appropriately, and it’s really just a reminder to invest with them. Also, since they are mostly interested in investment, they probably won’t help with a basic budget or savings.

Commission and paid consultants

Other consultants and even CFPs work with commissions, and in essence they are sellers who are paid to recommend specific investment or insurance products such as annuities . For this reason, they are generally not recommended.

Paid advisors can also earn commissions and are also paid according to the percentage of your investment accounts that they manage. This is also known as “assets under management” or AUM commissions. Usually this is 1-2% of the amount in your AUM.

It is extremely important to ask your consultant how they are being paid . Ideally, you need a paid advisor.

Paid consultants

Finally, there are paid consultants who simply charge a flat or hourly fee for the time spent managing your finances. Since most CFPs are required to follow this fiduciary standard, they are also paid and highlight the fact that they do not accept commissions. While there are several reputable commission and paid firms out there, you probably want to find a pay-only CFP.

Okay, let’s say a consultant charges an hourly rate for a fee only. That alone doesn’t tell you much. How long will it take for them to complete the job? Obviously, the advisors vary, but you can probably expect to spend over $ 1,500 in total.

For example, if your $ 150 an hour advisor spends 12 hours with you meeting with you and developing your financial plan, that’s $ 1,800. Bump that board up to $ 300 an hour and you get $ 3600.

Again, these are examples, but they give you a rough idea of ​​what you can expect to spend.

What to Expect When Visiting a Financial Advisor

When you hire a financial advisor, their first task is to get a clear picture of your financial health. You will receive a questionnaire with questions about the following:

• Assets and accounts : how much money do you have, how much debt do you have
• Income : what your salary looks like, do you have additional sources of income or gifts.
• Tax situation: withholdings, withholdings and other tax details.
• Estate planning : your will, beneficiary information, etc.
• Investing : your investment, risk tolerance, retirement goals.

Once your advisor has a complete picture of your financial situation, then advice will come. He will recommend a plan of action, and after talking with you about the various areas of your finances, he will draw up a plan. According to Investopedia , this should include a summary of the most important takeaways from your survey. The plan will also take into account your net worth, assets and liabilities and include the goals that you discussed with the planner – whether they are investment goals or simply accumulating funds from a reserve fund.

If applicable, the summary should also include a thorough analysis of your investment risk tolerance, inheritance planning details, and other information relevant to your financial plans. You can also expect to see potential best and worst-case scenarios for your retirement savings, as well as details on how you will withdraw money when you retire.

Once your consultant has developed a plan, they will work with you to implement it, periodically monitor your financial condition and send you a report.

If your financial planner is investing, they can also help you open and fund an investment account. They will offer a customized portfolio that will tell you what assets you should have (stocks, bonds, alternatives, real estate funds, etc.). Each firm has its own investment policy, so the approach may differ. Some firms only work with one stock company and restrict your investments to that company.

It is worth doing a little research on your own because some firms may charge a commission on the return on your investment. At the very least, learn the basics of investing yourself . Make sure you check your advisor thoroughly, and part of that is figuring out how they are investing your money and how they are paid.

Where to start your search

A good recommendation from a trusted friend or family member can go a long way, but if you want to test the reliability of your advisor (and you do), you should start with NAPFA, the National Association of Personal Financial Advisors . All consultants listed in their database are certified, paid, and each year they sign and renew the fiduciary oath. The Financial Planning Association is another good option for finding CFPs.

To start your search, you need to select a few potential candidates and then do a little research. Check their company website and bio. NAPFA recommends specifically reviewing their ADV (SEC Registration) form. You can do this on the SEC website , but many CFPs will offer a form on their website.

After narrowing down your list to a few consultants, you’ll want to call and schedule short telephone interviews. FPA suggests meeting with at least three advisors before making a decision.

How to Interview Your Potential Consultant

When talking to a prospective consultant, there are several important topics you need to address. Again, ask them to explain how they are paid. Specifically, ask about their pay structure. Even if you are sure that they are paid, ask them to confirm it.

Obviously, you want to look at their accreditation as well. In addition to verifying that you are dealing with a real CFP, if the advisor sells an investment product, you will also want to ensure that it is registered with the Financial Industry Regulatory Authority (FINRA). If they manage assets worth more than $ 100,000, make sure they are registered with the Security and Exchange Commission (SEC).

NAPFA offers several additional specific questions :

• Do you provide comprehensive financial planning or just investment management?
• How will you help me achieve my financial goals?
• What happens to my relationship with the firm if something happens to you?
• Do you always adhere to fiduciary standards?

In general, talk about your financial needs and make sure they can help you with them. However, you also want to separate a good financial advisor from a bad one . That being said, discuss the following topics during the interview:

• Their work experience : do they have a proven track record?
• Typical client of theirs : You want to make sure they are used to working with clients who have similar needs.
• Their investment philosophy : This is why it helps you learn the basics of investing. We recommend a long-term buy-and-hold portfolio like most personal finance experts. You want your advisor’s investment philosophy to match yours.

A good financial advisor listens more than speaks. They should also ask questions about your situation and come up with ideas. If your consultant does any of the following during the meeting, leave:

• They promise to destroy the market. If your advisor guarantees a high return on investment, it’s probably time to move on. On the stock market, on average, about 6-7% , and even this is not guaranteed.
• They advise you without knowing your complete financial situation. This goes hand in hand with 90% of conversations. They must have a complete understanding of your financial health in order to come up with a personalized action plan.
• You feel rushed or pressured . If the planner convinces you to return to them by a certain date, or they convince you to act within a limited time opportunity, they are probably trying to sell you something that goes beyond a secure financial future.

You should always look out for these red flags, but checking a paid CFP will help you make sure you have nothing to worry about.

Revealing and transferring your finances to someone else can be intimidating. But sometimes it makes sense, and there are many experienced and qualified consultants who can help manage your money. Take your time with the process – and do your research – and it shouldn’t be too hard to find a reliable person.

This article was originally published in September 2015 and was updated by Emily Long on June 23, 2020. Our updates include the following: updated links and resources, changes to match the current Lifehacker style, a new first paragraph, and a new lead image.

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