What is a financial advisor?
A financial advisor, sometimes called a “financial planner”, is a professional you hire to help you meet your financial goals. In short, they help you make decisions about how to use your money. Typical services include offering advice on budgeting, paying off debt, saving and investing.
Why do people use a financial advisor?
The logic is the same as paying for most services. For example, you can learn how to fix the broken pipes in your house yourself – or you can hire a plumber. Same with financial advisors: they should understand all the financial products available to you and be able to advise on which ones work will best at achieving your financial objectives. You pay them a fee to save time and provide expertise that you may never gain yourself.
What does a financial advisor do?
As mentioned, financial advisors can also be called financial planners. A financial planner *drum roll*… helps you to financially plan!
A financial plan is intended to achieve the following goals:
- Define major goals like paying off a mortgage or funding children’s university
- Be tax-efficient according to your sources of income and location
- Offer alternative options
- Risk management & creating backup plans
Do you have to pay for a financial advisor?
Yes – and this is why most people shy away from using a financial advisor. Here is the bigger question: will a financial advisor save you more money than you pay them in fees? Keep reading for the answers; for now, we will explain the ways a financial advisor gets paid.
There are three ways you will pay a financial advisor fee for their service.
Fee-only
This is where the advisor is paid directly by the client, either at a fixed rate or as a percentage of the assets they manage for you. This is often about 1%. This fee structure is generally thought of as the ideal solution for most people because it is very transparent and easy to understand.
Fee-based
Under this system, the financial advisor gets paid by you (the customer) as a percentage of assets under management (AUM), as well as receiving commissions from the financial products they recommend to you. In other words, they are incentivised by companies like mutual funds and insurance companies who want people to use their service.
Transaction-based
Stockbrokers, who make “buy” recommendations for stocks to their customers typically rely entirely on commissions that they charge you for trading the stock. Other investment advisors, for example, those who work at a bank, get commissions from the investment products they recommend. This fee structure can be cheaper but implies an increased risk of a conflict of interest developing.
How much money should you have to hire a financial advisor?
A general rule of thumb is that, if you are setting aside 20% of your income for saving and investing, it can make sense to hire a financial advisor.
There are exceptions to this rule, too. When looking to invest smaller amounts of money (say 1,000 euros, pounds or dollars), it might not be necessary to hire an advisor. Some basic understanding of investing will be enough to put the money into a pension fund or index fund for the long term.
However, it could be that you could have some savings, but need help to reduce your spending and create a financial plan to get back on track. People in a bad money situation might well be better off hiring an advisor who can help them fix things if they have not so far been able to do so themselves.
Is it worth seeing a financial advisor?
Whether or not to hire a financial advisor is an entirely personal decision and first requires an examination of your circumstances. Here are some questions to ask yourself (and answer truthfully) first:
Will you really get around to investing yourself?
Somebody needs to actually spend time and attention on ensuring you are building wealth for you and your family. If it’s not going to be you or your spouse, then it has to be somebody else by a process of elimination. If you are indeed willing to put in the time, there is a wealth of information online, including on this website.
Do you have a defined investing strategy?
Maybe you own a few investments already that seemed like good opportunities when you were presented with them. But do they fit into an overarching plan? If they don’t – and even if they are still good investments – you’ll need to make sure they’re suited to your goals.
How organised are your personal finances?
Are you the kind of person who has everything labelled in a filing cabinet or well-categorised hard disks on spreadsheets? Or do you have papers, computer files and account statements scattered all over? If the latter, you might need an advisor just to help with organisation.
Are you about to make a life-changing decision?
About to buy a house, move abroad, have a baby, etc? A second pair of eyes could help get the best financial outcome from this important life change.
Are you stressed about money right now?
Should it be the case that trying to manage your finances is just too much on top of work, family, socialising, exercising and everything else you have going on, outsourcing the task can make sense. Why not divest this job to a professional and save yourself some stress? If you are overwhelmed, they will probably do a better job, anyway. Alternatively, you just need to prioritise your finances better.
It’s worth noting that modern investment apps and websites offer their clients a great deal of support. This includes robo-advisors that can help you align your investment strategy with your goals, and even bots that can advise you on general budgeting.
If you’ve decided you need a financial advisor, what comes next? Selecting one who will do a good job for you isn’t trivial, but nor is it as hard as learning about investing yourself.
How to find a financial advisor
The oldest and truest method of finding good services is to ask for recommendations from people you trust. Importantly, though, it’s best to ask people who are in a similar financial position to yours – an advisor used to helping people who’ve already achieved a high net worth may not be suitable for a professional still building a career.
These days, a second way is also available to you: social media. While it’s true that many good financial advisors don’t have a social media presence, it doesn’t hurt to search around for advice on financial topics that interest you. If you find an advisor whom you like and their advice makes sense to you, it may be time to reach out and schedule a call or meeting with the advisor before hiring them. Twitter, LinkedIn, SubStack, and YouTube tend to have more substantial content, while Instagram and TikTok tend to be more about surface-level information.
The other option we’ve mentioned in passing is robo-advisors. These are automated investment services that work entirely online, without an actual person involved. Robo-advisors services typically tell you where to invest your money based on a questionnaire you complete about your financial circumstances and financial goals.
Final FAQs about financial advisors
Can you trust financial advisors?
Yes, but not all of them. It’s worthwhile establishing the advisor’s credentials and checking them out before entrusting your money to them. They should be a certified or chartered financial planner. NOTE: Also make sure to understand who will have control of your funds if you open an account and transfer money.
Is it worth paying a financial advisor 1%?
Hopefully, you will have a better understanding of this having read this article. The answer could be no, but if some piece of advice prevents you from making a bad financial decision, that could easily cover the 1% fee and then some.
How often should you talk to your financial advisor?
Once a year, or every time you have a big life event to consider. You want to be in regular touch in order to know what your money is doing, but most of the information about your investment performance can easily be gleaned from periodic emails or from the dashboard of your chosen investment app. In general, you really only need to contact your advisor when changes in your circumstances or strategy occur.
