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Use Your Freedom Wisely: Choosing the Right Financial Advisor

Updated: Feb 27






Step 1: Identify why you need financial advice

Embarking on the quest to find the right financial advisor can seem like a daunting task, but fear not! The journey becomes much smoother once you've pinpointed why you need one. Are you at the beginning of your career and eager to understand how much to save and the best way to achieve your financial goals? Perhaps you're navigating the complexities of financing your child's education or managing your finances during a divorce. Whatever your unique situation may be, rest assured that there's likely a financial advisor out there who specializes in exactly what you need.

It's important to recognize that you might require more than one type of financial plan to address all your financial goals, and that's perfectly okay. The key is to ensure that the financial professionals you're considering possess the necessary skills, knowledge, and experience to assist you in your specific financial journey. Your financial well-being is too important to leave to chance, so take the time to find the advisors who are the perfect fit for your financial needs.

Here’s a list of situations in which financial advisors are helpful:


Step 2: Finding the Right Financial Advisor for Your Needs

In your journey to secure the best financial advisor for your unique situation, it's important to understand the different types of financial professionals and the services they offer. Financial advisors are certified experts who provide guidance on various aspects of personal finances, tax laws, investments, and asset management. However, not all financial advisors are the same, and they specialize in different areas of financial planning.

Investment Advisers:

Investment advisers are experts in market conditions who create personalized investment plans aligned with your financial goals. They charge fees for advice related to specific securities, such as stocks and bonds. Investment advisers must be registered with the Securities and Exchange Commission (SEC) and/or state securities regulators.

  • Pros:

    • Regulated by the SEC and state securities regulator.

    • Provide personalized investment advice based on market knowledge.

  • Cons:

    • Typically, do not offer comprehensive financial planning services.

    • May require a significant financial investment for securities.

Examples of types of investment advisers include asset managers, investment counselors, wealth managers, and portfolio managers. It's essential to note that "investment financial adviser" is spelled with an "e" intentionally to identify legally regulated investment professionals and should not be confused with "financial advisor," which has a broader scope and generally refers to brokers without a fixed legal definition.

Stockbrokers: Stockbrokers facilitate the purchase and sale of investments on behalf of their clients and are often associated with brokerage firms. They can execute trades for both individual investors and institutional investors.

  • Pros:

    • Handle buying and selling of investments.

    • Regulated by the Financial Industry Regulatory Authority (FINRA).

  • Cons:

    • May recommend unsuitable investments.

    • Typically, only full-service stockbrokers offer financial planning services.

Certified Financial Planners (CFPs): Certified financial planners, regulated by the CFP Board, help clients create comprehensive wealth management plans. They consider various aspects of your financial life, including retirement and investment goals, insurance, and more. CFPs work with individuals and often with specific client types, such as small businesses.

  • Pros:

    • Offer a holistic, long-term approach to financial planning.

    • CFPs who provide investment advice are regulated by the SEC.

  • Cons:

    • Fees may outweigh returns on small investments.

    • Not all CFPs are fiduciaries.

Estate Planning: Estate planning involves getting your legal paperwork, such as a will or revocable living trust, in order. Financial advisors can help with this process and assist you in identifying individuals who can make decisions on your behalf when you are unable to, such as a health care proxy and an executor.

  • Pros:

    • End-of-life planning ensures the financial well-being of your loved ones.

    • Proper estate planning can save you money on fees like taxes and court costs.

  • Cons:

    • You are responsible for updating your estate planner about changes to beneficiaries or your financial situation.

Identify Your Financial Needs

Understanding your specific financial needs is the first step in finding the right financial advisor. You may require more than one type of advisor, depending on your goals, and that's perfectly acceptable. The key is to ensure that the financial professionals you consider have the skills, knowledge, and experience to address your particular financial requirements.

Step 3: Understanding Financial Advisor Compensation

It's crucial to comprehend how financial professionals are compensated, as their fees can vary based on factors such as the services provided and the scope of assistance. Different payment structures can influence the incentives financial advisors have, so it's essential to ask for details about their compensation methods.

Here are some common ways financial advisors get compensated:

  • Hourly Rate: Advisors may charge an hourly rate for their time, similar to how you would pay an attorney. Hourly rates typically range from $100 to $400 per hour.

  • Flat or Annual Fee: Some financial advisors collect an annual percentage of your assets under management, usually ranging from 1% to 2%. For instance, if your total assets are $100,000, you would pay between $1,000 and $2,000 annually.

  • Commissions: Advisors might earn commissions on the financial products they recommend to you.

  • Fixed Rate: Advisors could charge a fixed fee, which can range from $1,000 to $3,000, for services such as creating a comprehensive financial plan.

  • Retainer: In cases of complex financial situations, financial advisors may work on a retainer model and charge you either monthly, quarterly, or annually. This approach is not based on your assets and can help minimize conflicts of interest.

Some financial advisor fee structures combine two or more of these methods, such as operating on a fee-based model while also earning commissions on product sales. When selecting a financial advisor, consider whether you need advice for a specific issue or require ongoing investment management. For specific problems, an hourly rate financial advisor may be suitable, while more comprehensive financial planning may benefit from a fee-based advisor.

Step 4: Determining the Importance of a Fiduciary Financial Advisor

Not all financial advisors are obligated to prioritize your best interests, which is where the concept of a fiduciary comes into play. A fiduciary is a financial professional held to a higher standard of care, requiring them to place your interests ahead of their own, even if it means recommending strategies that may reduce their own compensation.

Registered investment advisors are held to the fiduciary standard, ensuring they act in your best interest. However, some financial professionals, such as brokers, do not necessarily adhere to this standard, despite recent regulations intended to enhance these standards. The importance of a fiduciary financial advisor is most significant when you are seeking advice for investment management and product selection. If your primary goal is to build a monthly budget, this issue may be less crucial.

Regardless of your specific needs, don't hesitate to ask potential financial advisors about their fiduciary status and how they are compensated. Your financial future and net worth are at stake, so it's essential to make informed decisions when choosing a financial advisor.

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