Let's face it: as a general populace, we aren't great at managing money. But it's no wonder why: From taxes to investing to debt-busting, there's a lot that goes into financial planning. And while we're all for learning to do it yourself, there are a number of reasons you'd enlist the help of an advisor. Here's when you might need one, where to find one, and how to make sure you pick one that meets your needs.
Illustration by Nick Criscuolo.
When Is It Time To Hire A Financial Advisor?
The basics of personal finance aren't terribly difficult, and with a little research, you can master financial milestones like getting out of debt or even investing. But there are some specific instances in your life in which it might make sense to hire an advisor. Forbes outlines a few:
- You're recently married: You'll probably have a lot of questions about merging accounts, responsibilities for the other person's finances, communicating about money, filing taxes and so on. A financial advisor can lay down the basics and help you manage your finances as a married couple.
You're starting a new business: Or freelancing. When I decided to leave a full-time job and work as a freelancer, talking to an advisor would have been smart. Rather than navigate the confusing maze of how taxes work on my own, a financial advisor could have talked me through it and saved me a lot of time and headache. When you decide on self-employment, whether it's freelancing or launching a business, talking to a financial advisor is a good idea.
Along those same lines, Forbes says it might make sense to talk to an advisor when you switch careers in general. They can help you prepare for the switch and stay afloat during the transition.
- Your family has grown: If you become a parent, there are a lot of financial considerations to make. How will your taxes change? Do you need an estate plan? A financial advisor can help you answer those questions and more.
- You're planning a big purchase: A house is probably the most common example. It's a daunting process with a lot of little details to consider. An advisor can give you insight on the best place to park your savings or how to prepare for the mortgage process.
- You've come into a big windfall: Maybe you've won or inherited a huge amount of money -- more than you've ever had -- and you have no idea how to start managing it.
These are some common milestones that prompt people to hire an advisor, but you may have your own reasons, unrelated to any major life event. Personal finance blog Money Under 30 explains:
In my opinion, there are three reasons to hire a financial advisor:
1. You feel "lost" in planning for your financial future; you need a roadmap.
2. You just don't want to deal. When it comes to money, you're not the DIY type, and you just want a professional to take care of it.
3. You like managing your money, but realise that your financial plan would benefit from an impartial and unemotional third-party opinion.
Again, it's great to research and come up with your own financial plan, but an advisor can save you a lot of time and energy. Whether you feel lost, or the DIY approach is stressing you out, or you're just really busy, there are plenty of valid reasons for finding help.
The Difference Between An Advisor, A Planner, And All Those Other Financial Pros
You've probably heard the term financial advisor and financial planner used in the same context, so what's the difference between the two?
Simply put, a financial advisor is a general term used to describe any professional who gives you financial advice. And this can be used to describe a number of different financial professions, as the Motley Fool explains:
So these people can be called financial advisors, wealth managers, investment managers, financial planners, financial life coaches, all these types of things. And just about anyone can say that they are such a thing. There's no common terminology for a lot of these things. There are no laws around it. Just because someone says they provide financial advice -- it may not be that they actually provide financial advice. They might just be selling you something. They might be what's traditionally considered a broker or an agent.
On the other hand, a Certified Financial Planner® is a little more specific: it's a professional who's certified by the Certified Financial Planner Board of Standards, Inc, so not just anyone can call themselves a CFP. And you probably want a qualified CFP dealing with your finances, because they have a fiduciary duty, meaning they're legally required to act in your best interest. That's huge. A stock broker, wealth manager, or any other non-certified advisor or planner isn't required to meet this standard. That doesn't necessarily mean all of those professionals aren't worth their salt, but CFPs are usually very particular about their titles, and understandably so: their certification shows they're reliable. If they mess up, they lose that certification.
To make things even more confusing, there are also CPAs -- Certified Public Accountants. Most people know that CPAs help prepare taxes, but they can do more than that, and some of them may offer advising services. Generally speaking, though, CPAs are mostly hired for tax-related financial tasks, while a CFP can handle more of your financial planning.
How Much an Advisor Costs
The cost of an advisor varies depending on what kind of advisor you have. The cost of the advice will depend on its scope. According to ASIC's Money Smart website: "As a guide, expect to pay between $200 and $700 for simple advice and between $2000 and $4000 for more comprehensive advice. If you've agreed to ongoing advice, some of the cost may be paid over time."
There is also room for negotiation, so don't think the fee that an advisor lists is set in stone.
According to consumer advocacy group Choice:
"Planners don't usually tell their clients that pricing structures are flexible, but you can and should negotiate."
Commission and Fee-Based Advisors
Advisors that work on commission are essentially sales people who get paid for recommending specific investment and insurance products. Obviously, commissions and volume-based payments for recommending financial products can influence the advice given by financial advisers.
For this reason, commissions were banned on new investments and super products in mid-2013 although there are some exceptions (for example, for selling life insurance, remain). If you bought a financial product before 1 July 2013, the adviser may continue to receive a commission each year for advising on that product. The commissions will continue to be deducted from the money you have invested until you leave that product or end your relationship with that adviser.
It's hugely important to ask your advisor how they're paid. Ideally, you want a fee-only advisor.
What to Expect When You Visit a Financial Advisor
Your first meeting with an advisor is usually free. The adviser will also be able to tell you how much the advice will cost so you can decide whether to proceed any further. Make sure the cost is given to you in dollars, not just as a percentage of the amount you have to invest.
Choice has a checklist for your first meeting with the finacial advisor:
- Request a copy of their Financial Services Guide (FSG) to be sent via email, fax or post before your first meeting – and be sure to read it.
- Discuss the planner's background and qualifications.
- Give the planner as much information as possible about your personal situation, needs, timeframe and attitude to risk.
- Discuss whether there are any limits to the advice they can provide.
- Find out exactly who the planner represents and ask if they have any preference for a particular type of investment or fund manager - if so, ask them to justify it.
- Find out about their professional indemnity insurance, what it covers and to what amounts.
- Ask if they have their own 'wrap' account or master trust and if these are likely to be recommended over other investments and, if so, why.
- Gauge the planner's attitude to strategies like gearing (borrowing money to invest). Does it match yours?
Once you hire a financial advisor, their first order of business is to get a clear idea of your financial health. They'll likely want to know the following:
- Assets and accounts: How much money you have, what kind of debt you have
- Income: What your salary looks like, whether you have any additional sources of income or gifts
- Tax situation: Withholdings, deductions, and all other tax details
- Estate planning: Your will, beneficiary information, etc.
- Investing: Your investments, risk tolerance, retirement goals.
Once your advisor has a thorough idea of what your financial situation looks like, that's when the advising comes in. They'll prepare a statement of advice (SOA) to formally document the advice, the strategies and financial products they want to recommend. If you want to, you can opt to deduce the cost of putting the SOA together from the balance of your investment. Advice on insurance may not require an SOA.
Once your advisor comes up with a plan, they will work with you on implementing it and then they will periodically monitor your financial health and send you a periodic report.
If your financial planner handles investing, they might help you open and fund an investment account, too. They will come up with an ideal, customised portfolio that includes specifics on what kind of assets you should have (stocks, bonds, alternatives, real estate funds, etc.). Every firm has a different investment policy, so the approach may vary. Some firms only work with one fund company and limit your investments to that company.
It pays to do a little research on your own, because some firms may charge fees for your investment return. At the very least, learn the basics of investing on your own. You want to make sure to vet your advisor carefully, and part of that is finding out how they invest your money and how they're paid.
Where to Start Your Search
A good recommendation from a trusted friend or family member can go a long way, but if you want to vet the reliability of your advisor (and you do), you should start with the industry organisations like the Financial Planning Association or the Association of Financial Advisors.
Once you start your search, you want to pick a few potential candidates, then do a little research. Check their company web site and bio. Once you narrow down your list to a few advisors, you'll want to call and schedule quick phone interviews.
How to Interview Your Potential Advisor
When you talk to a potential advisor, there are a handful of important topics you'll want to cover. Again, you should have them clarify how they're paid. Specifically, ask about their fee structure. Even if you're sure they're fee-only, get them to confirm it. Obviously, you want to look at their accreditation, too. Beyond making sure you're working with a true CFP, if the advisor handles investing, you also want to make sure they're registered with ASIC.
In general, talk about your specific financial needs and make sure they're able to help you with them. However, you also want to weed out a good financial advisor from a bad one. In doing this, discuss these topics during the interview:
- Their length of service: Do they have a proven track record?
- Their typical client: You want to make sure they're used to working with clients with needs similar to your own.
- Their investing philosophy: This is why it helps to learn the basics of investing. You want to make sure your advisor's investment philosophy matches your own.
Forbes points out that a good advisor won't talk 90% of the time during the interview. They will listen, ask questions, and offer insight. In addition, there are a few other red flags to look out for, and CFP Robert Brokamp goes over several of them in his podcast. A few of the most common ones:
- They promise to destroy the market: If your advisor guarantees a high investment return, it's probably time to move on.
- They give you advice without knowing your full financial picture: This goes hand in hand with the 90% of the talking thing. They should have a thorough idea of your financial health so they can offer a customised plan of action.
- You feel rushed or pressured. If the planner is urging you to get back to them by a specific deadline, or they urge you to act on a limited time opportunity, they're probably trying to sell you something beyond a solid financial future.
You should always look out for red flags like this, but vetting a fee-only CFP will help make sure you don't have much to worry about.
It can be intimidating disclosing and handing over your finances to someone else. But sometimes, it makes sense, and there are plenty of experienced and skilled advisors out there who can help manage your money. Take your time with the process, do your research, and it shouldn't be too hard to find one that's reliable.