Buzz
Financial advisors are not all the same.
Some advisors are more focused on sales, looking to earn higher commissions by upselling clients. Ideally, you'd seek out a fee-only advisor who follows the fiduciary standard, meaning they must prioritize your best interests when offering financial advice.
Fiduciaries can specialize in certain areas. For instance, a Registered Investment Advisor specializes in investments, while Certified Financial Planners (CFPs) offer more comprehensive services, covering everything from saving and investing to taxes, retirement, insurance, and estate planning. CFPs are required to disclose any conflicts of interest and how they are compensated before offering advice.
Watch out for broker-dealers and fee-based advisors. These professionals follow the 'suitability' standard, meaning they may sell you investment products that are acceptable but come with higher fees compared to similar alternatives. Although suitable, these products might not be the best choice for you, and the higher fees can diminish your returns over time. The White House's Council on Economic Advisers reported that these advisors cost retirement investors $17 billion annually.
Robo-advisors are another option, using algorithms to manage your portfolio while charging lower fees compared to traditional human advisors.
The Obama administration proposed the Fiduciary Rule, which would have required all financial planners to act in their clients’ best interests when advising on retirement accounts. The Trump administration delayed its enforcement, and reports suggest that Republican lawmakers may eliminate it.
How to Choose a Financial Planner
You can search for financial planners through the Financial Planning Association and the National Association of Personal Financial Advisors. According to Jacqueline O’Reilly, NAPFA’s marketing and communications manager, there is no standard fee for fee-only advisors. Their charges depend on your needs and the advisor you select, and they may bill by asset percentage, hourly rate, flat fee, or a combination of these.
It’s worth noting that many financial advisors focus on ‘mass affluent’ clients, or those with assets exceeding $250,000. This is why robo-advisors have gained popularity—they tend to be more affordable, with some, like Betterment, not requiring a minimum account balance.
You might also want to explore the Garrett Planning Network, which was created with the 99% in mind. Here, you can find fee-only advisors who charge by the hour and offer advice without considering the size of your assets.
When choosing an advisor, the Securities and Exchange Commission suggests asking these important questions:
What experience do you have, particularly with clients in situations similar to mine?
What licenses do you hold? Are you registered with the SEC, a state authority, or the Financial Industry Regulatory Authority (FINRA)?
What types of products and services do you offer?
Are you limited to recommending only a select few products or services? If so, can you explain why?
How do you get compensated for your services? What are your typical rates—hourly, flat fee, or commission?
Have you ever faced disciplinary action from a government regulator for unethical behavior, or been sued by a client dissatisfied with your work?
According to NAPFA, here are some fees to watch out for:
12b(1) Fee: This is an annual marketing or distribution fee related to mutual funds.
Surrender Charge: This is a fee deducted from the balance of your annuity or insurance policy if you cash it out or cancel it before the specified time.
Back-End Fee: A fee charged when you sell an investment early, often seen with mutual fund shares.
Wrap Fee: A fee that an investment manager charges to provide a package of services, such as investment advice, research, or brokerage services.
Performance Compensation: This type of compensation is based on meeting specific performance goals. For example, if the investment earns a 10 percent return, the planner might receive 0.5 percent, but if it earns 20 percent, the planner could earn 3 percent.
If you choose to hire a financial advisor, be sure to ask about their fees and how they are compensated. Also, if they are not fiduciaries, remember they may not always recommend the best products for your needs.
