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Do you need a financial advisor?

  • 5-min read

Wherever you are on your journey to the big bucks, a financial advisor can probably help. But first, let’s understand what they do—and how they’re paid.

A couple sits at a table with their financial advisor.
kate_sept2004 / Getty Images

In 2014, former Bulls superstar Scottie Pippen went on offense against his former financial advisor. He testified that the advisor had defrauded him while managing around $20 million of Pippen’s earnings.

When financial advisors make the news, it’s usually not because they successfully helped someone save and invest for retirement. Outliers like Scottie Pippen’s advisor may scare you off, but choosing a good financial advisor may be the most important financial decision you make. Here’s what you need to know. 

What can a financial advisor do for me?

Some financial advisors are personal portfolio managers. You meet with them once or twice a year to review your financial goals, and give them access to your investments so they can manage your account accordingly. These types of investment managers typically charge an annual fee of 1% to 3% of your balance. 

Other financial advisors have more of a holistic practice. They’ll work with you on investments, but also on saving strategies, planning for taxes, setting up college accounts, and getting started on an estate plan. 

How much do financial advisors charge?

There are two main ways financial advisors charge clients: fee-only or commission-based. Fee-only advisors charge either a flat fee based on what amount of work they’re doing for you or a percentage of assets under management. These advisors tend to cover all areas of your financial life rather than just investments or budgeting.

Importantly, most fee-only advisors are fiduciaries. This means they have a legal and ethical obligation to provide advice and recommendations that are in your best interest — not the best interest of themselves or their employer. They also have a duty to disclose any conflicts of interest.

Commission-based advisors don’t operate in the same way. They typically work with a specific fund group or specific financial institution, from which they can receive commissions or kickbacks when a client buys an investment product or makes a particular transaction. If you buy a front-end load mutual fund, part of that load goes to them. That doesn’t mean these financial advisors never give suitable advice. It just means you can’t be certain it’s the best option for your situation. 

Signs you should start working with a financial advisor

Not all people need to use a financial advisor, but if one or more of these signs apply to you, you should consider it. 

You have too much cash sitting in a checking account

The main job of both types of advisors is investing your excess savings. They can invest part in the stock market and keep part in liquid short-term investments. That way you can access the money if you need it and keep as much as possible in the stock market long term. 

It’s smart to have an emergency fund. You want to be able to make your fixed payments if something happens. But keeping any more than you need in a bank account, which probably pays 0.06% in interest, is a red card offense. 

Let’s say you have $30,000 in a checking account right now, and that’s a cool $20,000 more than you need in your -month emergency fund. Over the last 50 years, the stock market returned 9.4% per year on average. Let’s knock 2% off of that for fees and timing. If you earned 7.4% on that $20,000 for the next twenty years, you’d have $83,390.32.

If you earned the current average savings account rate of 0.06%, your $20,000 would be $20,241.37 in 20 years.   

Get your money out of bank accounts. 

You wouldn’t know a treasury bond from James Bond

Investing is complicated. You have to know the difference between stocks, bonds, funds, pork bellies, and derivatives. You have to make sure you’re diversified geographically and by asset class. You have to manage sales for taxes. You have to know if head and shoulders sales have made it so Procter & Gamble’s stock chart has a head and shoulders pattern. And which one is for dandruff.

Financial advisors not only know those things, but they should also be pros at communicating which parts you need to know. So, consider hiring a financial advisor if you’re just too confused by investing to make moves.

Your work nights are spent sleeping

Maybe you majored in finance and now spend your day building financial models. Picking stocks would be a cinch, but there’s so much more to your financial life than striking gold in the stock market. You work 87 hours a week and every minute outside work is spent sleeping or wishing you were sleeping. Why not let someone else handle the details?

If you need help with tax planning, insurance, or budgeting, you might want to set up a meeting with an advisor. 

What should I look for in a financial advisor?

The key decision here is commission-based vs. fee-based. Just about everyone who is not a commission-based financial advisor will tell you to go with fee-only advisors. 

As a reminder, commission-based advisors have a clear incentive to sell the products that they make a commission on — especially the ones that pay them the most.

When Meb Faber, founder of Cambria Asset Management, did a study of several popular asset allocation strategies over decades, he found that the only material difference in returns between the strategies was the fees it cost to implement them. If a commission-based advisor is taking a 5% load off the top for commissions, you could be sabotaging your retirement before you even get started. 

After that, look for a financial advisor who actively listens to you and is good at communicating. Your financial future depends on it.  

Young, wild, and fee-only

The older you get the more annual appointments you have. You have one with the dentist, the doctor, the tax guy, a parole officer (for some people), and—if you’re smart—a financial advisor. 

Choosing an advisor who will help you plan for the big things (like retirement) and the little things (like paying your bills on time), might just make that your favorite appointment of the year.