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You’ve started earning, contributing to a 401(k) or IRA, and you’re asking: do I need a financial advisor? Choosing a target-date fund in your 401(k) may feel secure, but you might still wonder what advisors do, how they’re paid, and whether hiring one makes sense. This guide explains what financial advisors offer, the common types, typical fees, questions to ask, and when an advisor may be worth it.
What financial advisors do
Financial advisors go by many titles—financial planner, consultant, coach, broker, wealth manager—and carry different certifications and backgrounds. In general, an advisor can help you:
– Set short- and long-term financial goals
– Create retirement and investment plans
– Build and manage an investment portfolio
– Advise on budgeting, saving, and debt reduction
– Coordinate tax, estate planning, and insurance needs (depending on expertise)
Services, fees and approaches vary widely, so it’s important to know what you need and what an advisor actually offers.
Common types of advisors
– Retail brokers: Work for large firms and sell investment products, usually earning commissions on transactions. This pay structure can create conflicts of interest because they are paid when you buy or sell products.
– Fee-only independent advisors: Often act as fiduciaries, required to put your interests first. They typically hold client funds with a third-party custodian and manage accounts for a percentage of assets under management (AUM), aligning their pay with your investment performance.
– Certified Financial Planner (CFP): A CFP has met work-experience requirements and passed rigorous exams covering broad financial topics. CFPs often charge a percentage of AUM (commonly 0.5%–1.5%) and sometimes require minimum account sizes.
– Financial consultant: A broad term that can describe salaried advisers at brokerages or certified professionals with credentials like the ChFC. Compensation may be salary, fees, or commissions.
– Wealth manager: Serves high-net-worth clients with a wide range of services, often including tax and estate planning. Firms may employ planners, attorneys, and accountants. Fees are usually higher but may decline as assets grow.
– Financial coach: Focuses on money basics—budgeting, saving, and debt management—and may offer hourly or per-session fees. Coaches sometimes hold certifications like Accredited Financial Counselor (AFC).
– Robo-advisor: Uses algorithms to build and rebalance portfolios based on your answers to a short questionnaire. Fees are usually lower than traditional advisors and can be charged as a percentage of AUM or a flat subscription.
Do-it-yourself basics
Many people can successfully manage basic investing on their own after learning index fund and asset-allocation principles. A simple DIY approach:
1. Contribute as much as you can to your workplace retirement plan. If unavailable, open an IRA at a discount broker (Vanguard, Fidelity, Schwab) and consider a target-date fund for automatic asset allocation.
2. Consider a robo-advisor to set up and rebalance investments for you; some offer access to human advisors at certain asset levels.
3. For short- and intermediate-term cash needs (1–5 years), use short-term CDs, money market funds, or high-yield savings accounts.
4. After maxing retirement accounts, build a taxable index-fund portfolio for additional savings.
How to choose an advisor
If you decide to hire an advisor, ask clear questions and do your homework:
– What are your credentials and qualifications? Look for well-known designations like CFP or CFA.
– Have you had any client complaints or disciplinary actions? Check BrokerCheck or similar databases.
– What services do you provide? Make sure their offerings match your needs and watch for salespeople posing as advisors.
– How are you paid? Understand whether they charge fees based on AUM, hourly rates, flat fees for a plan, or commissions.
– How do your after-fee returns compare to relevant unmanaged benchmarks? Compare performance net of fees to appropriate indexes.
– Are you a fiduciary? Fiduciaries are legally obliged to act in your best interest.
– Interview at least three advisors and request proof of credentials.
Ongoing oversight
Hiring an advisor isn’t a set-it-and-forget-it decision. Monitor performance, understand the strategy and holdings, and check how their returns compare to benchmarks. Make sure you’re comfortable with their approach and the fees you pay.
When an advisor is worth it
Hiring an advisor makes sense if you don’t want to manage investments, lack the time or interest to learn, or have complex needs—large portfolios, complicated taxes, estate planning, or business transitions. A middle ground is a low-fee robo-advisor that keeps your portfolio diversified and rebalanced while minimizing cost.
Roles clarified
– Financial representative: A broad title covering advisors, consultants, or planners; duties vary by employer and role.
– Broker: Acts as an intermediary who buys and sells securities on your behalf, typically holding licenses such as the Series 7.
Bottom line
Decide based on your willingness to learn, the complexity of your finances, and how much help you want. Learn the basics first so you can evaluate advisors more confidently, and choose someone whose services, credentials, and fee structure match your needs.
