A financial advisor can help you make better decisions related to your money and work toward your goals. But it’s important to do your due diligence when hiring a professional, and make sure you’re working with someone who meets your specific needs, especially since they come with fees.
Here’s how to assess whether working with a financial advisor is worth the cost.
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Assess the pricing structure
Not every financial advisor has the same pricing structure, so it’s important to understand exactly what you will owe your advisor. There are a few structures that are common in the industry. Assets under management (AUM) fees, for instance, are based on a percentage of your portfolio. If your advisor charges a 1% AUM fee and is managing $100,000, their annual fee would be $1,000. Whether this is worth it depends on your specific situation: A 1% AUM fee could make more sense for someone with complex finances who is in need of significant planning than someone who just requires basic portfolio rebalancing.
You may also come across advisors who charge flat fees or hourly rates. That structure often makes more sense for people who need a one-time plan instead of constant portfolio management.
Some financial advisors receive commissions when you buy a product they recommend, such as a mutual fund or annuity. However, this can create a conflict of interest. The advisor may want to sell you a product that’s not in your best interest because it will earn them a commission.
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Look for value beyond investment returns
Delivering high investment returns is important when it comes to financial advisors, but portfolio gains are only part of the job. An advisor who can help you construct a financial plan, work towards short- and long-term goals and stay even-keeled during market uncertainty adds more value.
You should feel comfortable asking your advisor about important decisions, such as when to take out Social Security, the best time for you to retire, insurance needs, estate planning basics and how to minimize your current taxes.
Assess how you feel about your finances after each meeting. Do you feel more confident about what you have to do, or are you walking away from meetings with more questions than answers? If the answer is the latter, it may be time to find a new advisor.
Verify credentials, conflicts and fit
If you do not yet work with a financial advisor and are considering hiring one, you should verify their credentials. You can use the Financial Industry Regulatory Authority (FINRA) BrokerCheck to verify broker records and search Securities and Exchange Commission (SEC) advisor records via the Investment Adviser Public Disclosure.
It’s best to choose a financial advisor who is a fiduciary, meaning they’re legally required to act in your best interests.
When vetting financial advisors, make sure they have the skills you need. If you need help with small business finances, find an advisor who understands the intricacies of small business finances.
Regardless of which advisor you work with, it is important for that professional to be transparent, responsive and willing to explain how their fees work. Any opaqueness or lack of communication can lead to a shaky relationship, especially if a financial advisor displays these red flags before you start working with them.
