What is a financial advisor?
In the broadest sense, a financial advisor is anyone you pay to help you manage your money, especially as it relates to retirement goals. This could be a stockbroker, an accountant, a retirement specialist in your company HR department, your uncle Steve (“He’s so good with numbers!”)… anyone. It’s a generic term. And it can come with a lot of sets of initials that make an advisor seem very capable and educated and experienced but really don’t add up to much. Unless you’re talking Certified Financial Planner™ (more on those in a bit.)
What you’re looking for, is a deeply qualified individual determined to act in your interest. You want someone who has a deep understanding of tax law, insurance, loads of various financial products, retirement strategies, and so much more. And there are lots of them out there. But first, understand what a financial advisor’s role is in your financial life and how to choose the one that’s best qualified to help you meet your goals.
What does a financial advisor do?
A financial advisor helps you create and execute a financial plan. Your advisor determines how much money you have now, how much money you’ll need for the future, and how you’ll grow it. And then… hopefully helps you grow it! Either by guiding you as you make certain decisions or making almost all of the decisions for you.
The first thing a financial advisor does is listen and learn. And they want to learn a lot. Most financial advisors will send you a worksheet or questionnaire to get things started. It can be a long set of questions because they need to know as much as possible about your financial landscape (hopefully it’s a very green place). This includes your debts, your income, your tax situation, and any other factor that will affect your financial future. They need to uncover everything and shine a light on your finances so they know which tools to apply and how to apply them.
As well as providing advice, many advisors will invest your money in a variety of stocks, bonds or real estate. This may be the sole focus of some advisors. They will pick investments you and help control your investing behavior, helping you to avoid panic buying and selling.
One underrated quality of a great financial advisor is empathy. Your financial advisor needs to understand your worries about your financial future. It’s one thing to get a sense of your goals. That’s pretty straightforward. Many people will look for a financial planner if they have money worries. The right financial advisor for you will try and uncover your worries and allay your fears through reassurance, concern, and at least a rough description of initial steps you can take to get on the right path. At least, that’s what a great financial advisor should do.
Do I need a financial advisor?
If you have a high net worth, a complicated estate or tax situation financial advisors can offer valuable advice. They are also useful for people going through a major life event like retirement, divorce or home buying. If you value having some there to answer any questions you have about your finances, an advisor is also beneficial.
In the past, people would have chosen to work with financial advisors for portfolio rebalancing and tax loss harvesting. But gone are the days when you needed a financial advisor to always maintain the right mix of investments and save on taxes. While this is still something many financial advisors offer, so too do online investment platforms.
While financial advisors can be valuable for those with complex financials or folks that like to do things in person — they can come with a hefty price tag. The fees they charge can eat into the amount of money you actually earn from your investments. Before signing on with a traditional financial planner, ask yourself if you really need one.
It’s important to have a financial plan so that you are set up for things like retirement, your children’s education (if you have kids) and emergencies down the road. This plan should be updated each time your financial circumstances change. It’s up for you to decide if you’d prefer a traditional financial planner, an online robo-advisor or if you’d like to go it alone. Regardless of how you decide to manage your money, your plan should be updated each time you have a life event that changes your financial situation.
How to find and choose a financial advisor
An effective way to find your financial planner is to ask someone much like you to recommend one. Ideally, your advisor is not only qualified but has a lot of experience working with people just like you. If you don’t know anyone in your direct circle who has a financial advisor you could consider posting on social media or doing some online research to find financial advisors recommended by others.
You can use the National Association of Personal Financial Planners. All of the advisors recommended by these organizations will be fee-based CFPs. (For why that matters, see below.)
When speaking with a prospective advisor, don’t discount the importance of personality. You probably intend to work with this person over a long period of time and so ensure you like their style of communication. Do you want a straight-shooter who bluntly offers advice? Or would you prefer a gentle bedside manner? Is it rude that this advisor you’re speaking to keeps cutting you off, or is it reassuring because it suggests he’s efficient and hard-charging? Note: It’s rude!
You’ll also want to choose a financial advisor that speaks your language. Is your advisor using lots of jargon and buzzwords and assuming you’re more familiar with intricate financial concepts than you actually are? That stuff is important. Your advisor needs to read signals and understand not just the kind of financial plan you’re looking for but the kind of conversations you want to have about that financial plan.
If choosing a financial advisor that acts in your best interest is a must (and it should be) choose a financial advisor who is a fiduciary. This means they legally have to do what’s in your best interest. Regardless of the money they make or anything else, they stand to gain by managing your money — you can rest easy knowing they are making the right decisions for your money.
Before selecting an advisor, consider interacting with a few advisors to get a feel for the kind of advice — and attitude — you’re looking for. They’re going to work for you, and they need to be right for you. Not the other way around. Don’t be afraid to ask a lot of questions (we have prepared the very best questions to ask — keep reading) and investigate all the costs you’ll pay directly or indirectly to the financial advisor.
Financial advisor cost
Financial advisors will have different fee structures depending on the services they offer. Keep in mind, fees vary according to your financial situation and the kinds of services you’re asking for.
Percentage of assets under management: Many financial advisors charge a flat fee based on “assets under management,” which refers to the amount of money they’re looking after for you. The most common percentage for in personal financial advisors is 1%-2%. For online advisors the fee is generally under 1%.
While one or two percent doesn’t sound like a lot — it adds up. One financial advisor demonstrated how a mere 1-2% of fees could decrease investment gains by half over a 25-year investment.
Flat Fee: Some financial advisors will charge a flat fee. They’ll let you know up front exactly what you’re going to pay for the services they offer. This fee could be anything from $1,000 to $3,000. Others might do an hourly rate of $200-$400 per hour. The more of their services you require, the more time they spend and the more you’ll pay.
Commission: Some advisors charge commission on the products they’re investing in on your behalf (such as mutual funds or exchange-traded funds, known as ETFs). In a sense, these advisors are resellers. They direct you to certain investment products, and they receive a commission on the purchase of those investment products.
Fee-for-service: Another approach is a combination of a percentage charge based on total assets under management plus a flat fee for additional services as you require them. This means when you need insurance or estate planning you pay extra on top of the percentage charged on your assets.
There are many different approaches financial advisors use to get paid. There may be a fee simply for creating a financial plan or for consultations or ongoing fees for managing your money. So, it’s important to ask your advisor about the total cost of any given plan and approach.
Financial planner vs financial advisor
There are many qualified financial advisors who don’t (and legally can’t) call themselves Certified Financial Planners™. A Certified Financial Planner™ (CFP®) is the best choice for most people. That’s because CFPs have a clear fiduciary duty to you.
There’s no more important concept in the financial planning universe than — fiduciary. They are legally obligated to place your interests above any other concern and cannot make commissions from managing your assets.
Certified Financial Planners™ are required by regulatory agencies to have studied financial planning curriculum and passed certain tests. They also have had to work in a financial planning capacity for a certain number of years. All CFPs have a fiduciary responsibility to their clients. Now, there are plenty of non-fiduciary advisors who may do good work. The point is not that they’re not a bad choice, but it’s crucially important to know what motivates your financial advisor. After all, they’re going to be making money recommendations on your behalf.
Questions to ask a financial advisor
When you are speaking to a financial advisor, you’ll want to do your due diligence in asking them some questions to see if they’re qualified to manage your money. Financial advisors are well used to tough questions and this will be nothing new to them.
Well, maybe don’t put it like that, but the idea is: You want to know how they make their money. With a CFP, of course, you know this going in, but with a non-CFP, you have to ask. Which is why your next question should be.
2. How are you compensated?
Are you fee-only? Commission-only? Fee-based? Commission-based? Note: the qualifier “based,” as in “fee-based.” If you see that word, that means the fee is not the only way they are compensated. So you need to find out the other part of their compensation equation.
3. What’s your approach to investing?
When you ask this question, you will hear words like holistic and strategic and collaborative. It’s important to drill down and figure out what that means to them. Holistic, for instance… Ask them to give examples of how a holistic approach will benefit you. How does your retirement look different than it would look if your advisor was (and this would be the opposite of holistic) solely focused on a certain dollar amount available to you when you turn 65. A holistic advisor wants to know about the nuances of your situation. Do you enjoy your work? Then maybe retirement means something different to you than to most clients. Are you a particularly charitable person? Do you love to travel? For years, these kinds of deeply personal but obviously financial issues were totally ignored. A growing number of financial advisors look at your whole life, not just your money.
Beyond these broad philosophies of investing, there are more specific approaches to educate yourself about and ask your advisor about. What are their thoughts on passive management versus active management? Do they practice socially responsible investing when their clients want it? If you get a “Huh?” you might want to move on. Even if they don’t involve themselves with it, it’s a burgeoning yet important approach to investing that any advisor should be aware of. There are plenty of other investment approaches. The main thing is, you should ask the question, listen to the answer, and then drill down to what the vague words and concepts they’re giving you. What does “our investment approach is: we work with you!” actually mean and how they’re applied to your financial plan.
4. What type of clients do you work with?
Do they work with younger people? Retirees? Wealthy people? Young, wealthy retirees? Your financial advisor doesn’t need to be someone like you, but your financial advisor needs to be someone who knows what makes someone like you tick.
What motivates you to be investing for the long term anyway? Implicit in questions about the clientele, of course, is a sometimes fraught question: How old are your clients? If you actually ask this question, and you can: They might say “All ages!” but if you press them, you’ll get a sense of which age range they typically focus on. It’s not an ageist question.
A 61-year-old is naturally likely to be spending a lot of time on retirement investing, simply because his clientele has aged along with her. But if you’re 25, is she the right advisor for you? It’s OK to talk this through with a prospective advisor. They should get it. If they don’t, then ask yourself: What else are they uncomfortable talking about? Again, this relationship should be marked by reciprocity. Both sides need to reveal what motivates them and how they like to collaborate.
5. How will we stay in touch?
There are tons of decisions that don’t require an in-person meeting or even an online chat or phone call. And if you’ve told your financial advisor you want to be minimally involved, then they won’t bug you—at least not very much. But unless you’ve signed up for pure robo-advisor with no human support, you’ll want access to your advisor (or advisors if your firm is set up like a hub and makes a team of people available to you). In fact, you’ll need to engage them at times.
Almost any big life change requires a conversation with your advisor. When you get married or change jobs or inherit a bunch of money or you have kids. Your advisor needs to be available and accessible to you to work through the implications of these kinds of changes. Or maybe you just want to talk out where things stand and where things are headed, Your advisor needs to answer questions — big or small — clearly and specifically and indicate that they are available to speak any time — even if they’re an online advisor, an increasingly common type of financial planner. Speaking of…
What is an online financial advisor?
An online financial advisor is similar to a traditional financial advisor, only they operate virtually. This means you might book an appointment via email or on their website and talk on the phone rather than meet in person. There are different types of online financial advisors, ranging from pure robo-advisors where you plug in your information and an algorithm determines how your money will be invested, to robo-advisors that offer unlimited human support.
These online financial advisors may offer lighter advice or just the same amount as an in-person financial advisor and they’re normally priced accordingly. Some online advisors start things off with a video conference. Some with a phone call. As you can imagine, a lot of these advisors are focused on a Gen Y clientele — people in their 20s and 30s. That said, these advisors are not just for young people. Many people later in life are switching to robo-advisors where they can get more bang for their buck.
Robo-advisors automate a lot of the work that would be done manually by a traditional financial advisor, as a result, they can charge a fraction of the price. Some robo-advisors make investing seem fun or even edgy, which can be really engaging and enticing. It’s also important to look past the marketing and ask them the same questions you would an old-school Certified Financial Planner.
Now that you’re well versed on financial advisors, why not book a free portfolio review with Certified Financial Planner from Wealthsimple. We offer state-of-the-art technology, low fees and the kind of personalized, friendly service you might have not thought imaginable from an automated investing service.