Even seasoned investors don’t always take the do-it-yourself approach to saving for retirement. Sometimes, it may be worth it to seek out the advice of a trusted advisor to make sure you’re on track to retire.
What’s A Financial Advisor?
A financial advisor is a professional who, for a fee, offers financial advice to others. They make recommendations for buying and selling investments, asset allocation, tax strategies, and other financial matters.
Financial advisors who offer investment advice must be registered with a firm established as a registered investment advisor, or RIA. Individuals affiliated with an RIA are called investment advisor representatives, or IARs. Depending on the amount of assets under management, RIAs and IARs register at the state or federal level and are subject to regulatory oversight.
Financial advisors are compensated by fees, which are expressed as a percentage of assets managed. For example, an advisor may charge a 1.5 percent annual fee. This would come out to $1,500 per year in management fees for a $100,000 account.
Do you need one?
Financial advisors certainly can help many people achieve their financial objectives, but some investors benefit more than others from paid financial advice.
Generally speaking, hiring a financial advisor makes the most sense for affluent people, people with complex tax situations, and those who don’t have the time or desire to do their own investment research.
Those with smaller accounts may have a hard time finding an advisor who will manage their account, given that their account will not generate much in fees. Investors who stay abreast of market news and enjoy doing their own investment research may find it unnecessary to retain a financial advisor. These types of investors can save money by managing their own portfolio, and may even enjoy doing so.
Look for these vital signs
Effective communication is vital when dealing with a financial advisor, so prospective clients should be certain that the person who will be managing their money is someone who listens, communicates clearly, and asks the right questions.
The character of a financial professional is important, too. The Financial Industry Regulatory Authority (FINRA) runs a website called BrokerCheck. This site allows anyone to search for a licensed investment professional and review important information about them, such as professional licenses, how long they have been in the industry, and disclosure events such as criminal history, bankruptcies, and customer disputes.
Fees, while unavoidable, should be simple and not be excessive. An advisor should be able to give a straight answer on how their compensation is calculated. It’s also a good idea to shop around and make sure that the advisor’s fees are competitive.
Watch for Red Flags
Disclosure events on BrokerCheck can be a big red flag. Simply having a disclosure event doesn’t make an advisor a bad or unqualified person, but if an investor sees something in the advisor’s history that doesn’t sit well with them, they should look elsewhere.
Difficulty in communication can be a reason to ‘next’ a prospective advisor – just as it would be with any other relationship.
It can also come down to numbers. An advisor should be able to show the historical performance of portfolios they have managed. If the numbers are unimpressive, then their service is probably not worth the fee. Hesitancy to provide this information should be a cause for concern.
Finally, investors should also be wary of complex fee structures or the inability to get a straight answer on how the advisor is compensated.