New to Financial Planning?

You're not alone.

My name is Lukas and as your dedicated Finance Friend, I'm here to help you learn the basics, teach you who a financial advisor is, and what they can and cannot do for you.

 

So, to make sure I get you up to speed and well-informed on who financial advisors are and some of the most important questions to ask yourself when looking for an advisor, why don't we get started with the basics.

Lukas Gemeinhardt Co-Founder of Finance Friends | FinanceFriends.org | Financial Advisor Search and Matching Tool

A Beginner's Guide to Financial Advisors: Part 1

Advisor Basics

What does a financial advisor do?

A financial advisor helps you create strategies for eliminating financial risk and building wealth over the long term. They can give you a game plan that puts you on track to achieve your financial goals. Most often, this takes place in the form of managing your investment portfolio and advising you on budgeting, taxes, and any other financial planning topics.

What's the difference between an investment and a financial advisor?

The difference is subtle but important. Most financial advisors act as investment advisors, but not all investment advisors are considered financial advisors.

 

When referring to a financial advisor, you’re talking about someone who is capable of helping you in many facets of your financial life. They can manage your portfolio and give investment advice, yes, but they also assist with retirement planning, estate planning, college planning, tax planning, and more.

 

Meanwhile, someone who considers themselves strictly an investment advisor has the sole task of putting your assets into strategic investment opportunities with the goal of increasing your wealth, i.e. managing your investment portfolio.

Which type of advisor is right for me?

There is a perfect advisor out there for everyone, but it depends on your personal needs, budget, and financial situation. Once you understand the difference between the types of advisors as explained above, you can choose which services are important to you and consider how much you can afford to pay an advisor to carry out those services.

 

Regardless of your choice, it’s crucial to take the time to vet your options before making a final decision. Make sure you understand exactly what each advisor is offering, how they will charge for their services, and if they have any past disciplinary issues you should know about. Finance Friends is here to help you answer all of these questions.

Finding an Advisor

Why is it so difficult to find the right advisor?

It’s a big decision and you’ve got a lot on the line. We’re talking about your life savings here so it’s okay to feel overwhelmed by this process. It’s difficult to find the right advisor because there are so many options available and they all offer slightly different services and fees.

Not only that but it’s important to find someone you trust, and ideally someone who makes you feel empowered and confident in your financial situation. It’s hard to know when someone is sincere, or just trying to take your business and doesn’t actually have your best interests in mind.

 

This problem is exactly why Finance Friends was created. We’re here to be an impartial, helpful friend in the process of choosing an advisor that is perfect for you through our proprietary match-making software and vetting process.

What credentials do they need?

There’s a number of credentials that a financial advisor should have depending on the specific services they offer. You’ll of course want to check their track record in terms of years of experience, fee structure, and whether they’ve ever received disciplinary action from the SEC (Securities and Exchange Commission). You can find all of this information in an advisor’s Form ADV, a document every firm or advisor must make available to you for free upon your request.

 

Once you’ve checked that information you can take a look at their individual certifications. It’s likely you’ll encounter these in the form of acronyms listed after their name. Some of the most common certifications include: CFP (Certified Financial Planner), CFA (Chartered Financial Analyst), CPA (Certified Public Accountant), CRCP (Chartered Retirement Planning Counselor) and PFS (Personal Financial Specialist).

 

Each of these accreditations come from different institutions and signify varying levels of education and experience. Make sure to familiarize yourself with an advisor’s specific credentials before signing on to make sure they’re fit to serve your needs.

Where can you search for an advisor?

Historically, most people find their advisors through referrals. They ask their friends, family, and colleagues for recommendations. The aim of this method is to find someone who has already built a level of trust with you, albeit indirect. Of course, the issue here is that your friends, family, and colleagues all have different financial situations. An advisor that works for them may not work as well for you.

 

Most people’s next step would be to use a search engine. A good ol' fashioned google search is how we look up most information in our daily lives and it can be a helpful tool in finding an advisor as well. But as we know online searches don’t always provide us with the best information, but rather the most prominent information, or even worse... paid search results (which is exactly what we always see with the largest firms like Morgan Stanley or Merrill Lynch).

Ultimately we recommend using an online advisor database like the one we’ve built into the Finance Friends website. You can search through our database of over 400,000 advisors nationwide using specific filters to find advisors that match your needs. Or better yet, take our quiz and get personalized recommendations on advisors that perfectly match your needs.

Matching with Advisors 

How to tell if the advisor will be a good match

There is no one answer to this question, unfortunately. All of the topics we’ve covered so far in this guide will have an effect on whether an advisor is a good match for you. But it’s important to remember that a good advisor should take the time to fully understand you and your financial situation. By understanding all of your financial habits, obligations, and goals, an advisor can better create a package of services that will work for you. Be wary of pushy sales-like advisors who will call you non-stop and try to take your business without spending the time to get to know you and your financial needs first.

Are advisors only for ultra-wealthy individuals?

Not at all! While the common stigma is that financial advisors only work with individuals who have more than $1M in investible assets, this is absolutely not true at all. It is true that some of the larger firms tend to oversee higher net worth accounts (typically averaging $1.3M); however, a majority of advisors actually belong to smaller firms that manage client accounts with less than $50,000. 

That being said, $50,000 in available investments can still be a large sum of money for individuals, but it's important to know that, even if you have no assets outside of a 401k (retirement plan) or a home, an advisor can still work with you to get you educated and started on a financial plan.

Advisor Costs

How much does an advisor cost?

It really depends on the fee structure an advisor uses with their clients. Advisors who charge flat fees can cost anywhere between $2,000 and $7,500 a year, while the cost of advisors who charge a percentage of a client's total account balance (typically 0.25% to 1% per year) will vary based on the size of that account balance.

 

Here's a quick example of how that works: A client who invests $20,000 with an advisor who charges a 0.50% management fee will pay $100 a year, while a client who has $200,000 invested will pay their advisor $1,000 per year. 

What about performance-based fees?

Performance fees can be an additional fee that an advisor can charge you if you choose to opt into this fee structure. Essentially, the advisor would take less of an annual management fee (or may not take any all!) but instead take a percentage of how much money he made you this year.

An example of this would be if you invested $10,000 with your advisor and he generated a 15% return on your investment in the first year, you would make $1,500. Now, if you both agreed on a performance fee of 20%, you would give your advisor 20% of the profits from last year which would equal $300 (20% x $1,500).

There is something important to keep in mind here. While performance fees align your advisor's interests with your own of getting more profits each year, advisors only share in your profits, not your losses. This means that (if you have a bad advisor) your advisor may be incentivized to pick riskier stocks for you to try to generate more profit for himself. However, if the risky stock fails and you lose money on the investment, the advisor will not owe you any money for his poor investment decision.

Why dont advisors have reviews or testimonials?

Currently, the SEC (Securities and Exchange Commission) has a rule which prevents advisors from advertising endorsements, reviews, and testimonials on their website and marketing materials. There are third-party services that allow people to give and view reviews with some restrictions. This is mostly to protect you from falling for false advisor reviews or statements that cannot be verified by any enforcement agency.

*Update* As of 05/2021, the SEC has updated the rules allowing reviews (if certain conditions are met), so, while still scarce, we expect reviews to start flowing in. There are two interesting stipulations to the rule: one is that advisors can pay for reviews as long as they denote the fact that the review was sponsored and the second is that the reviewer does not need to be a client of the advisor to leave a review. 

Finance Friends has recently added an SEC-compliant method for anyone to review advisors, so we highly encourage you to find the advisors you know or have worked with and leave a review! With so many scammers out there, we are thrilled to have reviews finally be legal. If you were one of those unfortunate enough to be scammed, you can now help to make sure that no one else does.

Should I consider using a robo-advisor?

A robo-advisor is simply an automated software service that uses computer algorithms to build and manage an investment portfolio for you. It can be a decent option if you’re searching for a hands-off, low cost approach to investing. Robo-advisors typically charge lower fees and require lower investment minimums.

 

Ultimately, you can consider using a robo-advisor, but it should never be considered a true replacement for a registered financial advisor. Robo-advisors will never be able to give you completely personalized planning, limiting your investment options. In many cases, you’ll have a hard time contacting the service provider and won’t reap the benefits of an experienced human advisor with years of knowledge and expertise.

 

We’d like to debunk the myth that robo-advisors are perfect for newbies. Even though robo-advisors can be a quick and easy way to get started, if you're new to investing, we’d recommend working with an advisor who specializes in financial education so you can work with them to learn more about how to properly organize your financials.

Getting Started

Requesting a free consultation

Almost every advisor or firm will offer a free consultation to prospective clients. And in the current era, it’s likely to be a virtual meeting or phone call. It’s unlikely you will be able to get all of your questions answered in one meeting but it’s a great way to see what it would be like to work with a specific advisor and best of all it's free! We recommend setting up more than one free consultation with a few choices so then you can decide which one is the best for your specific needs.

Time to find you your perfect advisor

Hopefully, you found this guide helpful! Feel free to reach out with any further questions or concerns, we’re here to help. Now that you have a better sense of what you’re looking for, try taking our quiz or browsing all the advisors in our database to find your perfect advisor today!

Still don't feel 100% comfortable in your financial knowledge?
No problem, let's continue onto Part 2: What questions to ask during an initial consultation.