Is a Financial Advisor Worth It? 10 Tricks for Developing a Worthwhile Relationship
Here are 10 tricks for finding the right advisor and having a productive worthwhile relationship with them:
1. Look for a Fiduciary Relationship
The term fiduciary derives from the Latin fiducia, meaning “trust” and it means that 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 themselves.
For example, a financial advisor with whom you have a fiduciary relationship will not make a recommendation that you buy 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 advisor 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 advisor’s recommendations to be objective and not tied to his or her own compensation.
It also wouldn’t hurt to ask if your advisor can sign a Fiduciary Oath, pledging to put your interests first, according to Austin Chinn, a certified financial planner with California-based Fountain Strategies, LLC.
2. 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 advisor.”
While referrals can actually be a great way to find an advisor 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 advisor sounds too good to be true, they probably are.
3. Don’t Abdicate All Responsibility
Sure, it would be nice to turn over all of your accounts and have an advisor magically turn your money into millions or billions.
However, the advisor 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 advisor client relationship involves BOTH of you asking A LOT of questions and BOTH of you listening closely and really gaining an understanding of each others’ answers.
4. If You Don’t Understand the Advisor’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 advisor explains things in a way that makes sense to you. If your advisor makes recommendations that you don’t understand (and couldn’t confidently explain to someone else), don’t do it.
5. Use Technology to Help You Understand the Advisor’s Recommendations
An advisor 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 advisor’s recommendations (as well as your own ideas).
NewRetirement users report that it is really reassuring to see the advisor’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 advisor with knowledgeable questions.
6. Understand Your Advisor’s Business Model (How They Make Money)
Advisors operate under a variety of business models. These are the most common:
Commission-based: An advisor who works for commissions is earning money when they sell you an investment, insurance and other financial products. Commission-based advisors 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 advisor is only compensated by fees that you pay. There are a variety of fee models:
- Flat fee: The advisor charges an agreed upon fee in return for agreed upon services.
- Hourly fee: You are charged only for the time the advisor 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 advisor is managing for you. This is the common structure when the advisor is actively managing your money, making trades, rebalancing, etc.
Fee-based: With a fee based system, the advisor 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 AND the advisor is earning commissions on products they recommend to you.
7. Ask About the Advisor’s Specialty
Some advisors 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, but also drawdown assets. Some specialize in helping you turn assets into reliable retirement income.
However, many advisors also offer different kinds of sub specialties. They have a tendency to like certain strategies over others.
When interviewing, it is great for you to try to find out what makes each advisor unique and make sure that what they offer is what you genuinely need.
You should also know about all of the advisor’s certifications. There is a virtual alphabet soup of different types of financial advisors (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.
8. Get Excited About the Potential Benefits of Working With an Advisor
Multiple studies show that people feel better about their finances and are more successful when working with an advisor. Recent data from Northwest Mutual show that those who work with advisors 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 advisors:
- 66% feel very financially secure (vs. 31% without an advisor)
- 85% feel like they are headed in the right direction (vs 71% without an advisor)
- 71% feel happy with their life (vs 50% without an advisor)
- 61% have clarity on balancing spending now vs. saving for later (vs 50% without an advisor)
- 81% set specific goals for the next 5-10 years (vs 67% without an advisor)
- 68% are confident they will achieve their goals (vs 55% without an advisor)
- 73% have financial plans built to endure market ups and downs (vs 30% without an advisor)
9. Know Your Own Levers, Strengths and Weaknesses
It is not a great idea to go into an advisor 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 plan and endless opportunity for strengthening their financial future. What are you doing right? Where do you need to improve?
10. Did You Know that NewRetirement Offers Advisory Services?
Not everyone needs a financial advisor. But, did you know that NewRetirement offers flat fee advisory services?
You can collaborate with a Certified Financial Planner who has takes a fiduciary oath and specializes in retirement. Your advisor will:
- Review your NewRetirement plan to quickly understand your circumstances and make sure it is set up properly.
- Help you establish goals and identify ways to strengthen your finances.
- Meet with you via phone or video call to discuss your goals and suggest ideas for how to do better.
- Provide ongoing support.
Click here if you would like to learn more about NewRetirement Advisors.