If you are like most Americans, you may need help managing your finances. According to the NFEC, a lack of knowledge about personal finance can cost you $1,200 annually.
Getting the help of a financial advisor can help you manage your finances more effectively and avoid costly mistakes. Financial advisors are not just for wealthy individuals. They can help people set long-term goals and manage their finances.
Determine Where You Need Help
Before you talk to a financial advisor, you must identify the areas of your life that need help. In the first meeting, you should be able to explain your specific needs.
Aside from investment advice, financial advisors can help people manage their various financial needs. For instance, they can help people set goals and develop strategies to improve their financial situation.
You may not need financial planning in a relatively simple financial situation, such as without significant debt. However, if you require more comprehensive advice, such as retirement planning, financial advisors can help you.
If you have complex financial needs, such as establishing trusts or college funds for your children, financial advisors can help you. Although different types of financial advisors may offer the same services, choosing the one that fits your needs best is important.
Research the Types of Advisors
Although there are no regulations regarding the activities of financial advisors, many people still refer to themselves as financial advisors. However, it’s important to note that not all of them have the best interests of their clients in mind.
Understanding the various types of financial advisors can help you make informed decisions. Some are bound by a fiduciary duty, which means they are legally obligated to act in your best interest. On the other hand, some individuals who call themselves financial advisors must only provide suitable recommendations for their clients.
Before you hire a financial advisor, make sure that you thoroughly understand how they earn their living. This will allow you to make an informed decision.
Fee-Only
A fee-only financial advisor typically charges a flat fee or an hourly rate for their services. This type of financial advisor makes money from the prices that they collect from their clients.
Most fee-only financial advisors are bound by a fiduciary duty, which means they are legally obligated to act in their clients’ best interests. They do so through a fee-only model, which means they can avoid conflicts of interest.
Commission-Based
For most financial advisors, most of their income comes from sales commissions earned through third parties. Some individuals who make these commissions refer to themselves as free financial advisors who do not charge fees.
Depending on the type of financial product that the financial advisor sells, their sales commissions can be a substantial portion of their income.
Unlike financial advisors who act as sales representatives for a brokerage firm, commission-only advisors do not have to follow fiduciary duties. However, it is important to note that some fee-only advisors may act as fiduciaries when discussing insurance products.
Commissions aren’t always a red flag. They can be a part of the financial advisor’s overall compensation package.
Although it’s convenient to purchase financial products through a financial advisor with a commission, it’s essential to understand the difference between a fee-based and a commission-based financial advisor.
Registered Investment Advisors
A registered investment advisor (RIA) is a company that provides financial advice bound by a fiduciary duty. It employs multiple investment advisor representatives (IARs) bound by this duty.
IARs may refer to themselves as financial advisors and can be fee-based or fee-only. Some may also have the credentials of a certified financial planner.
Certified financial planners (CFPs) are highly skilled at helping people plan their financial lives. They can also help individuals manage their complex financial situations.
Robo-Advisors
With the help of robo-advisors, which are automated investment platforms, people can get low-cost, personalized investment advice. Most of these firms focus on helping individuals achieve their long-term goals, such as retirement.
Although people who have complex financial needs may prefer to work with a traditional financial advisor, some robo-advisor firms provide financial planning solutions a la carte.
Choose Your Service
Investment Advice
They can help individuals manage their investments by researching options and ensuring their portfolio stays within their desired risk level.
Debt Management
They can also help people manage their debts, such as credit card debts, student loans, and mortgages. Financial advisors can help individuals establish a repayment plan.
Budgeting
They can help individuals set goals and manage their finances by analyzing where their money goes after they get their paycheck.
Insurance
Financial advisors can also help individuals identify potential gaps in their insurance coverage. They can recommend new policies, such as long-term care or disability insurance.
Taxes
One of the most common services that financial advisors can provide is tax planning. This involves figuring out ways to reduce the taxes people pay. Although financial planners can also help individuals prepare their taxes, they may not be able to provide the same level of expertise as a certified public accounting firm (CPA).
Retirement
With the help of financial advisors, individuals can build a retirement fund that’s ideal for their long-term goals. They can also help them manage their investments to keep their money safe.
Due to the complexity of the financial industry, it’s essential to consider the various factors that affect an individual’s financial needs before choosing a financial advisor.