5 Things to Know When Choosing a Financial Adviser

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Editor's Note: This story comes from Wealthramp.

Choosing your financial adviser can be easy once you know what you’re looking for.

These five steps will help you find the smart fit for you.

1. Get clear on what your financial adviser will deliver

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There’s a difference between a broker and an independent financial adviser. Brokers or insurance agents sell products. They’re paid commissions for financial products they may recommend to you.

Independent financial advisers work directly for you. They provide advice gained from experience and focus within the industry.

A relationship with a financial adviser may result in a broader payment structure for working with you across areas such as financial planning, investment management, and estate planning.

2. You can ask questions about the fees — in fact you should

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Assessing the true cost of working with a financial adviser can be tricky. The first question to ask? You need to know if the adviser is fee-only. Or does this adviser earn commissions off of assets they recommend and/or manage for you?

The Wealthramp network of independent advisers are all fee-only. Still the fee arrangements between yourself and an independent adviser can vary.

The more complex your situation, the more your service may cost.

3. So how do financial advisers get paid, and how much will it cost?

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Brokers earn commissions on the trades they make for you. Financial advisers are paid for providing advice. Period.

Fee-based advisers may do a little of both, and charge you for both of those services. So it’s a confusing place to start.

The most common fee arrangements for fee-only advisers are assets under management (AUM), and flat rate or retainer; occasionally advisers will accept an hourly rate, but it’s not common.

Assets Under Management (AUM)

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The most common compensation model for fee-only advisers is a fee based on a percentage of the assets managed for you.

In addition to providing holistic financial planning for their clients, the adviser may create a customized investment allocation that directly relates to the financial plan you’ve collaborated together to create.

The adviser will implement and maintain the portfolio, including trading, rebalancing, and tax-loss harvesting throughout the year.

Like legal or other professional fees, the percentage rate can vary by adviser but generally averages around 1% of the first $1 million of investments being managed.

Example: Say you have a $500,000 portfolio that you manage with the help of a fee-only adviser charging 1% of your portfolio’s value each year. In that case, you’re paying $5,000 a year for that guidance.

Flat Fees/Retainer

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Flat-fee relationships are usually financial planning focused. The adviser may not directly manage your investable assets but can provide guidance on your investment strategy.

In this type of relationship, once you have agreed on the fee and have shared your short and long-term financial goals, the adviser will focus on cash flow, tax strategy, and financial planning to help you achieve those goals.

Many people choose to continue these relationships after the initial financial plan is created to ensure that there’s constant oversight of the plan. For ongoing engagement, your financial adviser will update and adjust your financial plan as your life changes.

Flat rates or retainers should always reflect the complexity of your situation.

Example: For new investors just starting to save and invest outside of their 401(k), rates can be as low as $75 per month. For more complex situations, annual fees can range from $2,500 to $10,000 or higher.

Hourly

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Occasionally, a financial adviser will agree to work with you on a rate-per-hour basis. This is generally for ad hoc, non-recurring advice.

You will most likely find the hourly rate is usually between $250 and $500 per hour.

4. I’ve heard about hidden fees and costs — what should I be looking for, and where?

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The true cost of financial advice isn’t always transparent or easy to calculate. It’s a problem that has dogged the industry for years.

The SEC has made some progress in requiring more transparent reporting of both fees and conflicts of interest, but the total cost of advice still isn’t always easy to track.

Brokers

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If you work with a broker, and not an independent financial adviser, you will pay the broker a commission on every trade they make on your behalf.

Broker commissions aren’t usually isolated on a monthly fee report, and that can make it difficult to know exactly how much you’ve been paying for “advice” in any period of time.

A broker might recommend higher-cost proprietary products or investments, products that might possibly not be the best investment for you within a risk category.

Insurance Agents

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If your adviser is an insurance agent, and many are, they will likely receive a commission on insurance products that you purchase.

Insurance products such as annuities are useful in some portfolios, but fees can be very high and eat into returns.

Fee-Only

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Fee-only advisers never get paid commissions. They don’t sell anything. They are paid for advice only.

Your engagement contract with the adviser will include a fee schedule that you’ve both agreed on.

You will still need to take on the trading and fund costs, but independent advisers work with low- or no-cost custodians and generally only recommend low-cost investments.

5. What does an adviser actually do for me? Is it worth it?

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Nearly everyone doing financial planning has asked themselves this question. Is building an ongoing relationship with an adviser worth the cost?

The most notable study in answer to this question was done by Vanguard. Updated in July 2022, the study attributes net additional return (“alpha”) from working with a fee-only adviser at 3%. That’s 3%, net of the fees paid to the adviser.

Vanguard reminds investors that a potential 3% improvement can’t be expected annually; rather, it is likely to be very irregular. And the extent of the value will vary based on each client’s unique circumstances and the way the assets are managed.

The value of working with a fee-only adviser

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So what is it that financial advisers DO to earn that extra return? The value of working with a fee-only financial adviser typically comes from these seven categories:

  • Diversifying portfolios according to risk profiles
  • Making cost-effective investments
  • Rebalancing investors’ portfolios
  • Allocating assets
  • Optimizing spending/withdrawal strategies
  • Assessing total return versus income investing
  • Behavioral Coaching to help investors build and maintain their long-term objectives

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