Understanding the Role of a Financial Advisor
Making objective decisions about your money can be tricky. Money is often an emotional topic and therefore it’s easy to make financial decisions that work against your best interest.
Financial advisors exist to provide expert and objective guidance on managing your finances, planning your retirement, and achieving your financial goals. They can help you make informed decisions about topics including your investments, spending & saving, tax planning, insurance and risk management, and your estate plan.
Financial advisors can create a comprehensive financial plan that aligns your money with what matters most to you, paving a path to your ideal future.
4 Tips to Help You Choose the Right Financial Advisor
1. Identify Your Financial Needs
Before you start looking for a financial advisor, it’s important to make a list of your financial needs. For example, are you looking for help with retirement planning, investment management, tax planning, or all of the above?
Not all financial advisors offer the same guidance and services. Some specialize in investment management, while others don’t manage investments and only help clients build financial plans. Understanding your needs will help you find a financial planner or financial advisor with the right expertise.
Whether you need assistance with creating a comprehensive financial plan or specific investment advice, knowing your needs is the first step in choosing the right financial planning services.
2. Understand the Types of Financial Advisors
There are multiple types of financial advisors. Common advisor types include fee-only advisors, commission-based advisors, and fee-based advisors.
Fee-only advisors charge their clients a fee or hourly rate and do not earn commissions on the products they recommend. Fee-only advisors can manage investments for a fee but the client is the only person who compensates these type of advisors, potentially reducing sales conflicts of interest.
On the other hand, commission-based advisors earn commissions on the financial products they sell. Commission-based advisors are really financial sales professionals, often specializing in selling insurance products or investment vehicles that generate commissions. They are only compensated by third party companies who incentivize them to sell their products.
Fee-based advisors can charge a combination of fees for financial planning and investment management and also have the ability to receive commissions for selling products including insurance policies.
One way to tell if your advisor is fee-only or can receive commissions is to look for language on their websites and brochures that mention that they are regulated by the Financial Industry Regulatory Authority (FINRA). FINRA regulates financial sales professionals. Fee only advisors are either regulated by their state or the Securities and Exchange Commission (SEC).
Other examples of terms that distinguish different types of financial professionals include Registered Investment Advisors (RIAs) and Chartered Financial Analysts (CFAs). If an advisor is affiliated with a Registered Investment Advisor (RIA), it typically means that the advisor is not working for a large financial product company and is likely a fee-only advisor. Chartered Financial Analysts (CFAs) often don’t work directly with clients as they have advanced investment certifications that imply they spend their day working on investment portfolio construction and analysis, however you may see client facing advisors who have this designation in their title. This might imply they have deep investment management expertise.
Understanding the common types of financial advisors will help you make an informed decision that aligns your financial goals with the right financial partner.
3. Evaluate How Much You Can Afford
Financial advisor costs vary based on the level of services they provide and how they charge. Some advisors charge a percentage of the assets they manage and bundle multiple services for this fee, while others may charge an hourly rate or a flat fee for planning advice outside of managing investments.
Consider your budget and how much you are willing to spend out of pocket on financial advisory services. If you know you don’t have much wiggle room in your budget to pay directly for advice, it’s possible that working with an advisor who manages your investments might be a path of least resistance as they are commonly paid a fee deducted from your investment accounts. If you feel confident managing your own investments but want to pay for bigger picture advice, then looking for an advisor that bills a direct fee to you might be the right call.
At the end of the day, the cost of hiring a financial advisor should be justified by the value they provide, which can sometimes be difficult to quantify. Value can come in the form of monetary gain over the course of the relationship. Value can also come from the peace of mind and mental satisfaction of knowing you have a partner looking out for your financial future. It’s also important to factor in the long-term benefits of professional investment management and financial planning services as these services tend to show their monetary value after long periods of time.
4. Check Qualifications and Credentials
Ensure that the financial advisor you choose has the necessary qualifications and credentials to provide you with high quality advice. Look for certifications such as the Certified Financial Planner™ (CFP®) designation. This certification indicates that the advisor has met rigorous professional standards and has the potential expertise to manage your finances.
Additionally, check that an advisor is a member of organizations including the Financial Planning Association (FPA), The National Association of Personal Financial Advisors (NAPFA), the XY Planning Network (XYPN), and the Garrett Planning Network. These membership affiliations can be strong signs that your advisor is committed to professional development and potentially being a fiduciary as many of these organizations require that their members be fiduciaries.
What Questions Should You Ask a Financial Advisor?
When meeting with potential financial advisors, it’s important to ask the right questions to ensure they are the right fit for you. Some key questions include:
| Question | Why Ask |
| What type of client do you specialize in working with? | Ensures the advisor has the necessary skills and background for your particular situation |
| How do you charge for your services? | Clarifies the cost structure and helps avoid unforeseen or hidden fees |
| What is your approach to financial planning or do you just manage investments? | Understands the advisor’s methodology and alignment with your goals |
| Can you provide an example of what working with you would look like? | Provides perspective on the type of advice they offer and what your experience may be |
Asking these questions will help you research financial advisors thoroughly and potentially ensure you choose a financial advisor who aligns with your needs and expectations.
What Are the Benefits of Hiring a Financial Advisor?
| Benefit | Description |
| Expert guidance on managing your finances | Financial advisors provide advice on topics including your investment portfolio, spending & saving, tax planning, insurance and risk management, and your estate plan |
| Offering customized financial planning services | Financial plans are designed to help you achieve your specific financial goals and needs |
| Peace of mind | Knowing your financial future is well-managed can reduce your stress and worry |
By hiring a financial advisor, you can gain access to professional investment management and comprehensive financial planning services that can help you confidently achieve your financial goals.
See If Stage Ready Financial Planning Is the Right Fit for You
At Stage Ready Financial Planning, we specialize in fee-only financial planning for individuals and couples over age 50 in Dayton & Southwest, Ohio. We help you create a clear and easy to understand plan so that you can retire with confidence and live your ideal lifestyle. Schedule your introductory call today!
Importance of a Financial Plan
Building a financial plan can be a powerful step in creating your ideal financial future. A financial plan helps you identify and set clear financial goals and provides a roadmap to achieve them. Whether you are saving for retirement, buying a new home, trying to pay less in taxes, or making income decisions with your investments and Social Security, a financial plan can guide you through each STAGE of your financial journey.
The Role of Traditional Financial Advisors
Traditional financial advisors have been known to manage investments for their clients as their primary service offering. As the financial services industry has evolved and access to low cost investment vehicles has improved, the scope of services offered by the traditional financial advisor has grown to include comprehensive financial planning and advice on topics including budgeting, taxes, risk management, and estate planning. That said, there are still many financial advisors who primarily invest client money for a living. It’s important to fully understand what an advisor offers and how they help you plan!
FAQs
Do I really need a financial advisor when I retire?
It’s definitely possible to manage your finances on your own. Hiring a financial advisor can provide peace of mind and objective guidance to help you avoid costly mistakes. An advisor can help you create a financial plan, manage your investments, and ensure you have a steady income throughout your retirement. Their expertise can also assist with tax planning, estate planning, and navigating complex financial decisions, making your retirement more secure and less stressful.
Is it better to have a financial advisor or financial planner?
The terms financial advisor and financial planner are often used interchangeably. However, a financial planner typically focuses on creating customized financial plans, while a financial advisor may offer services primarily focused on investment management. The best choice depends on your specific needs and the services you are looking for. If your primary need is investment advice, a financial advisor may be more suitable. For financial planning advice on topics like budgeting, tax planning, and estate planning, a financial planner might be the better choice.
What are the disadvantages of a financial advisor?
While financial advisors offer many benefits, there are potential disadvantages to consider. These can include the cost of their services, potential conflicts of interest if they earn commissions on the products they recommend, and the challenge of finding a trustworthy advisor. It’s important to thoroughly research financial advisors, understand their fee structures, and evaluate their qualifications and experience to ensure you choose a financial advisor who aligns with your needs.