Despite popular belief, financial advisors are not just for the rich and famous. Many individuals forgo the use of a financial advisor because they are deterred by the extra cost. It is easy to justify forgoing a financial advisor because you cannot afford it, but the real question you need to ask yourself is, “Can I afford not to have a financial advisor?”
Look closer at the benefits a financial advisor can bring to your financial situation. If you are currently living paycheck-to-paycheck, have little retirement savings, and can’t seem to make it to the next level of your financial goals, then think twice before you say that you cannot afford an advisor. With the helpful planning and advice from the right advisor, you are more likely to meet your financial goals. (For more on finding an advisor for retirement, read: How to Hire a Retirement Advisor.)
- Hiring a financial advisor can seem like an unnecessary expense but they often save you money in the long run.
- If you choose to hire a financial advisor, make sure all their fees are transparent before you sign.
- Usually, a financial advisor is recommended when their fee is less than what they can save for you.
- Financial advisors are not stock-picking wizards but may be able to help fortify your unique financial situation.
Go With A Fee-Only Advisor
There are essentially three types of financial advisors: fee-only planners, fee-based planners and commission-based planners. With fee-based planners and commission-based planners, you will pay less upfront. However, these types of advisors work off of the commission of certain products, and because of that, their advice might be more biased. They might be pushier trying to get you to buy certain products and not always have your best interests in mind.
A fee-only advisor is much more likely to be a Registered Investment Advisors (RIA), meaning they must provide you with financial advice that is based on what would be the best for your unique financial situation, rather than give you advice that will help them sell products.
Yes, a fee-only advisor can cost you a lot more money upfront. If your advisor charges an hourly rate of $200, and it takes them five hours your first meeting to set up your plan, it can be daunting to pay the initial $1,000. However, while the first two meetings with your advisor will be costly due to the amount of work they do to set up a personalized plan for you, your follow up meetings and check-ins should be much shorter and inexpensive. (See also, What Long-Term Investing Should Mean to You.)
Percentage-Based or Flat-Fee Advisors
Another option to consider is a financial advisor that charges a percentage based off of the assets they manage. This fee can range from 0.5% to 2%. Usually, advisors that charge a percentage will want to work with clients that have a minimum portfolio of about $100,000. This makes it worth their time, and will allow them to make about $1,000 to 2,000 a year. Again, this might seem like a huge price tag to pay per year once your portfolio is that padded, but these advisors can be more motivated to grow your investments. The more your investments grow, the more money they will make from their percentage.
For certain services, such as an estate plan or will, it might be better to go with a flat-fee advisor. If an advisor charges you a set rate for the service, you will not have to worry about them racking up hours or whether you need to make any simple modifications.
How Much Money Can an Advisor Save You?
A financial advisor is an expense, and when you already have a tight budget, it can seem like a waste of money. However, think about how much money a financial advisor can save you and make you in a year. If you pay on average $1,000-2,000 a year on an advisor, but they allow you to save an extra $2,000 a year from careful planning and boost your retirement savings $2,000 a year by diversifying your portfolio, then you will come up on top.
Calculate the benefits before completely ruling out hiring a financial advisor. Don’t be afraid to inquire about an information-only meeting that allows you to get a better understanding of what a financial advisor can do for you. (See also, 5 Things to Ask Before Hiring a Financial Advisor.)
Weigh the Benefits of an Advisor
Financial advisors can impact more than just your retirement portfolio. They can also help you manage difficult student loan repayments, help with proper estate planning, and even ensure you have enough money for your children to attend college. They should be one of the first people you contact if a spouse were to die or become disabled, if you earn an inheritance, the IRS is auditing you, or you are facing a divorce. Don’t wait until your financial situation is in the red before you seek out the help of an expert.