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Let’s be honest: Handling money is tough, and many of us struggle more than we should. Between taxes, investments, and paying off debt, financial planning involves a lot of moving parts. While we’re all for learning how to manage finances ourselves, there are several good reasons to consider getting professional advice.
Here’s when it makes sense to seek help, where to look for a trustworthy advisor, and how to choose one that fits your goals.
When should you hire a financial advisor?
The fundamentals of personal finance aren’t too complicated, and with a bit of effort, you can achieve important financial goals like getting out of debt or even starting to invest. However, there are certain times in life when hiring a financial advisor might be beneficial:
You’ve recently tied the knot. This might raise a lot of questions about combining finances, managing shared responsibilities, tax filing, and communication about money. A financial advisor can help you navigate these new responsibilities and guide you through the basics of financial management as a married couple.
You’re starting a new venture. Whether you’re launching a business or diving into freelancing, it can be overwhelming to handle self-employment taxes on your own. A financial advisor can save you from unnecessary confusion and stress. If you’re becoming self-employed, seeking expert advice is wise.
You’re making a career switch. A financial advisor can assist you in planning your finances during this transition, ensuring you stay financially stable through the change.
Your family is expanding. Becoming a parent brings many financial questions: How will your tax situation change? How do you start saving for your child’s education? Do you need an estate plan? A financial advisor can provide guidance on all of these issues and more.
You’re preparing for a significant purchase. Buying a house is a prime example—it’s a complicated process that involves many small details. An advisor can offer valuable insights on how to save effectively and how to navigate the mortgage process.
You’ve received a large financial windfall. Whether it’s through inheritance, a lottery win, or another source, a financial advisor can help you manage an amount of money that you may not be accustomed to handling.
You’re approaching retirement. A financial advisor can guide you through decisions regarding Social Security, pensions, Medicare, retirement accounts, and managing your income during retirement.
You need expert advice. If the thought of handling your own finances feels overwhelming or you simply don’t have the time, consulting a professional can help you get organized and on track.
These are some of the most common situations, but you might have unique reasons that don’t necessarily relate to a major life change.
While it’s great to take the initiative and create your own financial plan, an advisor can save you valuable time and effort. Whether you're feeling lost, overwhelmed by the DIY approach, or simply too busy, there are plenty of valid reasons to seek professional help.
Understanding the differences between an advisor, a planner, and other financial professionals
You’ve likely encountered the terms financial advisor and financial planner in the same conversation, but what sets them apart?
To put it simply, a financial advisor is a broad term that encompasses any professional providing financial guidance. This could refer to a wide range of roles, from wealth managers to financial life coaches. Unfortunately, there is no standardized definition for what financial advisors can or cannot do, say, or offer.
In contrast, a Certified Financial Planner® (CFP®) is more clearly defined: it’s a professional who holds certification from the Certified Financial Planner Board of Standards, Inc. Not everyone can claim to be a CFP. You’d likely prefer to work with a qualified CFP because they are bound by a fiduciary duty, which means they are legally required to act in your best interest.
This is a big deal. A stockbroker, wealth manager, or other non-certified professional doesn’t have to meet these standards (though a regulation requiring them to act as fiduciaries for retirement advice was passed in 2016 but reversed in 2018). While these professionals may still be capable, CFPs are very particular about their titles because their certification signifies reliability—if they make a mistake, they risk losing it.
To add to the complexity, there are also CPAs—Certified Public Accountants. While most people associate CPAs with tax preparation, some may also offer advisory services. However, CPAs are typically hired for tax-related financial matters, whereas a CFP can take care of broader financial planning needs.
What an advisor charges
The cost of an advisor can differ based on the type you select. As financial advisor is a broad term, their fees can range from free to over $300 per hour. Some may charge a flat fee, typically between $1,000 and $3,000.
Certain brokerage firms, such as Fidelity or Vanguard, offer free or discounted financial advisory services. However, it’s important to remember that you get what you pay for—these services will often steer you toward buying their own funds. While this may not necessarily be a bad thing, it's more of a gentle nudge to invest with them. Additionally, since they’re primarily focused on investments, they’re unlikely to provide assistance with budgeting or savings.
Commission-based vs. fee-based advisors
Some advisors, including even CFPs, earn a commission, meaning they’re paid for recommending specific investment or insurance products, like annuities. As a result, these professionals are typically not the most impartial choice for financial guidance.
Fee-based advisors can also earn commissions and are compensated based on a percentage of the investment accounts they manage. This is referred to as “assets under management” (AUM) commissions, typically ranging from 1-2% of the total value of your AUM.
It’s crucial to ask your advisor how they earn their income. Ideally, you want a fee-only advisor.
Fee-only advisors
Finally, fee-only advisors charge either a flat fee or an hourly rate for their services in managing your finances. Since most CFPs must adhere to a fiduciary duty, they are typically fee-only and emphasize that they do not accept commissions. While some commission and fee-based advisors are trustworthy, you’re likely better off choosing a fee-only CFP.
Let’s say an advisor charges an hourly, fee-only rate. But this rate alone doesn’t provide much insight. How long will it take them to finish the job? Advisors vary in their time commitments, but you can generally expect to spend at least $1,500 in total.
For instance, if your advisor charges $150 per hour and spends 12 hours working with you to create your financial plan, the total comes to $1,800. If their rate increases to $300 per hour, that would bring the cost to $3,600.
These are just examples, but they provide a rough estimate of what you can expect to pay.
What to expect when you visit a financial advisor
When you hire a financial advisor, their first priority will be to assess your financial health. You’ll be asked to fill out a questionnaire that covers the following aspects:
Assets and accounts: An overview of your money, including any existing debt.
Income: A look at your salary, plus any additional income or gifts you receive.
Tax situation: Details about withholdings, deductions, and other tax-related factors.
Estate planning: Information on your will, beneficiaries, etc.
Investing: Insights into your current investments, risk tolerance, and retirement goals.
After your advisor gains a clear understanding of your financial situation, the advisory process begins. They’ll suggest a course of action, and after discussing various aspects of your finances, they’ll create a plan. As stated by Investopedia, the plan should summarize the key findings from your questionnaire. It will also take into account your net worth, assets, and liabilities, and include the goals you discussed with your planner, whether they involve investing or simply setting up an emergency fund.
If relevant, the summary should also provide a detailed assessment of your investment risk tolerance, estate planning, and other financial considerations. You’ll likely also see projections of the best and worst-case scenarios for your retirement savings, along with a strategy for how you’ll withdraw funds when you retire.
Once your advisor develops a plan, they’ll help you implement it, and regularly check on your financial health, sending you progress reports along the way.
If your financial planner manages investments, they may assist in opening and funding an investment account. They’ll create a tailored portfolio with guidance on the types of assets to hold (such as stocks, bonds, alternative investments, or real estate funds). Keep in mind that different firms have different investment policies, and some may only work with a single fund provider, restricting your investment options to that company’s offerings.
It’s wise to conduct some research yourself, as some firms may charge fees on your investment returns. At the very least, familiarize yourself with the basics of investing. You’ll want to carefully evaluate your advisor, which includes understanding how they invest your money and how they’re compensated.
Where to begin your search
A solid recommendation from a reliable friend or family member can be invaluable, but if you’re serious about assessing your advisor’s trustworthiness (and you should be), you should begin by looking into NAPFA, the National Association of Personal Financial Advisors. All advisors in their database are certified, fee-only professionals who sign and renew a Fiduciary Oath annually. Another excellent resource for finding CFPs is the Financial Planning Association.
To kick off your search, select a few candidates and conduct some background research. Review their company website and professional bio. NAPFA specifically recommends checking their Form ADV (SEC registration), which you can find on the SEC website, though many CFPs will also provide this form directly on their website.
After narrowing down your options, schedule brief phone interviews with the advisors. The FPA suggests meeting with at least three advisors before making your decision.
How to conduct an interview with your potential advisor
When engaging with a potential advisor, there are a few crucial topics you need to address. First and foremost, confirm how they are compensated. Be specific about their fee structure. Even if you’re convinced they are fee-only, it’s important to get a clear confirmation.
It’s also vital to examine their qualifications. Beyond ensuring they’re a legitimate CFP, if the advisor offers investment products, verify that they are registered with the Financial Industry Regulatory Authority (FINRA). Furthermore, if they manage over $100,000 in assets, ensure they’re also registered with the Security and Exchange Commission (SEC).
NAPFA provides some additional key questions to ask:
Do you offer holistic financial planning or is your focus solely on managing investments?
What specific steps will you take to help me achieve my financial objectives?
What impact will an event in your life have on my professional relationship with the firm?
Are you obligated to act according to a fiduciary standard at all times?
Generally, you should openly discuss your specific financial goals and verify that the advisor is equipped to address them. It’s also crucial to distinguish a trustworthy advisor from a less reliable one. During your discussion, consider these key points to evaluate:
Experience and track record: Do they have a successful history in the field?
Clientele type: Ensure they’re familiar with clients who have similar financial needs as yours.
Investment approach: Understanding investment basics is valuable. A long-term buy-and-hold strategy is recommended, which aligns with most financial experts. Ensure that their investment strategy resonates with your own.
A reputable financial advisor should prioritize listening and asking insightful questions about your circumstances. If they do any of the following during your meeting, it's a red flag to end the conversation:
They claim to outperform the market. If your advisor promises you extraordinarily high returns, it’s likely time to move on. The stock market typically yields around 6-7%, and even that’s not guaranteed.
They offer advice without understanding your complete financial situation. This is connected to the 90% talking issue. They should be well-informed about your financial health to create a tailored strategy for you.
You feel hurried or pressured. If the advisor is pushing you to respond by a set deadline or encouraging you to act on a time-limited opportunity, they’re likely trying to sell you something that isn’t in line with a secure financial future.
Always be on the lookout for warning signs like these, but choosing a fee-only CFP will significantly reduce any concerns you may have.
It can be daunting to share and entrust your financial details to someone else. However, in some cases, it makes sense, and there are many experienced and capable advisors who can help manage your money. Take your time with the process—and do your homework—and finding a trustworthy one shouldn’t be too challenging.
