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Hiring A Financial Advisor? 3 Things To Know

Financial advisor

[As a friendly reminder of my disclosure policy, this post on financial advisors is not to be taken investment advice. Instead, it is meant to be educational so that you can better understand the world of finance. I hope you find value in it!]

Align your goals with the advisors

Often, people nearing retirement decide that they need to meet with a financial advisor to see if they are ready to cross the finish line. However, doing such is usually ill-advised if you don’t do your homework first. Why? Because your goals may not align with the advisor’s goals.

Wait for a second, isn’t an advisor’s job to help people plan for retirement and other financial pursuits? Yes, it is, but how they help you meet your goals depends on what type of advisor you choose.

You see, advisors are in the financial planning industry to help people and make money by selling solutions. Heck, they usually feel fulfilled doing so and get compensated for doing what they like, which is sensible. However, the keyword in the first sentence is selling, and they can sell you investment, insurance, money management, or planning solutions. 

Nobody should have to work for free, but you should only buy what you need.

Therefore, failing to select the type of advisor for the solution you need can cause a misalignment of goals, which is never a good idea. So, it is essential to do your homework first to understand what type of solution you likely will need and to meet with various kinds of advisors first so you can select the one that fits you best.

Important note: There is nothing wrong with advisors selling solutions. After all, the solution may work for you, and they deserve compensation for their time. But it is essential to thoroughly analyze any proposal to make sure that it is suitable for you. 

For example, do you need an advisor who will bill you for a financial plan or one that will create a plan and manage your money from now on? 

I work as an advisor at a firm that sells management solutions. When meeting with potential clients, I readily tell them that this type of service may not suit everyone since transparency is important.

Ask for what you need

Before meeting with an advisor, ask them if their business model can align with your needs based off the research you have done.

For example, if you are not searching for someone to manage your money, convey that before the meeting and tell them you are looking for a financial checkup. If the financial advisor’s business model cannot accommodate that by billing you solely for their time, that is not the right advisor for you. 

However, if you are looking for a turnkey retirement plan that includes having someone manage your investments, ensure that they do that.

Always align an advisor’s business model with the type of help you need, period. And, be sure to know what your needs are. Failing to do so is the equivalent of going to a dealership without knowing what type of vehicle you are looking to purchase.

Types of financial advisors

Most advisors nowadays work under the AUM model, which stands for assets under management. While nothing is wrong with this model, choosing an AUM advisor will often cost you significantly more than an hourly advisor. Why? Because they charge you a percentage of your portfolio annually. And for every dollar they bill, that is one less dollar that will compound towards your goals, and Compounding Is Beautiful. This model usually provides turnkey financial services, from which many people derive peace of mind.

On the other hand, some financial advisors make money by selling products instead of services, such as insurance policiesloaded mutual funds, or annuities. It is helpful to keep in mind when working with these types of advisors that most people only need term life insurance (unless they are very wealthy or have a reason for needing permanent coverage), should choose index funds instead of loaded mutual funds, and only consider annuities if they are risk-averse, need guaranteed income, or have maxed out their other retirement savings vehicles (and want additional preferential tax treatment). Notably, annuities are the only financial/insurance product outside pensions that provide guaranteed income.

Lastly, some advisors charge an annual retainer fee to manage your money or an hourly rate/fixed cost for financial planning. Financial advisors who work by retainer almost always only make sense for wealthier individuals since the retainers can be as high as $10,000 a year. In contrast, hourly/flat-rate advisors can be great for those more hands-on with managing their money. However, the caveat with hourly/flat-rate advisors is that their solutions require client implementation, which requires discipline.

Notably, advisors may mix and match the above models depending upon their business. However, only pay for the business model you need as a solution.

Important note: When searching for an advisor, ensure that they are a fiduciary, which means that they must put your goals ahead of theirs. All CFPs (Certified Financial Planners) are fiduciaries, and many non-CFP advisors are fiduciaries. All it takes is an inquiry, so do not hesitate to ask them!

In closing

Financial advisors can be a great resource since they can help ensure you are tracking well for retirement or so that you retire more securely. However, as with all purchases, it is essential to do your research before choosing an advisor to guarantee you select the proper type.

Do you work with an advisor, have you in the past, or do you plan to in the future? If so, what is your reasoning, and how was your experience? Let me know in the comments below, and as always, have a great day!

Mile High Finance Guy

finance demystified, one mountain at a time

mile high finance guy

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