Given the complexity of today’s economy and retirement system, more Americans than ever are looking to hire financial advisors for guidance on their most pressing financial issues. The hard part for many people is figuring out how to find an advisor to engage.
This article will lay out the steps in finding a vigorously vetted, fee-only advisor who can serve your needs.
What Types of Services Are Offered?
Before you consider hiring an advisor, you must understand the type of service you are looking for. The most common service people retain a financial advisor for is to manage their money. This is referred to as assets under management.
That said, the right financial advisor can help with a myriad of other services to benefit your financial life beyond asset management. Here are some of the services that advisors can provide:
- Determining your ideal retirement age
- Purchasing a home that fits your budget
- Recommending tax planning strategies
- Setting up college savings plans
- Advising on ways to pay down debt
- Determining the right amount of insurance for your situation
Once you decide what you are looking for, it’s important to understand how potential advisors are compensated for their services.
How Financial Advisors Get Paid
Over the last 20 years, the compensation that a financial advisor charges has changed drastically. Up until the early 2000s, advisors were commonly paid a commission for the products they sold to their clients. This is the older brokerage or bank model that you may be familiar with if you own an annuity (variable or fixed indexed) or A, B, or C mutual fund for which you paid a commission for the right to own that product.
The ultimate goal of the commissioned advisor was to learn about a client’s personal situation and sell a product that “solved” a problem.
The commission-based model has two problems: One, the advisor has an incentive to sell you more products, which may or may not be suitable for your situation, to make more commission. Two, these products traditionally have been designed to be inferior to hide the commissions paid by clients. This meant that consumers were paying high commissions to own products that had poor returns.
Starting in the mid-2000s, compensation began to shift as advisors moved to an “assets under management” model, in which your fee would be a percentage of the assets the advisor managed for you. This model is your typical “We charge 1.00% of the assets we manage” statement.
Changing pricing in this way started to align the interests of advisors with their clients. For example, as the client portfolios that an advisor managed grew in size, the advisor essentially got a raise. More importantly, the advisor didn’t have to worry about selling a product to get paid! Instead, they got to do what is in the client’s best interest.
The downside to this model is that it works for the advisory firm only if the client has a decent-size portfolio. That’s why, over the last two years, we have started to witness a sea change in the way advisors charge clients.
Advisors are moving toward a Netflix- or Equinox-type subscription model, where there might be an upfront flat fee with a monthly retainer for ongoing service. By changing pricing in this way, advisors can work with you even if you don’t have a giant nest egg.
Where to Search for a Financial Advisor
Most people find the advisor they ultimately hire in a few different ways. The first way is to walk into a bank or brokerage firm. The second is to ask a friend for a referral. The third way is to attend a dinner seminar or free information event.
It’s possible these options could lead to finding a great financial advisor—but is there a better way?
We believe that the National Association of Personal Financial Advisors (NAPFA) is the best place to find a financial advisor to hire. The core mission of NAPFA is to put consumer interest ahead of personal gain.
From the NAPFA website: “NAPFA-Registered Financial Advisors are fiduciaries—at all times—for their clients. They take a holistic approach to planning that takes into account all of the client’s financial considerations—from investing to estate planning. The goal is always to preserve and grow your money.”
Advisors who are members of NAPFA are fee-only, meaning that only their clients compensate them and that they make no commissions on any financial product recommended.
In addition, all NAPFA members must be college educated, carry the CERTIFIED FINANCIAL PLANNER™ (CFP®) certification, sign a fiduciary oath, commit to continuing education, and submit a peer-reviewed financial plan. There is no organization in the financial advice industry that holds its members to a higher standard than NAPFA.
Hiring an advisor can seem like a confusing process, but if you find your advisor using NAPFA, you can better ensure that they meet the highest standards in the industry from a compensation, education, and credential perspective.