The title means little
Anyone may call themselves a financial advisor. What matters is the legal standard and the pay structure. A fiduciary is legally bound to put your interests ahead of their own. Registered investment advisers owe that duty, while brokers and insurance agents are held to a looser standard and may steer you toward the product that pays them more. Many people are registered as both and change hats in the middle of a conversation, so ask for the commitment in writing: a fiduciary at all times, for all accounts.
How they get paid
- Fee-only advisors are paid solely by you, by the hour (commonly $200 to $400), by the project (a full plan often runs $1,500 to $4,000) or by retainer.
- Assets under management means a percentage of what they manage, typically about one percent a year. On $500,000 that is $5,000 annually, and it rises with your balance.
- Commission pay comes from the products sold, such as loaded mutual funds, annuities and whole life insurance.
- Fee-based sounds like fee-only and is not, because it means fees plus commissions.
One percent sounds small. Over thirty years it can consume a quarter of what the portfolio would otherwise have become.
When one is worth it
Most people in their twenties with a workplace plan and an index fund need no ongoing management. A few hours with a planner earns its cost at turning points: stock compensation, marriage, a house purchase, a child, an inheritance, self-employment, or a parent needing care. For taxes, the professional is a CPA or enrolled agent, and for wills and trusts it is an attorney.
Checking them out
- Look the person up on the SEC's Investment Adviser Public Disclosure site and on FINRA BrokerCheck, which show licenses, employment history, customer complaints and regulatory actions.
- Read Part 2 of the firm's Form ADV, which must state fees and conflicts of interest in plain language.
- Ask who holds your money. It should sit with an independent custodian in your name, with statements coming directly from that custodian.
- Ask them to state, in dollars, everything you would pay in a year.
Guaranteed returns, pressure to decide today, reluctance to put anything in writing, and a recommendation that arrives before they have asked about your goals and debts all mean you should leave.
Tip Bring your own numbers to the first meeting: income, spending, debts, balances and the fees on your current funds. The advice you get is limited by the quality of what you hand over.
