Financial advisors are evolving to work with more and more diverse clients, including clients that have high needs, but low budgets.
Many people are embarrassed to seek out a professional financial advisor because they do not believe they have enough assets.
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Perhaps you have just graduated from college and the first student loan payment is due. You may have heard about the FIRE movement — financial independence, retire early — and want to get a head start on being able to retire early. Maybe a family member has passed away, leaving a small inheritance, and you do not want to squander the opportunity. Traditional milestones such as your first career job, a wedding or your first house can trigger a need for guidance.
No matter what has prompted you to recognize the need for help, getting the right guidance can have the biggest impact on your long-term investment success.
Finding an advisor who is open to working with clients with fewer assets is definitely a challenge. It is true that most financial advisory firms have high minimum investable asset thresholds that must be met before they are willing to accept you as a client. However, there are plenty of quality firms that have created compensation structures that enable them to work efficiently with clients with smaller accounts.
Clients with assets under $250,000 have a different range of financial needs than wealthier clients and will typically pay a higher fee for services. As assets grow, it is possible to reduce these fees over time.
If you’re an up-and-coming investor, here are the questions that you will need to ask and understand in order to match with the right person:
— How much will a financial advisor cost?
— What other fees may I potentially incur?
— What kinds of services will I need?
— Where can I look to find a financial advisor?
— What else should I consider when seeking a financial advisor?
— What questions should I ask a prospective advisor?
How Much Will a Financial Advisor Cost?
The typical compensation for a professional financial advisor’s advice is based upon the market value of all the assets that they manage on your behalf. The “assets under management,” or AUM fee, is typically expressed as a percentage of this calculation and is typically deducted directly from your accounts on a quarterly basis.
The average AUM fee is just over 1%. However, smaller account holders will typically pay a higher percentage, often as much as 2% per year. If you have $150,000 in qualifying assets and your advisor charges a 1.5% AUM fee, you would be charged $2,250 for the annual fee, with $562.50 deducted every three months.
Because AUM is based upon the market value of the underlying assets, your fee will fluctuate or change with the up-and-down investment results. Your advisor will recalculate your fees on a periodic basis, which is also spelled out in the Uniform Application for Investor Advisor Registration, or Form ADV as it is more popularly known.
As an account grows, the AUM percentage may be reduced. The lowest AUM fees are associated with accounts that typically exceed $5 million.
Smaller investors may choose a financial advisor that offers services on a flat-fee basis instead of an AUM fee. They may charge a stated fee for a financial plan, or bill an annual or 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 an hourly fee is likely to be in the range of $200 to $400 per hour. Flat fees are becoming more common with smaller investors who have a greater need for planning advice vs. investment management.
The Form ADV details the fee calculations and deductions. Each Form ADV is unique to the firm. The advisor is required to give their Form ADV to you at the beginning of your relationship with them, and it must remain easily accessible to you. Any person who provides investment services to their clients must file this document with both the Securities and Exchange Commission (SEC) and any state regulatory body that oversees them.
It is important to ask your prospective advisor what they charge. A good financial advisor expects this question and will answer it in an open and forthright manner. Do not be afraid to ask the advisor to give you the specific dollar calculations for your account instead of just percentages. This can be the easiest way to truly understand both the services that you will receive and what those services will cost. Be sure that they also show you the fee schedule in the Form ADV so that you will be able to reconcile their voiced explanation with the written description.
Once you begin working with the advisor, be sure to check your bill to ensure that you are being charged as described in the Form ADV. Fee-based advisors bill their clients directly and mistakes can occur.
Some advisors are paid on a commission basis rather than an AUM/flat-fee basis. 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.
A hybrid advisor has the flexibility to charge fees with one set of clients and receive a commission with other clients. 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 Potentially Incur?
In addition to the AUM or flat fee, an investor may pay a second fee for any recommended product solutions.
A client is not paying twice for the same benefit; rather, they are paying all parties to the transaction.
— The advisor’s fee is the compensation for their advice, recommendations and management of the chosen investments. The product solution has fees associated with the investments secured to implement the recommendation. Product fees may be referred to as expense ratios, and they are fully disclosed in the account paperwork.
— Product fees are added to the advisor’s fee to determine the total fee. So, a client may pay a 1% advisor fee and a 1% product fee, for a 2% 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.
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What Kinds of Services Will I Need?
As a smaller investor, you may need different services than a more affluent investor requires.
For example, it will be important for you to have a financial plan detailing your current state, specific goals, available cash flow to support those goals and the path the advisor is recommending that you take to achieve the goals. This financial roadmap should be able to grow with you as your prosperity rises and you begin meeting each goal.
Many financial advisors will offer an individualized financial plan included with their advisory fee, but as a smaller client, you may be asked to pay for the financial plan separately as a flat fee.
As a novice investor, you may not need as many services because you have fewer assets, but you are still entitled to the same high caliber of service as larger investors.
Where Can I Look to Find a Financial Advisor?
Now that you understand how a financial advisor may be compensated and that a financial plan should be part of the services available to you, there are many ways to find a competent advisor.
Keep in mind that, in this digital age, you may choose an advisor anywhere in the country that is appropriately licensed to provide services to you. Many financial advisors, especially for smaller investors, are able to serve your needs completely by video, even from another state.
— Ask friends, family or colleagues for recommendations. These individuals are often able to give you firsthand knowledge about an advisor, including how responsive they are to communications and how well they explain complex topics.
— Ask other professionals for recommendations. Did an accountant prepare your taxes this year? They can be an excellent source to recommend you to a financial advisor. Professionals network with each other as “centers of influence.” Financial advisors love these referrals because the CPA already understands your financial situation and they know that they will likely mesh well with you personality-wise. You also may get better service overall because your accountant and your advisor become a cohesive team. With two minds thinking about your situation, the CPA can be overseeing tax efficiencies for the advisor’s investment recommendations. Not only is a CPA an excellent referring source, but also lawyers, insurance agents and even your mortgage broker.
— Use an online advisor search. These are professionally managed databases that include financial advisors that not only work with smaller clients, but may already cater to younger generations. Most advisors on these platforms are fee-only planners, and you pay for their services with an AUM or flat fee.
— U.S. News (https://money.usnews.com/financial-advisors). This online database of financial advisors is searchable by location and firm name, and provides details on their specialties and experience.
— National Association of Personal Financial Advisors (napfa.org)
— Garrett Planning Network (Garrettplanningnetwork.com)
— XY Planning Network (xyplanningnetwork.com). These advisors work specifically with next-generation investors.
— The CFP Board (cfp.net). This network includes all advisors who have earned the certified financial planner, or CFP, professional designation and provide fee-only services.
— Get matched with an advisor by a business-to-client (B2C) service provider. The internet is filled with firms that are focused on digitally connecting financial advisors with new clients. A quick internet search for “financial advisor near me” will bring back innumerable options. Most of these services are free to the investor, but the advisor pays a subscription to be on their platform. Some of these services give the lead to multiple advisors, so you may receive more than one reply. If you prefer a fee-only advisor, include the word “fiduciary” in your search terms.
— Check out a robo advisor. Many financial firms and banks are offering online automated portfolio management services and financial planning as a cost-effective option. While the financial advice tends to include more broad-based information, artificial intelligence is now being used to bring more customized services to these platforms. You can do an internet search on “robo advisor” to find available services. While initially a robo advisor can seem less expensive, more personalized services will add enough fees to make it worth choosing a human advisor instead.
What Else Should I Consider When Seeking 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. While they have to be licensed to work with you in your state, you may also want to consider:
— 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 within the financial services industry.
— 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 very profitably, enabling them to focus more on the individual, rather than the account size.
— Online presence. An advisor’s website and their social media profiles can offer a lot of information. Does the website tell a positive story of the advisor’s investment philosophies, firm values and the team’s background and experience? Do they offer insightful thought leadership on LinkedIn? Do their personal social media sites reflect a lifestyle that you value? Often our best relationships are with those who are similar to us. 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. While the industry is still heavily weighted with Caucasian men, more women and minorities are entering the field, as well as advisors who are focused on specific segments of the population, such as LGBTQ+. Regulatory record. Each advisor must disclose information such as a personal bankruptcy or criminal history, and all disciplinary actions are reported publicly. You can view your potential advisor’s record in the SEC database called Investment Advisor Public Disclosure or the Financial Industry Regulatory Authority (FINRA) database called BrokerCheck.
What Questions Should I Ask A Prospective Advisor?
An astute advisor should not rush you when it comes to answering your questions. They should also answer them in simple language and not industry jargon. While most of the information will be in the Form ADV, there are still several questions that will give great insight. Here are a few:
— What services do you provide to clients with smaller accounts?
— What type of clients do you typically work with?
— Do you have a niche or special expertise?
— How often will we meet?
— What other communications 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?
— How wide a range of professionals do you have available to call on so that all my needs are addressed with your oversight?
— If applicable: Will the person who referred me get any form of compensation from our working together?
If you have been upfront with your overall financial picture and are feeling good that you would like to work with the advisor, there is one final question to ask:
“Am I a good fit for your practice?”
The answer will confirm whether the advisor is comfortable serving small accounts and is truly the right match for you.
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How to Find a Financial Advisor If You’re Not Rich originally appeared on usnews.com
Update 04/17/24: This story was published at an earlier date and has been updated with new information.
