Everything You Need to Know Before Working with a Financial Advisor

Working with a financial advisor is a big personal decision.

It's important to have all of the information available so that you can make the best choice for yourself.

This post walks through:

  • How to know when it makes sense to work with a financial advisor
  • How much a typical financial advisor costs and their fee structures
  • The difference between certain types of financial advisors
  • Questions to ask when meeting with an advisor
  • Important character traits to look for

When does it make sense to work with a financial planner?

1) When you have a lot of complexity in your financial life (i.e. equity compensation, large crypto holdings, small business finances)

2) When you’re too busy or you just want someone else to do everything for you

3) When you have a major life event happening - so this could be marriage, buying a home, starting a family, sending kids to college, entering early retirement. Anytime your lifestyle changes, your finances are most likely going to change as well and a financial planner can help ensure that the right decisions are being made for your situation

4) If you feel like you need help clarifying life goals and figuring out what you’re working towards - the numbers and math behind financial planning is only a small portion of what it actually is, it’s more of a life planning relationship that takes into account your money so that you can accomplish what you want to in life

Also read: 7 Signs It's Time to Hire a Financial Planner

How much does a financial advisor cost?

There are so many different kinds of financial advisors and pricing models out there - which makes it even more confusing - and they all have their pros and cons.

So this post walks through 5 of the most common ways financial advisors are paid by clients and how much each typically costs:

What's the difference between fee-based, fee-only, and advice-only financial advisors?

Fee-based advisors can make money through client fees as well as from commissions or product sales.

Fee-only advisors only earn money through the fees their clients pay. The most common type of fee is based on a percentage of assets under management (AUM) so if an advisor had a 1% AUM fee and you had $500,000 invested with them, your annual fee would be about $5,000 and that’s all that you’re paying the advisor. Some other ways a fee-only advisor may charge is a flat annual fee, monthly subscription, or hourly planning. View a database of 500+ fee-only financial advisors here.

Advice-only advisors are essentially a sub-category of fee-only, and the main difference is that advice-only advisors don’t manage investments. They typically give advice for a flat-fee or hourly rate. This is usually best for DIY investors as you’re not required to transfer investments to them and you can get just the advice you need. Get access to a database of advice-only advisors here (no affiliation).

Commission-based advisors only earn income based on the products they sell or the accounts that they open. There’s no focus on advice and there aren’t very many true financial advisors who are commission-based because it's very limiting. People who claim to be commission-based financial advisors are typically insurance sales reps. There’s not necessarily anything wrong with this, you just want to always ask how someone’s getting paid before you start working with them.

6 traits to look for in a good financial advisor

1) Empathy - when you choose to work with an advisor, you’re trusting that person to help you make the best financial decisions for yourself. If that person isn’t empathetic and they can’t relate to your situation, they probably can’t give you advice that’s in your best interest.

2) Knowledgable - your advisor should not only be knowledgable, but specifically knowledgable about your situation. If you work a regular 9-5 and receive W-2 income, you may be able to work a larger portion of the advisor population, but if you have equity compensation or if you own a business, you need to find an advisor who specializes in those situations so that you know you’re getting the best service possible.

3) Proactive - you also want someone who brings things to your attention that you may not have been aware of or even thought about. Financial planning is typically a year round activity and a good financial advisor should be proactive with things like taxes, donations, investment flexibility, because that’s how you stay on top of things and ensure that important tasks are being completed on time.

4) Personable - If you dread meeting with your advisor, you’re probably not going to find much success in financial planning because your advisor is a partner on your financial journey. If they talk down to you or they don’t understand your situation, don’t be afraid to look elsewhere. There are hundreds and probably thousands of advisors out there who specialize in working with certain types of people and chances are, there’s a perfect fit for you out there somewhere.

5) Curious - A good advisor should ask a lot of questions about you and your money so that they can get a good understanding of your situation and so they can begin uncovering certain behaviors or beliefs around money that may be holding you back. 

6) Active listener -  If you meet with an advisor and all they do is talk about themselves and their products, you’re probably meeting with a sales person, not a true financial advisor. In my opinion, a financial advisor should closely resemble a combination of a teacher and a therapist. Money is a highly personal thing and an advisor should be there as sounding board and trusted partner who can help you get where you want to be financially.

5 questions to ask when meeting with a financial advisor

1) “Are you a fiduciary?”

2) “How often do you communicate with your clients?”

3) “Are you fee-only?"

4) "Why did your last client hire you?"

5) "How do you get paid?"

That's all I have!

I hope this helps make meeting with a financial planner a little less scary.

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