Laura answers a common question about how to find and hire the right financial professional.
Laura answers a common question about how to find and hire the right financial professional.
Find a transcript here.
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Welcome back to Finance Friday, another special edition of Money Girl, where I answer your burning money questions! Today’s topic will answer a common question I hear, which is something similar to the following:
“My financial situation has recently changed, or I have some complicated money questions and probably need to consult a financial professional. How do I know if I should hire a financial advisor, and where can I find one that’s right for me?”
Whether you just received a windfall, like an inheritance or work bonus, or have new financial goals because you’re starting a family, opening a business, going through a divorce, or want to retire soon, you can benefit from working with various financial advisors. This post will review the main types of financial advisors and tips for finding and hiring the right ones.
Welcome back to episode 952 of Money Girl–I appreciate you downloading the show! I'm Laura Adams, an award-winning author, on-camera spokesperson, female money speaker, and founder of The Money Stack, a Substack newsletter.
You can learn more, ask questions, and sign up for the Money Stack at LauraDAdams.com. Newsletter subscribers automatically receive my Money Success Toolkit with the exact templates I use to manage money.
7 types of financial advisors
There’s a misconception that only wealthy people need financial advisors to help them invest multi-million dollar portfolios. Different types of professionals can help you with tasks like setting up retirement accounts, optimizing taxes, protecting your assets, making business decisions, creating emergency documents, and investing, regardless of your income or net worth.
Here are seven types of financial professionals you should be familiar with.
1. Banker: A personal banker is an employee of a bank or credit union who can help you choose the best accounts for earning higher interest, get a loan, or invest for retirement with their institution. Commercial bankers can help you open a checking account or get a loan or line of credit for your business.
The compensation for bankers is typically a base salary plus bonuses or commissions for meeting targets, like the number of new checking accounts and mortgages they open. While bankers can be helpful, remember that they’re incentivized to grow their book of business by keeping your money with their institution. So, don’t overlook other types of professionals we’ll review here who can also help you achieve financial goals.
2. Insurance agent: Insurance products, like auto, home, renters, life, disability, and health plans, must be purchased through licensed firms and their agents, who are regulated at the state level. Some agents work as employees of one company, and others are independent brokers, selling policies from multiple insurance companies. They typically work on commission, which is paid for by the insurance company, not you.
Most agents specialize in a line, such as selling property and casualty, life and health, or business policies. Right now, I use a local agent for my auto, homeowners, and umbrella liability insurance so I can quickly email or call them with questions or make any needed policy changes.
I’ve often used online sites and marketplaces for life, disability, and health insurance since I don’t need a relationship with a specific company or person for those products. They can make it easy to compare policy premiums and benefits.
However, you might find a life and health insurance broker useful, especially if you need assistance enrolling in a health plan or applying for Medicaid or Medicare. You can do an online search for a local broker or ask for recommendations from family or friends.
Having too little insurance is risky, but it’s expensive to be overinsured. So, make a habit of shopping around to get affordable coverage that minimizes your potential risks. If you have insurance questions, most brokers will consult with you free of charge in hopes of getting your business.
READ ALSO: 10 ways to save money on car insurance
3. Tax accountant: There are different types of tax pros with varying levels of education and qualifications who can give you advice, assist with retirement planning, prepare financial statements, and file taxes. The tax industry is regulated through a combination of federal oversight by the Internal Revenue Service (IRS) and state-level agencies.
For straightforward tax returns, using an EA may suffice. However, for more complex issues, like business interests, rental property, self-employment, or tax planning, I recommend using a CPA with experience in the type of work or advice you need.
A CPA’s fee usually depends on the complexity of your situation and the time it takes to research it or complete a tax return. In some cases, a good CPA can save you more money than they charge by helping you legitimately reduce taxes.
The IRS has a tax preparer search tool for locating tax preparers near you or verifying the type of credentials held by a specific tax professional. As with most professionals, getting recommendations from satisfied family or friends is an excellent way to find a good local CPA.
4. Estate attorney: An estate planning attorney specializes in helping you plan for the distribution or management of personal and business assets after your death or in case you become incapacitated. They create a customized strategy based on your wishes and draft legal documents like wills, trusts, powers of attorney, and healthcare directives.
Every adult should have a basic estate plan in place, especially if you have minor children, a blended family, or specific wishes for your healthcare or end-of-life care. However, the larger your estate, the more you can benefit from strategies to reduce taxes, help your heirs bypass probate, and protect your assets.
You can research potential estate attorneys online and ask your network for recommendations. Then, verify their credentials with your state’s bar association and take advantage of free consultations to assess their communication style, expertise, and fees.
5. Stockbroker: The primary responsibility of an investment broker is to make recommendations that are “suitable” for you based on your financial situation and goals. For instance, if you want to buy a particular security when prices are low and sell when they rise, a broker would earn a commission by making those trades on your behalf.
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. While you need to be cautious anytime you work with a commissioned salesperson, 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. Brokers are regulated by the Financial Industry Regulatory Authority (FINRA); you can do a background check on brokers at FINRA.org.
6. Registered Investment Advisor (RIA): Unlike a broker, an RIA is a fiduciary, legally obligated to act in your best interest at all times and disclose conflicts of interest. They typically act as an ongoing advisor, creating a long-term financial strategy and plan. An RIA must ensure that the investments you buy and sell are consistent with your long-term goals and financial objectives.
RIAs are usually fee-only advisors, charging a percentage of assets under management (AUM). Fee structures vary by company, but could range 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.
RIAs are regulated by the U.S. Securities and Exchange Commission (SEC) or state securities authorities, depending on the size of the firm. You can check an RIA’s background at AdviserInfo.SEC.gov.
7. Certified Financial Planner (CFP): This is a professional certification for individuals who must meet rigorous education, examination, experience, and ethical standards as set by the Certified Financial Planner Board. A CFP may also be an RIA, but not all RIAs are CFPs.
CFPs are trained to help you manage finances through a comprehensive approach that integrates all areas of your finances to achieve your life goals. They create a detailed financial plan with actionable recommendations and points to review your progress.
CFPs are paid in different ways, including commission-only, fee-only, salary, or a combination of these methods. In general, a fee-only planner may give you more objective advice since they’re not incentivized to recommend a particular investment or insurance product.
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.
There are other excellent credentials, such as a Chartered Financial Analyst (CFA), which requires professionals to pass exams covering investing, accounting, professional ethics, economics, securities analysis, and portfolio management. But a CFP is the gold standard that I recommend for an advisor. They can create a one-time financial plan or work with you on an ongoing basis.
A great place to start your search for a CFP is LetsMakeAPlan.org, which is run by the CFP Board, a non-profit organization that sets and enforces standards for certification.
How to find a financial advisor
Which type of financial advisor is best for you depends on factors like how much you have to invest, the products you want or need to buy, 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 clients with smaller portfolios.
To find the right advisor, I always say it’s great to get a recommendation from friends or family. You can also visit the National Association of Personal Financial Advisors and Garrett Planning Network to search for and verify the credentials of certified fee-only professionals in your area and nationwide.
What’s important is that you understand an advisor’s level of experience, legal obligation to protect your financial interests, and method of compensation. I recommend having a virtual or in-person meeting to ask any type of financial pro or advisor the following questions:
That's all for now. I'll talk to you soon. Until then, here's to living a richer life!
Money Girl is a Quick and Dirty Tips podcast, and I want to thank our fantastic team! Steve Riekeberg audio-engineers the show. Holly Hutchings is our director of podcasts, Morgan Christianson is our advertising operations specialist, and Nathaniel Hoopes is our marketing contractor.