The True Expense Implications of Engaging a Financial Consultant
Get savvy about your finances and avoid missing out on the benefits of enlisting a financial advisor. These pros offer more than just investment advice, they lend a helping hand to reach your short-term and long-term financial goals.
Core Features on the Tab:
Investment Management: Advisors will develop and maintain personalized investment strategies, tailored to your unique goals and risk tolerance. This ongoing service typically involves percentage-based fees, ranging roughly from 0.5% to 1.5% of your assets.
Planning: Most financial advisors offer services such as retirement strategies, tax optimization, estate planning, and education savings, either tucked into their asset-based fees, or billed separately as flat fees or hourly rates.
Specialized Expertise: If you face complex situations like business succession planning, estate tax strategies, risk management, or tax-efficient investment strategies, consider finance pro's with certification as CFPs (Certified Financial Planners) or CFAs (Chartered Financial Analysts).
When It's Most Beneficial:
Advisors shine during life transitions, or high-stakes financial decisions, such as:
- Preparing for retirement
- Receiving an inheritance or windfall
- Handling business sales or career transitions
- Navigating divorce or the loss of a spouse
- Creating estate plans
- Addressing tax troubles
- Planning for education expenses
Operating Under Trust:
Top-tier advisors function under a fiduciary standard, legally placing client interests above their own. This applies primarily to:
- Registered Investment Advisors (RIAs)
- Fee-only advisors
- CFPs
Compensating Your Advisor:
Financial advisors mainly fall into three categories: fee-only planners, fee-based planners, and commission-based planners.
Fee-Only Advisors:
Prepare for some upfront costs with fee-only advisors. An initial $200-per-hour advisor consultation for your personalized plan can add up quickly. However, the follow-up meetings and check-ins should be more affordable once the initial work has been completed.6
Percentage-Based Advisors:
An advisor who charges a percentage based on the assets they oversee may also be an option. This fee might range from 0.5% to 1.5%, with the minimum portfolio amount depending on the particular firm you choose.
While this might seem steep, remember that the more your investments prosper, the more your advisor earns. Some argue that a 1% fee is excessive for accounts under $1 million, but negotiating a smaller percentage or opting for flat fees can help balance costs.7
Flat-Fee Advisors:
You might want to consider flat-fee advisors for specific services, such as crafting an estate plan. The legal documents can then be created by a lawyer based on the advisor's plan. If an advisor charges you a set rate for the service, no additional hours or modifications will rack up the costs.
Important Note:
Robo-advisors offer the least expensive management fees, but you won't be able to conversate with a real advisor about your investment strategy unless you pay extra or have a larger account.
How Much Can Financial Advisors Save You:
Employing a financial advisor can feel like a substantial expense, especially when you're tight on funds. Yet, careful tax planning and the many other services they offer could easily offset their fee. If you're currently shelling out $1,000 to $2,000 a year on an advisor, the potential savings could be significant. Don't rule out consultations until you've calculated the potential benefits.8
Finding the Right Advisor:
To maximize your return on investment, take these steps:
- Initiate a free consultation to grasp their services and methods.
- Ask for references from current clients, and read reviews online.
- Validate their credentials through official channels, like the SEC's Investment Adviser Public Disclosure website or FINRA's BrokerCheck.
- Ensure their fees match your financial situation and portfolio size.
- Delve into the specific ways they can improve your financial picture.
The aim isn't to find the cheapest advisor, but rather one whose expertise offers value exceeding their fees.
Financial Planner vs Financial Advisor:
There's much overlap between the two roles. A financial planner helps design strategies to meet your long-term goals, and sometimes provides investment advice and facilitates portfolio additions. Financial planners encompass a broader perspective, addressing matters like estate planning, tax strategies, and saving for higher education.
On the other hand, a financial advisor can include both planning and investment management. Financial advisors can encompass brokers and investment managers, with "financial advisor" serving as the more common term. All financial planners are financial advisors, although not all financial advisors are planners.
Choosing a Trustworthy Advisor:
- Lean on personal recommendations from friends, family, and colleagues who have experienced working with financial advisors similar to your circumstances.
- Your employer's 401(k) or retirement plan provider can be a valuable resource, as they often have connections with advisory firms.
- Professional organizations like the National Association of Personal Financial Advisors maintain databases searchable by location and specialization.
Establishing an Advisor's Legitimacy:
Inspect the SEC's Investment Adviser Public Disclosure platform or FINRA's BrokerCheck, using the name and other pertinent details to ensure you access accurate information.
- To optimize your personal-finance management and achieve your wealth-management goals, consider a financial advisor who offers investment management, planning, and specialized expertise.
- When seeking a financial advisor, look for those who operate under a fiduciary standard, such as Registered Investment Advisors (RIAs), fee-only advisors, or CFPs (Certified Financial Planners), for trusted, client-focused advice.
- Whether you choose a fee-only advisor, percentage-based advisor, or flat-fee advisor, carefully assess their services, fees, and potential benefits before making an investment in your future.
