From time to time I receive emails from readers who have realized they need financial help beyond reading blogs and books.
Maybe their financial situation suddenly became more difficult due to a new job or inheritance. Or maybe they just need personalized advice to help them increase their savings or pay off debt.
Although I consider myself well versed in personal finance, I do not have experience in individual counseling, which is something to consider if you are looking for a financial advisor. Just as you don’t want to go to a doctor who has 10 years of research and publishing experience but has never done a clinical examination, you want your financial advisor to have hands-on consulting experience.
If you’re thinking about getting a financial advisor, here’s how to know if the time is right, how much it will cost, and how to choose the right one for you.
When to contact a financial advisor
In my opinion, there are three reasons to hire a personal financial advisor:
- You feel “lost” in planning your financial future and need a roadmap.
- You just don’t want to deal. When it comes to money, you don’t like to do everything yourself and you just need a professional to take care of it.
- You enjoy managing your money, but you realize that your financial plan would benefit from a third party’s unbiased and unemotional opinion.
I think we all fall into one of these three categories at some point in our financial lives. But let’s look at each situation and consider when it’s time for you to hire a financial advisor.
1. You need help planning your financial future
This may be true for most of us when we start. There are so many goals competing for our limited financial resources:
- Payment of student loans.
- Replenishment of the pension account.
- Maintaining an emergency fund.
- Buying a house.
- Taking a vacation.
- Have fun NOW.
No wonder we find such huge money as 20 and 30 year olds!
While getting the help you need from a professional will cost you, if it helps you get ahead in the long run, then the price of a financial advisor is worth it.
Here’s my take: If you have a comfortable emergency fund and can afford the services of a financial advisor without getting into debt, a financial planner can be a good investment. In fact, a planner’s fee can pay off in a few years if it helps you make better financial decisions in the interim.
Related: Emergency Funds: Everything You Need to Know
2. You just don’t want to deal with money.
Some people hate managing their money. And it’s cool; the important thing is that you acknowledge it and ask someone else to do it for you. In this case, hiring a financial advisor will not be difficult.
However, you will need enough investment assets for the consultant to hire you.
When it comes to investment advisors, most of them cannot afford to work with you as a client until you have an investment of $100,000 or so. Some drop that amount down to $50,000 while others don’t take clients until they have $500,000 or even $1 million to invest. So you will have to shop around.
I think the $100,000 level makes sense. If you have less money invested, you might be better off putting your money into low-cost index funds and leaving them alone.
Related: How to Invest in Index Funds: A Beginner’s Guide
3. You want an unbiased third-party opinion about your money
There are many independent investors who never hire a financial advisor. They think, “I like to do it myself and I’m pretty smart, so why would I pay someone 1% of my money every year and reduce my profits?”
But here’s the thing: no matter how much you learn about investing, you will never be on par with Wall Street. And no matter how much you learn about investing, you will always be human and therefore susceptible to making irrational decisions.
If paying a financial advisor saves you one bad decision a year—or you discover an opportunity you missed—they could very well increase your return on investment, despite the commission.
Read more: Do you need a financial advisor?
How much does a financial advisor cost?
In an ideal world, everyone would have financial advisors that we could contact once a month or call before making a major purchase or investment decision.
However, in reality, financial advisors are expensive. As a result, the decision to hire a financial advisor requires a careful cost-benefit analysis.
And to further complicate things, different advisors work with different fee structures:
- Annual fee. Financial planners typically charge several thousand dollars for a comprehensive financial plan.
- Hourly rate. Hourly pay is usually several hundred dollars per hour.
- Percentage of invested assets. You will be charged a fixed percentage of your total account balance – typically between 0.25% and 1% per annum. The unofficial industry benchmark is 1%, although consultants may charge slightly more or less.
Let’s look at some real numbers so you can get an idea of how much you can pay if your advisor charges a percentage fee.
If you have $200,000 to invest, you will pay $2,000 per year. If you have $1 million, the fee will go up to $10,000 per year, although some advisors have a fee structure where the percentage goes down as your assets grow.
Rule of thumb: Always ask how your consultant is compensated.
Some financial advisors receive commissions from banks and investment companies. So while they offer “free” advice – which may well be tempting – these consultants usually earn commissions on the investments they sell to you. Over time, the wrong investment can actually cost you more than paying a paid consultant.
I’m not saying that all commission consultants will give bad advice, but a good consultant should be transparent.
Read more: Are Certified Financial Planners Worth the Money?
How to choose a financial advisor
When it comes to choosing a financial advisor, you need to make sure the right person is someone who understands your goals, has experience working with people in your situation, and most importantly, makes you feel comfortable. The last thing you want is to end up with an advisor who doesn’t answer your questions in a way you understand or who forces you to make investments that you don’t feel comfortable with.
You’ll want to jump into the verification process with a few pre-planned questions:
- Do they have experience with clients like you? This applies not only to your financial situation, but also to whether you are a member of the LGBTQ+ community; Black, Native, or Colored person; single, married or divorced; etc.
- What services do they provide? Do they offer investment advice, tax support, budgeting assistance, etc.?
- How much do they charge? Are they hourly, down payment based, or percentage based?
- What is their communication style and frequency? How often do you want to hear from your consultant, and which format is best for you: email, phone, in person, or all three?
- Which firm owns your assets? If you’re investing with your financial advisor, make sure the custodian is a big brand name firm that you’ve heard of, like Fidelity or TD Ameritrade.
For more detailed guidance on selecting and screening financial advisors, please see How to Choose the Best Financial Advisor.
After you’ve “interviewed” your potential consultant, consider how you felt after talking to them – were you completely overwhelmed or are you now confident in your financial future?
Don’t trust your finances to someone who makes you feel “out of your element”.
Where to find a financial advisor
I recommend two websites that make it easy to find a financial advisor: Registry of paladins as well as SmartAsset.
Registry of paladins offers two free ways to find a financial professional in your area. You can use a matching service that collects information about you and your needs and then suggests the right consultants. Or you can use the directory and go through the list of certified professionals yourself. Once you find a consultant you are interested in, you simply schedule an interview.
Another useful tool for finding your financial planner: smart asset. After answering a few questions about your current situation and future financial goals, the built-in tool will match you with up to three pre-verified advisors. You can then easily schedule an interview with each planner and choose the one that best suits your needs and preferences.
Read more: The Best Financial Advisors for Millennials and Generation Z
Hiring a financial advisor may require you to spend some money. But if you have the right person on your team, it can definitely be a worthwhile investment.
Many of us feel lost in our finances, but getting a second opinion from a financial advisor can be reassuring. It fires up the cauldron – and that’s almost always a good thing!
Featured image: Andrey_Popov/Shutterstock.com