A financial advisor can help you make better decisions related to your money and work toward your goals. But it’s important to do your due diligence when hiring a professional, and make sure you’re working with someone who meets your specific needs, especially since it comes with money.
Here’s how to check if working with a financial advisor is worth the cost.
Check the price structure
Not every financial advisor has the same pricing structure, so it’s important to understand exactly what your advisor will charge you. There are several industry standard frameworks. Expenses under management (AUM), for example, are based on a percentage of your portfolio. If your advisor charges 1% of AUM and manages $100,000, his annual fee would be $1,000. Whether this is appropriate depends on your specific situation: A 1% AUM fee may make more sense for someone with complex finances who need significant planning than someone who just needs to rebalance a basic portfolio.
You may also come across consultants who charge low fees or hourly rates. That structure often makes more sense for people who need a one-time plan instead of regular portfolio management.
Some financial advisors receive commissions if you buy a product they recommend, such as a mutual fund or annuity. However, this can create a conflict of interest. An advisor may want to sell you a product that is not in your best interest because they will earn a commission.
Look for value beyond the benefits of investing
Delivering high investment returns is important when it comes to financial advisors, but portfolio returns are only part of the job. An advisor who can help you build a financial plan, work toward short-term and long-term goals and stay grounded during market uncertainty adds tremendous value.
You should feel free to ask your advisor about important decisions, such as when to take Social Security, the best time to retire, insurance needs, estate planning basics and how to minimize your current taxes.
Check how you feel about your finances after each meeting. Do you feel more confident about what you need to do, or do you leave meetings with more questions than answers? If the answer is the latter, it may be time to find a new counselor.
Verify guarantees, conflicts and validity
If you have not worked with a financial advisor and are considering hiring one, you should verify their credentials. You can use the Financial Industry Regulatory Authority (FINRA) BrokerCheck to verify a broker’s records and search an adviser’s Securities and Exchange Commission (SEC) records using Investment Adviser Public Disclosure.
It is best to choose a financial advisor who is a fiduciary, meaning that he is required by law to act in your best interest.
When evaluating financial advisors, make sure they have the skills you need. If you need help with small business financing, find an advisor who understands the complexities of small business financing.
No matter which advisor you work with, it’s important that that professional is transparent, accountable and willing to explain how their funds work. Any lack of transparency or communication can lead to a shaky relationship, especially if a financial advisor shows these red flags before you start working with them.
