If you don't know much about money, it can be hard to choose a financial advisor to help you manage it. Because each area of finance is so specialized, it's almost impossible to know a lot about all of them. Planning your estate is very different from, say, choosing the right investments. Managing a portfolio is not the same as making a budget for each month.
A robo-advisor could be a good choice if you want the basics: someone to invest your money, make smart decisions, and help you make a financial plan.
Betterment or Wealthfront, two of the best robo-advisors, can help you do all of these things based on your goals and how much risk you are willing to take. They will also charge you a small fee. You can start online in just a few minutes, and it's a great way to build a portfolio.
But if you want more advanced advice, like how to plan your estate, you'll need a human advisor. Here's what you should look for in a human financial advisor, why you need a fiduciary, and what qualities you should look for to find the right one for your situation.
How to find a good financial planner
Finding the right financial advisor can take a lot of stress off your shoulders, but it can be hard to let someone into one of the most private parts of your life.
When you look for a financial advisor, you are actually hiring a professional to help you.
It's a job interview, so it's important to listen carefully to everything the advisor says.
And be careful with the free "advisor" that a financial company gives you.
Most of the time, these advisors have a lot of competing interests. They are more like salespeople than advisors. That's why you need a trusted advisor who only looks out for your best interests.
If you want an advisor who can really help you, you shouldn't just pick the first name that pops up in an ad. Instead, you should look into a few different options. Here are six ways to find a reliable financial advisor you can trust.
1. Find a fiduciary
At best, the rules about who can be called a fiduciary are unclear. At the moment, many advisors are required to act in their client's "best interests," but what that means can be hard to enforce, except in the worst cases. You're going to have to find a real fiduciary.
The first way to tell if a financial advisor is good is if they work for you and are on your side.
Look to see if their advisors invest in their ongoing education about tax planning for retirement savings like 401(k) and IRA accounts. These are complicated accounts, and sometimes the laws change, like with the SECURE Act of 2019. Don't work with a financial advisor who doesn't put money into their own education.
2. Look at those papers
Consumers looking for financial advisors should also check their professional credentials. They should look for well-known standards like registered investment advisor (RIA), chartered financial analysts (CFA) or certified financial planner (CFP). The people who have these titles have to act as fiduciaries.
These people have mastered a complex body of knowledge, passed a comprehensive test (or, in the case of a CFA charter holder, a series of tests), and agreed to follow a code of ethics. Even though these credentials don't prove that someone is working for your best interests, they do show a certain level of education and skill, which are both important.
3. Know how the advisor makes money.
Some salespeople pretend to be advisors, especially those who work for companies like insurance companies or fund management firms whose main business is not advising clients. In these situations, the advisor is often just trying to sell you products and services from the company.
Even if you think an independent advisor is more likely to give you unbiased advice, you should still be careful. Even independent advisors can end up selling a company's products or services.
So ask the following questions:
Do they make money when they sell insurance?
Do they get a commission when they buy or sell stocks?
Are they connected to a company that sells its own financial products?"
So be very careful around a person who says they can help you but you don't have to pay them. "He who pays the piper calls the tune," says an old proverb.
4. Look for advisors who only charge a fee.
The most obvious way to avoid conflicts of interest in the financial industry is to find a financial advisor who only works for you and gets paid by you and other clients like you.
Of course, this will cost you money, but you're probably going to come out ahead.
The reason for this is that the price of many "financial solutions" like annuities already includes a lot of money for sales commissions. When you buy these products, you're paying a lot of money for them based on the advice of a salesperson with a conflict of interest, but the price is often hard to figure out. In the long run, this advice could cost you a lot more than what a fee-only advisor would cost.
The advisor shouldn't have a reason to push his own agenda. Instead, he should always do what's best for the client. It's a good idea to base the fee on a certain percentage of the assets being managed. When a client's assets go up, the advisor's fee goes up, too.
Another way to charge for service is by the hour. This may work well for clients with more money, since they only pay once for advice and not based on how much money they have.
By sticking with a fiduciary advisor who only works for a fee, you pay the piper and call the tunes. After your first meeting with this kind of advisor, you might go back once a year for a check-up and to have your plan changed if your life or financial goals change.
5. Search for clarity
Any advisor should be able to explain everything to your full satisfaction and in a way that makes sense. If an advisor makes you feel stupid or incompetent because you have questions, just leave. You can't get to know someone like this for a long time.
A lot of money is made by financial advisors who try to hide what they are doing.
Make sure that your advisor knows who is paying him or her.
6. Find a guide who will help you stay on track.
A good advisor has three qualities: they are knowledgeable, humble, and caring.
Being able to understand how your client feels and let them know that you can help with those feelings gives them a level of comfort that is very important to your job.
Many people don't realize how important it is for an advisor to listen to their needs, but that's not the only way the advisor can help the client reach their goals and address their specific life situations. A good advisor won't just tell you what to do; they'll also keep you going.
Sometimes, the advisor might have to calm you down after a tough or exciting time on the stock market or in your life. In the end, the advisor's job is to keep you on track to reach your goals, which sometimes means acting like a counselor.
When the market is unstable, your advisor should be a steady voice of reason, helping you avoid making decisions based on emotions that could lead to costly mistakes.
What to ask a financial planner
When you're looking for a financial advisor, you'll want to know exactly what they can do for you. Before you hire someone, here are some important questions to ask.
How do you get paid?
If you know how an advisor gets paid, you can figure out a lot about how the relationship might go. You'll want to make sure that their goals are the same as yours and that they won't just do things to get a commission.
What's your background?
It is also important to know the advisor's educational background and professional credentials. The world of money is complicated, so you'll need a financial advisor who has proven they can handle it.
Are you a fiduciary?
When an advisor acts as a fiduciary, they put your needs before their own. You'll want to make sure that they are always willing to act in your best interests.
How does your company measure how well you do?
This is also important for figuring out what your advisor wants from you. They might say they're working for you, but if their annual bonus depends on something else, they'll probably do what's best for themselves.
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