When Is It Time to Call In a Professional?
Although investing for retirement is an easy—and smart—decision, how to invest may be more complicated. A professional financial advisor can help you navigate the world of investing and make informed financial decisions. You may want to consult a financial advisor if you:
need help creating a retirement savings portfolio. A financial advisor can help you sort through all your options.
have come into a significant amount of money and don’t know how to handle it. A financial windfall can easily dwindle if not carefully invested.
don’t have much money but want to make the most of it. A financial advisor can help you create strategies designed to leverage small amounts of savings.
have reached a savings goal and need to formulate a new plan. New ideas and investing concepts can help you get to the next level.
are far from reaching your savings goal and need a new strategy. If you’re frustrated about your progress, a financial advisor can help you take a fresh look.
just want a sounding board to talk about investing decisions. An impartial third party can help you assess your options and guide you in the right direction.
What to Look For In an Advisor
When you work with a financial advisor, it’s important to find someone trustworthy. After all, you’re expecting this person to help you with your money and your financial future. Consider the following before choosing a financial advisor:
Qualifications. Almost anyone can claim to be a financial advisor. So ask about experience, specialized training and credentials. For example, find out if the advisor is a broker/dealer, registered representative, investment advisor representative and/or a Certified Financial Planner.
Fees. Find out what it will cost to work with the advisor and whether he or she works on a fee-only basis, commission basis or a combination.
Breadth of services. Will this individual help you with transactions or work with you on a comprehensive financial plan? See the next section on fiduciary and non-fiduciary advisors.
Personal style. Is the advisor listening to your needs and concerns before making recommendations? You should feel confident the advisor is making suitable recommendations rather than pressuring you for a sale.
Fiduciary and Non-Fiduciary Advisors
When choosing a financial advisor, you’ll want to consider the relationship (fiduciary or non-fiduciary—see more on this below) and the reputation of the advisor. In addition, consider how the advisor will be paid:
Hourly. You pay the advisor for the time he or she spends working with you.
Pro: If you just want a quick opinion, this may be the most inexpensive route.
Con: If you want ongoing financial planning, the charges can quickly add up.
Fee-only. Here, the advisor generally charges a percentage of the assets managed each year.
Pro: The better your investments perform, the more the advisor will be paid—encouraging the advisor to manage your investments prudently.
Con: A typical fee is one percent of assets, which can add up over many years.
Commission-based. In this case, advisors are paid a commission based on the products you buy.
Pro: You generally pay this only when buying or selling.
Con: Some advisors could be influenced to steer you toward an investment that pays them a higher commission.
Usually, financial advisors acting as fiduciaries use the fee-based model. Broker/dealers and other financial advisors who sell securities may be more likely to use the commission-based model.
What Is a Fiduciary?
Fiduciaries are legally and ethically required to choose suitable investments and act in your best interest in the near- and long-term. A federal rule announced in April 2016 requires financial advisors who give investment advice specifically for retirement to act as fiduciaries, even if it means less revenue for them.
However, there is a “best interest contract exemption” available allowing for certain commission-based transactions as long as they’re in the client’s best interest.
In contrast, non-fiduciaries must also provide suitable advice. However, they’re not forbidden from taking their own interests into account, such as how much commission they may earn.
When to Work With a Fiduciary
You can request a fiduciary arrangement for all your investments, not just retirement. This relationship can be beneficial because your advisor is more focused on your long-term goals than what products to sell. You may find a fiduciary relationship best when you’re interested in:
a variety of services, including long-term financial planning
ongoing account management and annual or more frequent reviews
the ability to rebalance and reposition your portfolio without additional fees
When to Work With a Non-Fiduciary
In some cases, you may find that it’s to your financial advantage to work with a professional who isn’t a fiduciary. This type of relationship may work better for you when you:
have few assets or are working toward short-term goals
are a sophisticated investor
are a buy-and-hold investor who doesn’t want ongoing account management If your needs are few, working with a non-fiduciary may be less time-consuming and less expensive.
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