Editor's Note: This story originally appeared on NewRetirement.
A lot of people wonder if hiring a financial adviser is worth it. Are they really worth the time, cost, and hassle?
It can be a sizable expense, and you don’t want to make mistakes or feel uncomfortable about the process. If you decide you could benefit, it is important to choose an adviser that is not only well qualified, but also is right for you and your needs.
Following are tricks for finding the right adviser and having a productivem worthwhile relationship with them.
1. Determine Your Primary Financial Advising Need
There are multiple reasons to seek financial advice. In general, the most common reason to hire an adviser is to get help with investments.
But, investing is not the only thing advisers do. In fact, not all advisers offer investment guidance and there are multiple kinds of investment advice from those that do.
Common adviser services include:
- Building a long-term financial plan and an overall financial strategy for achieving your goals
- Providing assurances that what you have been doing on your own is adequate
- Setting an investment strategy (but enabling you to make and manage the investments)
- Setting an investment strategy and actively manageing those investments
- Providing behavioral coaching to help you actually do what you ought to be doing
- Reducing tax expenditures
- Offering help reviewing employee benefit choices, determining insurance needs (including Medicare options), figuring out how to pay for college, optimizing your debt, building a long term budget, setting a plan for adequate retirement income, planning your Social Security start age, mitigating risks, building an estate plan and getting answers to key questions like how much to save, when can you retire and so much more.
Knowing what you want from an adviser is critical to a successful relationship.
2. Assess How Much Help You Want With Your Finances
You have options for how to plan and manage your financial life. Many people feel like they might benefit from an adviser, but either can’t or don’t want to pay for the input.
In fact, a mere 24% of people have hired a professional financial adviser. And, only 30% of U.S.. households have a written long-term financial plan.
Here are options you might not have considered for developing a high-quality financial plan:
Do It Yourself
Lots of people build their own spreadsheets or use online tools and resources to manage their short- and long-term finances. Do-it-yourself folks may be dedicated to learning about personal finance, but by no means is everyone an expert.
For planning, online tools like the NewRetirement Planner can be incredibly helpful to all kinds of do-it-yourselfers. For DIY investments, many use a company like Vanguard to help them set a low-cost investment strategy and then manage their portfolio themselves.
- NewRetirement Planner: The NewRetirement Planner and PlannerPlus can guide personal finance experts as well as curious newbies toward a secure future. The platform enables you to build a comprehensive retirement plan. You can build a basic plan for free. Or, for $96 a year, access tools to help with taxes, retirement income, detailed budgeting, real estate decisions, advanced monitoring, and more. The cost of PlannerPlus is whole lot less than the $2,500 most fee-only advisers charge to build a plan, and you get a lot more control.
Do It With Me
A hybrid approach to planning is becoming increasingly common. You might hire an adviser on an hourly basis to advise you on strategy or to help you get started, but you manage your own plan and investments.
- NewRetirement Live: For just $150, you can set up a one-on-one session to learn how to set up and stress-test your retirement plan. Get the assurances you need to feel more confident about your future.
- NewRetirement Classes: NewRetirement Classes meet once a week for eight weeks in an online group and learn how to create an accurate plan, gain insight into whether your resources align with your retirement dreams and get ideas for how to do better.
Do It for Me
This is the traditional adviser relationship. You go to an adviser, they gather information from you, set your strategy and keep you on track over time.
- NewRetirement financial adviser: Do a flat fee consultation with a licensed fiduciary who will collaborate with you to create personalized retirement strategies.
3. Look for a Fiduciary Relationship
The term fiduciary derives from the Latin fiducia, meaning “trust,” and a person acting as a fiduciary for you has a legal or moral obligation to put your needs and interests before any needs or interests of their own.
For example, a financial adviser with whom you have a fiduciary relationship will not make a recommendation that you buy a life insurance policy that they don’t think you actually need. However, it does not mean that they will always make the “right” recommendations.
“If an adviser is a fiduciary, he or she is required to put your interests before his/hers,” says Judy McNary, of Broomfield, Colorado-based McNary Financial Planning, LLC. You want the adviser’s recommendations to be objective and not tied to his or her own compensation.
It also wouldn’t hurt to ask whether your adviser can sign a fiduciary oath, formally pledging to put your interests first, according to Austin Chinn, a certified financial planner with California-based Fountain Strategies, LLC.
4. Take Referrals With a Grain of Salt!
When we asked NewRetirement users about the worst financial advice they ever received, a couple of people responded with something along the lines of: “Go talk to my buddy who is a financial adviser.”
While referrals can actually be a great way to find an adviser who has been vetted by a trusted associate, your needs may be nothing like your friend’s needs. Find out why your friend recommends them, be open but a bit skeptical.
If an adviser sounds too good to be true, they probably are.
5. Don’t Abdicate All Responsibility
Sure, it would be nice to turn over all of your accounts and have an adviser magically turn your money into millions or billions.
However, the adviser relationship shouldn’t work that way, and anyone who tries to convince you otherwise is suspect.
You have an obligation and need to be involved in the planning process. A good adviser-client relationship involves both of you asking a lot of questions and both of you listening closely and really gaining an understanding of each other’s answers.
6. If You Don’t Understand the Adviser’s Plan for You, Don’t Do It
Personal finance is complicated. There are a lot of layers to it. However, it is not particle physics. You can understand it.
You want to make sure that the adviser explains things in a way that makes sense to you. If your adviser makes recommendations that you don’t understand (and couldn’t confidently explain to someone else), don’t do it.
7. Use Technology to Help You Understand the Adviser’s Recommendations
An adviser will usually make a series of recommendations for your finances. Some of these suggestions will easily make sense to you, others won’t. One trick we recommend is to use an online retirement planning tool like the NewRetirement Planner so that you can test out the adviser’s recommendations (as well as your own ideas).
NewRetirement users report that it is really reassuring to see the adviser’s recommendations in action in their plans. You can easily see how different suggestions will impact your cash flow, returns, taxes, estate value and more!
Then, you can go back to your adviser with knowledgeable questions.
8. Understand Your Adviser’s Business Model (How They Make Money)
Advisers operate under a variety of business models. These are the most common:
Commission-based: An adviser who works for commissions is earning money when they sell you an investment, insurance and other financial products. Commission-based advisers have an inherent conflict of interest because they are paid based on what products they sell you. It is not necessarily nefarious, but you need to be cautious in this type of relationship and know exactly what they are earning and why they are making recommendations.
Fee-only: Fee-only means that the adviser is compensated only by fees that you pay. There are a variety of fee models:
- Flat fee: The adviser charges an agreed-upon fee in return for agreed-upon services.
- Hourly fee: You are charged only for the time the adviser spends working for you.
- Assets Under Management (AUM): A fee is charged (0.5%-1.5% paid annually) based on the amount of money the adviser is managing for you. This is the common structure when the adviser is actively managing your money, making trades, rebalancing, etc. (It is important to notethat this can be incredibly expensive. Getting 1.5% on $100,000 is $1,500 a year or $15,000 over 10 years. Put another way, if you are getting a 15% rate of return on your money with a 1.5% fee, then you are really only earning 13.5%.)
Fee-based: With a fee-based system, the adviser charges a combination of a flat fee plus commissions. Under this type of arrangement, you need to ask a lot of questions about how they’re actually getting paid and for what. You might be paying high fees while the adviser is earning commissions on products they recommend to you.
9. Ask About the Adviser’s Specialty
Some advisers are really focused on how to help you grow your money when you are young. Others are more focused on retirement and helping you figure out how to grow your investments, but also how to draw down assets. Some specialize in helping you turn assets into reliable retirement income.
However, many advisers also offer different kinds of sub-specialties. They have a tendency to like certain strategies over others.
When interviewing advisers, it is great for you to try to find out what makes each unique and make sure that what they offer is what you genuinely need.
You should also know about all of the adviser’s certifications. There is a virtual alphabet soup of different types of financial advisers (CFP, ChFC, RFP, CSA, RICP and more). A Certified Financial Planner (CFP) is widely accepted as the gold standard, with additional designations being a bonus.
10. Get Excited About the Potential Benefits of Working With an Adviser
Multiple studies show that people feel better about their finances and are more successful when working with an adviser. Data from Northwestern Mutual show that those who work with advisers report substantially greater financial security, confidence and clarity than those who go it alone:
The differences are not incredibly dramatic (except for being prepared to handle market ups and downs), but real.
Of those with financial advisers:
- 66% feel very financially secure (versus 31% of those without an adviser)
- 85% feel like they are headed in the right direction (versus 71% without an adviser)
- 71% feel happy with their life (versus 50% without an adviser)
- 61% have clarity on balancing spending now versus saving for later (versus 50% without an adviser)
- 81% set specific goals for the next five to 10 years (versus 67% without an adviser)
- 68% are confident they will achieve their goals (versus 55% without an adviser)
- 73% have financial plans built to endure market ups and downs (versus 30% without an adviser)
11. Know Your Own Levers, Strengths and Weaknesses
It is not a great idea to go into an adviser relationship without a good understanding of where you stand right now. You should have an idea of the type of services you need.
We think that the NewRetirement Retirement Planner is a great way to gain insight into your current situation and also how you might be able to improve. And, it is not always all about investment returns.
Everyone has strengths and weaknesses in their plans and endless opportunity for strengthening their financial future. What are you doing right? Where do you need to improve?