Far too many people are embarrassed to seek out a professional financial advisor because they do not believe they have enough assets.
Historically, it was difficult finding advisors willing to work with clients with fewer assets. Most financial advisory firms still have high minimum investable asset thresholds. Fortunately, more quality firms are now finding efficient ways to work with these smaller accounts.
Perhaps you have just graduated from college and the first student loan payment is due. Maybe you have heard on TikTok about the “financial independence, retire early,” or FIRE, movement, but are not convinced that it is right for you. Maybe you have just learned about a beloved relative leaving you enough money to turn your side gig into a full-time business. Traditional milestones like starting a career, getting married or buying your first home can trigger a need for guidance.
Getting the right guidance early in the process can have the biggest impact on your long-term investment success.
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If you’re an up-and-coming investor, consider these questions when finding a financial advisor:
— How much will a financial advisor cost?
— What other fees might I incur?
— What services will I need?
— Does a fiduciary advisor give better advice?
— Where can I find a financial advisor?
— What else should I consider when choosing a financial advisor?
— What key questions should I ask a prospective advisor?
How Much Will a Financial Advisor Cost?
A financial advisor typically charges for their advice based a percentage of the assets that they manage for you. This fee is detailed in the Uniform Application for Investor Advisor Registration, or Form ADV, as it is more commonly known, and is unique to each firm.
Form ADV explains how fees are calculated and deducted. Advisors are required to give a copy to you at the start of your relationship, and it must remain easily accessible to you. This document is filed with the Securities and Exchange Commission (SEC) and any relevant state regulators.
The assets under management (AUM) fee is deducted directly from your accounts. The average AUM fee is just over 1%. Smaller account holders might pay higher fees, often as much as 2% per year. In dollar amounts, with an 1.5% AUM fee on $150,000 of qualifying assets, you would pay $2,250 each year.
Your assets will rise and fall in value, so your AUM fee will increase or decrease with those fluctuations. Your advisor will recalculate your fee on a periodic basis to account for these changes. If the account value grows, the percentage may be reduced. The lowest fees are typically for accounts over $5 million.
More and more smaller investors are choosing a financial advisor that charges a flat fee instead of an AUM fee. They may charged a stated fee for a financial plan, an annual fee or an hourly rate. A stand-alone financial plan may run $1,000 to $3,000. An annual flat fee may be as much as $7,500, and hourly rates range from $200 to $400.
It is important to ask your prospective advisor what they charge. A good financial advisor anticipates this question and will answer it in an open and forthright manner. They will also show you where to find the information in Form ADV. Do not hesitate to ask for the specific dollar amounts instead of just percentages to understand the cost of services.
Regularly check your statements to ensure that you are being charged as outlined in Form ADV. Fee-based advisors bill their clients directly, and mistakes can happen.
Some advisors are paid on a commission basis instead of AUM or flat fees. In these situations, the advisor is being paid for their services by the product vendor. You are still paying a fee for the advisor’s services, but the vendor has priced the fees into the product itself rather than directly billing you.
Hybrid advisors can charge fees to some clients and receive commissions from others. However, a hybrid advisor cannot charge a directly-billed fee and receive a commission for the same client recommendation. Hybrid advisors must take extra care to ensure that you clearly understand at all times who is paying the advisor for their services.
What Other Fees May I Incur?
In addition to the AUM or flat fee, an investor might pay a separate fee for any recommended products.
A client is not paying twice for the same benefit; rather, they are paying all parties to the transaction.
— The advisor’s fee compensates them for their advice, recommendations and management of your investments.
— The product solution covers the costs associated with the investments themselves. Often referred to as expense ratios, they are fully disclosed in your account paperwork.
Product fees are added to the advisor’s fee to determine the total fee. For example, you may pay a 1% advisor fee and a 1.5% product fee, for a 2.5% total fee. The advisor’s fee is payable for as long as the client has a relationship with the advisory firm. The investment product fee is only payable for the time period that the client has the product in their portfolio.
What Services Will I Need?
As a smaller investor, your needs might differ from those of more affluent investors, but you still deserve the same high caliber of service.
You will likely need an initial financial plan that outlines your current financial goals, available cash flow and the advisor’s recommended plan to achieve these goals.
Many financial advisors will include an individualized financial plan in their advisory fee; but, as a smaller client, you may need to pay for the financial plan separately as a flat fee.
Does a Fiduciary Advisor Give Better Advice?
Many investors are unsure how a fiduciary advisor affects their decision, especially after a recent high-profile court case.
In April, the U.S. Department of Labor introduced the Retirement Security Rule, also known as the DOL Rule. The proposal aimed to protect consumers from excessive fees. The proposal was struck down in July by a U.S. District Court due to a conflict with existing Employee Retirement Security Act law that governs retirement plans. The 2024 proposal mirrored an Obama administration bill that failed in 2018 for the same reasons. An attempt in 2020 by President Donald Trump’s administration stalled when he was not re-elected.
The DOL Rule would have required all retirement advisors to adhere to a fiduciary standard, the strictest in the industry. A fiduciary is an advisor who must prioritize their clients’ interest over their own. Even non-fiduciary advisors must follow similar regulatory standards. At the heart of these proposals is an ongoing argument between two factions of the financial services industry over compensation transparency. There is a presumption that all commissioned sales pose a conflict of interest. A fiduciary standard demands that conflicts must be eliminated or fully disclosed.
There are two issues with a fiduciary standard:
— A fiduciary standard is not fool-proof. The $64.8 billion dollar Ponzi scheme perpetuated by Bernie Madoff for over 17 years was the largest in history. Madoff was a fiduciary financial advisor who was deeply trusted by both clients and regulators alike.
— A fiduciary standard is also not conflict-free. Under an AUM fee model, an advisor earns more as assets increase and less as they decrease. If the stock market goes down, the advisor usually has greater client responsibilities and needs to be more responsive at a time when their income is reduced. Other conflicts, such as discouraging large purchases or insurance needs that may decrease account value, might arise.
It is always a positive for the entire financial industry when clients feel confident that their needs and interests are being met by their professional advisors. Heightened regulation will not universally deter any advisor that is not already putting their clients’ needs first. The additional compliance requirements may make recruiting and retaining quality advisors more challenging. Institutions and advisors alike will pass along their additional costs to the client, all of which could create new barriers to accessing professional, personalized advice, especially for small investors.
Focusing solely on whether an advisor is a fiduciary is not enough. The advice from a fiduciary and a non-fiduciary advisor can be exactly the same, or it can vary depending on the options that fit the advisor’s compensation model. Investors should ask their advisors how they are paid and why their recommendations are best for their unique situation.
[READ: 7 Top Financial Advisor Firms by AUM]
Where Can I Find a Financial Advisor?
Now that you know how financial advisors are compensated and the importance of having a financial plan, there are several ways to find a competent advisor.
Geography is less important in the digital age. As long as an advisor is licensed in your state, they can serve you by video from anywhere in the U.S. Instead of choosing the closest advisor, you can find one that best matches your needs by experience, niche market and expertise, gender, languages spoken, and other criteria.
Ask Friends, Family or Colleagues For Recommendations
Hearing first-hand from someone you know and trust how an advisor communicates and responds to messages can be invaluable.
Ask Other Professionals For Recommendations
Did an accountant prepare your taxes this year? They can be an excellent resource to recommend you to a financial advisor. Professionals routinely network with each other as “centers of influence.” Financial advisors love these referrals because the CPA already understands your financial situation and whether your personalities will mesh. You also may get better service overall because your accountant and your advisor become a cohesive team. Lawyers, insurance agents and even your mortgage broker are other professionals that can point the way.
Use an Online Advisor Search
These databases include financial advisors who work with smaller clients and often cater to younger generations. Most advisors on these platforms are fee-only planners, and you pay with an AUM or flat fee:
— U.S. News & World Report. This online database of financial advisors is searchable by location and firm name, and it provides details on their specialties and experience.
— National Association of Personal Financial Advisors.
— XY Planning Network. These advisors work specifically with next-generation investors.
— The CFP Board. This network includes all advisors who have earned the certified financial planner, or CFP, professional designation and provide fee-only services.
Match Online With an Advisor
The internet is filled with firms that connect financial advisors with new clients, and it’s often a free service for investors. A quick internet search for “financial advisor near me” will bring innumerable options. The downside to this method is that your info may go out to multiple advisors. If you prefer a fee-only advisor, include the word “fiduciary” in your search term.
Consider a Robo Advisor
Many banks and online brokerages are offering cost-effective online automated portfolio management services and financial planning.
What Else Should I Consider When Choosing a Financial Advisor?
The U.S. Bureau of Labor Statistics recorded 330,300 financial advisors in 2023, a daunting number to winnow down to find the right advisor for you. Consider these factors:
Firm Size
Financial advisors can be a solo operation, a small boutique practice or associated with a practice consolidator, resulting in a much larger firm footprint overall. There is not a perfect size. Larger firms may offer a broader range of services and have some economies of scale. However, smaller firms may be able to offer a higher degree of personalization and familiarity that is comforting to a newer investor.
Credentials and Expertise
Professional designations signal that an advisor has completed advanced education and passed challenging exams in various specialties.
Niche Market
Many advisors are willing to dive deep into a smaller pool of clients in order to provide highly customized services. Niche practices can be managed profitably, enabling them to focus more on the individual, rather than the account size.
Online Presence
Websites and social media profiles can tell you a lot about an advisor. Does the website tell a positive story of the advisor’s investment philosophies, firm values, and the team’s background and experience? A current profile picture and engaging content builds trust. Your financial relationship with an advisor is as intimate as your relationship with your doctor, so understanding them as an entire being is invaluable to building trust together.
Demographics
The industry is still heavily weighted toward Caucasian men, but more women and minorities are entering the field. Advisors are also focusing on specific populations, such as LGBTQ+.
Regulatory Record
Advisors must disclose personal bankruptcies, criminal history and all disciplinary actions. Details are available in the SEC database called Investment Advisor Public Disclosure or the Financial Industry Regulatory Authority database called BrokerCheck.
What Key Questions Should I Ask a Prospective Advisor?
An astute advisor should not rush you when it comes to answering your questions in simple language and without jargon. While most of the information will be in Form ADV, these questions will set you on the right path:
— What types of clients do you typically work with?
— What services do you provide to clients with smaller accounts?
— Do you have a niche, or any special expertise?
— How often will we meet? What other communication will I receive?
— How much will I pay for your services in dollars?
— Are you a fiduciary? Can you receive a commission? If yes, how will you differentiate commissions and fees?
— Will I work directly with you or someone else in your firm?
— What other professionals can you bring to the table to address all my needs?
— Will the person who referred me get any form of compensation from us working together?
Once you are comfortable with the advisor, be sure to ask this final question: “Am I a good fit for your practice?”
This will confirm if the advisor is comfortable serving smaller accounts and is the right match for you.
[Are Financial Advisors Worth It?]
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How to Find a Financial Advisor If You’re Not Rich originally appeared on usnews.com
