A financial advisor is a professional who is registered with the state, or the SEC, to provide information and counsel to those who are trying to reach a monetary goal or objective. This goal or objective may be retirement, or merely an attempt to earn a specific return on investment. Financial advisors can play an important part in your overall financial plan but learning how to choose a financial advisor and when you may or may not need one, is important. The following information is provided to help you maintain control of your money while avoiding common and costly mistakes. Know the right questions to ask a financial advisor before hiring one so you can build sustainable wealth to support a continued comfortable lifestyle during retirement.
A financial advisor is a firm, person, or group of people who provide advice, information, or recommendations to others about investments, savings, money management, and financial risk. Some advisors are registered to manage their clients’ money while others merely provide counsel and don’t actually manage other people’s money. Regardless of the level of service provided, financial advisors charge fees for their services and therefore must be registered to do so legally.
Financial advisor costs will vary from advisor to advisor. Some financial advisors have a flat fee which they charge for their recommendations and advice. Others collect a percentage of the total money they have under their management. A question about compensation is one of a few key questions to ask a financial advisor before hiring them. When a flat fee is charged, the client is fully aware of what the financial advisor’s costs will be in advance. When a percentage of total money under management is used to calculate the charge, financial advisor costs will not be fully known until earnings have been accounted for at the end of a specific time period.
Some financial advisors have a flat fee as well as a fee for total money under management. Understanding what, when, why, and how fees and charges are assessed is important to understand prior to using the services of a financial advisor. Financial advisor costs can add up quickly over time and destroy the value of a portfolio.
For example, a 1% advisor fee on a portfolio earning 6% annually where the client is contributing $12,000 a year, would pay a financial advisor $100,438 over the course of thirty years. But what becomes even more important is the compounding growth which is lost because of that 1% fee. When the compound growth on the $100,438 fee paid to the financial advisor is lost, the total loss to the portfolio becomes $174,538. The additional $74,100 simply disappears, becoming part of the problem which has been defined as financialization.
Knowing this, it becomes critical to find a financial advisor who adds more value to your portfolio than what their fees will cost. A registered investment advisor is regarded as a fiduciary. A fiduciary merely means someone who is trusted for their advice or expertise. Yet a financial advisor’s registration does NOT stipulate that a financial advisor provides any guarantee to the public that the advice or recommendations they provide will deliver the least costly, best, or even the most profitable returns. In fact, many people end up assuming higher risk because of the advice of a financial advisor. This contributes to financialization and produces a massive drag on the Gross Domestic Production of the United States. It also accounts for the bigger incomes which are associated with the financial advisor sector, compared with other income sectors, throughout the United States.
Because of this, choosing a financial advisor becomes a question of finding an advisor who has similar values and risk avoidance characteristics as you do. Otherwise, you may find yourself assuming a risk that normally you would not have taken on by yourself or invested in a company or idea which is counter to your own morals.
Remember, a financial advisor carries no legal responsibility, assumes no risk, holds zero obligation to ensure your money is invested according to your values and is NOT legally required to ensure you make or keep more of the money you earn. The fiduciary role and responsibility of a financial advisor are to either invest your money or advise you to invest your money, where you have a reasonable level of probability of attaining a desired rate of return.
That is all.
This brings up the question, “do I need a financial advisor?”
“In the abundance of counselors, there is victory.” At the same time, “A man with too many advisors comes to ruin.” Consequently, it pays to be cautious before you hire a financial advisor. Once hired, it’s important to pay attention to whether the counsel provided by the advisor is profitable. Some questions to ask a financial advisor before hiring one would be:
In addition to these questions to ask a financial advisor, it’s also critical to evaluate the historical returns of a financial advisor before paying them to manage or advise you on how to manage your own money since most financial advisors do not outperform the S & P 500. As mentioned above, fees can destroy a portfolio, especially if the advisor is not providing enough value to outpace the cost of their fees. If an advisor can’t prove they have outperformed the S & P 500 consecutively over a number of years, then their advice may not be worth it to you. And no investment is worth taking on the risk unless you know the exit strategy before you enter the investment.
Not everybody who is registered to be a financial advisor or planner is capable of making your money grow for you. Learning to discern what advice you need and what recommendations you will act upon are strictly your responsibilities. A financial advisor may help you become aware of what is available to you to reach your financial goals, but they may or may not be part of the process once you understand what you need to accomplish. Knowing what you want to accomplish will determine if you will continue to need counsel to accomplish your financial objectives. Being knowledgeable will help you avoid unintended consequences resulting from ignorance.
In your best interest, it is never a good plan to invest in something you don’t fully understand. Those who invest (or do not invest), only on the advice of a financial advisor, assume a greater risk than people who understand what’s happening.
Taking the time to understand the difference between the price and the value of a stock, bond, or investment, will help you avoid assuming risks that can destroy your portfolio.
The most important consideration surrounding hiring a financial advisor is, “Do they make me money?” If they don’t provide a profit, then paying the financial advisor costs is a waste of time and money. If a financial advisor generates a profit for you, then they are at least doing you a service. Whether you need the financial advisor to continue to generate that profit is another question that should be reviewed frequently as the financial advisor costs will reduce any profits you gain.
Many people have never used a registered investment advisor, choosing instead to read, listen to, and follow the example of someone they know or respect who has already built the type of wealth they are trying to build for themselves. Though these respected individuals cannot legally be called financial advisors, they certainly can be learned from, because they have done it themselves. Just because someone has passed the registration requirements, doesn’t mean they have done anything for which they are now registered to advise others to do. As one person boldly stated, “You can’t license what is in a person’s heart.”
Paying attention to what successful people do and don’t do can be very empowering. So empowering you may not even need to pay a financial advisor to get the knowledge needed to build sustainable wealth for yourself.
At Life Benefits, we have helped hundreds of people build sustainable wealth, even though we are not registered financial advisors. We believe that when people are educated as to what is possible, and what isn’t, they will make the right choices for themselves.
We don’t charge fees for our education, so we can legally offer you a complimentary strategy session to see if we can help you build sustainable wealth. If you want to keep more of the money you make, grow your wealth, and have financial peace of mind, schedule an appointment with us to see how we help people keep more of the money they make, grow their wealth, and ultimately have financial peace of mind. You can schedule an appointment here or call the office at 702-660-7000.