Yes, advisors cost money. But they can help you avoid costly mistakes, understand your options, and make valuable recommendations based on many factors, including your taxes, risk tolerance, and goals.
Laura answers a listener’s question about managing an inheritance. You’ll learn the different types of financial advisors, how they get paid, and tips for choosing the right one.
Money Girl is hosted by Laura Adams. A transcript is available at Simplecast.
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Hi, friends! I’m Laura Adams, and you’re listening to the Money Girl podcast! Since 2008, I’ve been bringing you personal finance and small business tips every week. My mission is to help you get the knowledge and motivation to prioritize your finances, build wealth, and have more security and less stress. I create every show to ensure you come away with practical advice to make better money decisions.
Be sure to subscribe to the show and participate by sending me your money questions or comments. You can leave a message 24/7 on our voicemail line at 302-364-0308. You can also email me using my contact page at LauraDAdams.com.
I recently received an email from Gautam, who said, “I want to thank you for being so helpful and providing great advice related to financial health. I’ve learned a lot over the past months from your podcast and website, and I believe that will continue to be true for a long time. I’m a single, 28-year-old guy working in tech. I contribute to an HSA, FSA, 401(k), ESPP (employee stock purchase plan), and have been investing on my own since I started working in 2018.
My life changed drastically last year when I lost my parents. As a result, I inherited various assets but don't know what to do with them. I don't have any debt, and my net worth is about $900,000. I’m unsure how much to invest in stocks or if I should sell my real estate and put the money into stocks. I know there are many investment options with lower risk and lower returns, like CDs, bonds, and mutual funds. What advice can you give about managing these funds or hiring a financial advisor?”
I appreciate your question, Gautam, and I am so sorry about the loss of your parents. Any time you receive a significant inheritance, other windfalls, or experience major life changes, such as starting a family, going through a divorce, having a job loss, or approaching retirement, you need a financial advisor. It sounds like Gautam has done a great job saving so far and he should seek expert advice to protect and grow his wealth.
Yes, advisors cost money. But they can help you avoid costly mistakes, understand your options, and make valuable recommendations based on many factors, including your taxes, risk tolerance, and goals. This show will review the different types of financial advisors, how they get paid, and tips for choosing the right one.
First, it's essential to understand which advisors have and don't have fiduciary responsibilities. A fiduciary is legally required to work in your financial best interests, not theirs.
Stock brokers and some advisors are not fiduciaries and only get held to a standard called "suitability." That means they must recommend financial products that are suitable for a client’s risk tolerance and goals.
However, a suitable product may be the one that pays the broker the highest commission. In other words, a suitable product may be OK but there could be a conflict of interest that prevents you from understanding your options or buying a better product.
Let's start by discussing four types of financial advisors to familiarize you with their responsibilities, services, and typical rates.
Advisors who make sales commissions earn some or all their income from third parties. For instance, if you buy a mutual fund, the advisor may get paid directly from the fund company. Or a mutual fund may include a "load" or fee that gets deducted from your investment account and paid to the advisor once you purchase it.
Since commissioned advisors only get paid when you buy a product, they typically offer free investment advice; however, be aware that they are not fiduciaries. A commissioned advisor works as a salesperson for an investment brokerage and gets held to the suitability standard I previously mentioned.
It's similar to working with a Honda car salesperson and asking them what's the best car to buy. They would never tell you to buy a Toyota because they're trained and incentivized to sell Hondas. That doesn't mean a Toyota isn't an excellent choice for you, but it probably wouldn't come up in a conversation with a Honda representative.
While you need to be cautious anytime you work with a commissioned salesperson, remember that some financial products always get sold that way. For instance, if you buy life or health insurance from a licensed advisor or insurance broker, they get paid a commission.
As I mentioned, paying a commission for a product doesn't necessarily mean it's a poor choice or not in your best interest. What's important is to ask an advisor how they get paid and understand if there's a potential conflict of interest.
Advisors who earn money from services by charging an hourly rate, a flat annual rate, or a percentage of your assets under management (AUM) are fee-only financial advisors. Fee structures vary by company, such as from 1% to 3% of the total value of your portfolio.
For example, if you have a $100,000 portfolio, a 2% fee means you pay $2,000 yearly for management and advice. That gives an advisor an incentive to grow your portfolio value. Other advisors may work exclusively with clients to create financial plans and charge flat or hourly fees ranging from a few hundred or thousand dollars.
Advisors who blend the commission and fee-only models are known as fee-based. They may charge a percentage to manage your portfolio and also sell investment products on commission. Or they may charge a flat fee to help you create a financial plan and receive a commission if you purchase their recommended products.
Again, what’s important is understanding how your advisor gets paid and avoiding potential conflicts of interest.
Robo-advisors typically offer low-cost digital financial management using algorithms with little or no personal customer service. However, some robo-advisors also offer human advisors for a fee or once your portfolio exceeds a limit. For instance, Betterment and Personal Capital are robo-advisor platforms that advise clients with higher account balances and paying higher fees.
Most robo-advisors offer pre-constructed portfolios of exchange-traded funds (ETFs) based on your risk tolerance and investment goals. They typically provide taxable and tax-advantaged investment accounts, such as IRAs, and may also offer high-yield savings.
Examples of financial advisor certifications
Another often-confusing aspect of working with financial advisors is their various professional certifications and designations. Here are several you should know:
You might seek many more financial specialists, such as insurance brokers licensed to sell various products, such as annuities and health, life, and disability policies. You might want help creating emergency documents using an estate attorney, getting out of debt using a credit counselor, or planning for college expenses using an education specialist.
Which type of financial advisor is best for you depends on factors like how much you have to invest, the products you want, and the services you need, such as investment management, business advice, or tax preparation. Some investment advisors only work with high-net-worth individuals or pre-retirees, but many accept smaller portfolios.
How to find the best financial advisor
To find the best financial advisor, you might get a recommendation from friends or family or search online. Various organizations, such as the National Association of Personal Financial Advisors, Certified Financial Planner Board, and Garrett Planning Network, allow you to search for and verify the credentials of certified professionals in your area and nationwide.
You can research any advisor’s status and background using the SEC’s Investment Advisor Public Disclosure and FINRA’s BrokerCheck database. That’s an important step to make sure there are no disciplinary actions or significant complaints filed against them.
Once you settle on one or more potential financial advisors, meet with them in person or online to discuss their qualifications and your goals. If you're married or in a serious relationship, you should both meet with potential advisors and be prepared to discuss your income, expenses, and current investments. Take notes during the meeting and ask any questions that come up.
Questions to ask a potential financial advisor
Essential questions to ask a potential financial advisor include:
Using an expert financial advisor to enhance your money management skills can help you maximize returns, save time, avoid mistakes, and stay disciplined to follow a sound financial strategy.
Gautam, I hope this show helps you find an advisor who can give you expert advice on managing your wealth and inheritance. If you have a money question or a topic suggestion, leave a voice message at 302-364-0308. Or visit LauraDAdams.com to use my contact page and learn more about my work, books, and money classes.
Be sure to follow Money Girl on Apple Podcasts, Spotify, or wherever you listen to podcasts, so you automatically get each new weekly episode! That's all for now. I'll talk to you next week. Until then, here’s to living a richer life.