Financial and Investment Advice

Derek Notman, CFP |

The Value Of Paying An Advisor For Financial Planning & Investment Advice

  • Should you pay for financial advice? 
  • Should you pay for a financial plan? 
  • Should you pay to have someone else manage your investments? 

Get answers to these questions and more here.

Fair warning, this is a long post - buy hey, doesn't it make sense to do your due diligence?  It is your money after all!

If you are considering engaging the services of a financial adviser then it is important you understand the following information before you contact one. 

This post will explain a variety of terms, fees, etc. in detail with the hope of giving you a better understanding of an industry that is not terribly easy to understand.  This will help you determine if and who you may want to work with for help with your money.

I recently subjected myself as a financial adviser, and my fee structure, to feedback from an online group who believe, for the most part, that people should manage their own financial planning and investments.

The response was overwhelming, with an ongoing commentary for over 24 hours.  Although there were a few crass comments, the majority of people were very constructive in their feedback and made some really good points for me to consider. 

I learned a lot and ultimately made some changes to how I work and how I charge for my services.

In this post I will cover the following questions that you may have wondered about:

  • What is the difference between a financial advisor, financial planner, investment advisor, and registered representative?
  • Do you need a financial advisor?
  • When should you hire a financial advisor?
  • How to find a financial advisor?
  • How much does a financial advisor cost?
  • Do entrepreneurs need a financial advisor during the early stages of their business, and should they pay for them?
  • What is the value of paying for a financial plan & investment advice?

 

What is the difference between a financial advisor & adviser, financial planner, investment advisor, and registered representative (broker)?

Unfortunately, the financial services industry has a lot of terms that simply don’t make sense to the common investor.  Add that to a wide range of ‘professional titles’ how is one to know who a so-called ‘advisor’ is and what they ‘do’?

Let’s address the differences here and now, in plain English.

What is a Financial Adviser (Advisor)?  And why is it spelled with an E-R and O-R?

According to the Cambridge English Dictionary, financial adviser is defined as:  a person whose job is to give advice to other people about money and investments. 

This is about as plain vanilla and general as you get with a definition.  At the root this definition makes sense, but I think it is also fair to say that it leads to confusion when it comes to what & who a financial advisor actually is.

Michael Kitces, Publisher of the Kitces.com website & blog, writes extensively on the history and why there is a difference in the spelling, advisor vs. adviser, in this article. There is a difference between the two, however they are generally accepted as the same in today's culture.

So, in simple terms, a financial advisor helps people with their money and investments, and can be compensated in a variety of ways, more on fee structures later.  What they can actually do depends on specific definitions of their titles which I will explain below.

Certified Financial Planner®

Also known as a fiduciary adviser, a CFP® works with people to do comprehensive financial planning, helping people with everything from cash flow & budgeting to investing and advanced business succession planning.  They are process, not product, focused. 

They must fulfill rigorous education & ethical standards set by CFP® Board, must have at least three years of industry experience, and have passed a certification exam before they are allowed to call themselves a CFP® professional.

A CFP® can also engage in additional services beyond the financial plan, including insurance and investment advice barring they are licensed correctly.

If you come across someone who is calling themselves a “financial planner” but does not carry the CFP® marks, then they are most likely using a general term allowed by the firm they work for but that has not been endorsed by the CFP® board.  Tread lightly here.  You can see if someone holds the CFP® designation by going here and searching.

Investment Adviser

As defined by the Investment Advisers Act of 1940 (pages 3-4), an investment adviser is: “any person who, for compensation, engages in the business of advising others, either directly or through publications or writings, as to the value of securities or as to the advisability of investing in, purchasing, or selling securities, or who, for compensation and as part of a regular business, issues or promulgates analyses or reports concerning securities…”

If someone is calling themselves a Registered Investment Adviser (RIA), or Investment Advisor Representative (IAR) of an RIA, then they are typically required to file & register with the Securities & Exchange Commission (SEC).  You can search to see if a particular person or firm is registered here.  Not only will it confirm if a professional is registered or not but will list if they have been suspended in any jurisdictions or if they have filed for bankruptcy. 

If you cannot find the “investment adviser” here, then proceed with caution.

Registered Representative (Broker)

As defined by the Financial Industry Regulatory Authority (FINRA):  “While many people use the word broker generically to describe someone who handles stock transactions, the legal definition is somewhat different—and worth knowing. A broker-dealer is a person or company that is in the business of buying and selling securities—stocks, bonds, mutual funds, and certain other investment products—on behalf of its customers (as broker), for its own account (as dealer), or both. Individuals who work for broker-dealers—the sales personnel whom most people call brokers—are technically known as registered representatives.”

Additionally explained as:  “Registered representatives are primarily securities salespeople and may also go by such generic titles as financial consultant, financial advisor, or investment consultant. The products they can sell you depend on the licenses they hold. For example, a representative who has passed the Series 6 exam can sell only mutual funds, variable annuities, and similar products, while the holder of a Series 7 license can sell a broader array of securities.”

Keep in mind that CFP®’s and Investment Advisers are acting in a fiduciary manner for you, Registered Representatives operate under the Suitability standard instead.  What do these terms mean?

Simply put, acting as a fiduciary means that the adviser is acting under a duty of good faith and trust for the client’s best interests, being personally responsible for recommendations they make to you, putting themselves on the line if they make a mistake.

Working under a suitability standard means the registered representative believes a recommendation is suitable for you based upon a variety of factors, but in the end they are not liable in the same way a fiduciary adviser is.

Put another way, a fiduciary adviser is working first and foremost for you, the client.  A registered representative is working on behalf of a broker/dealer and only must show that their recommendation to you was suitable at the time it was made.

Can an adviser be more than one of these at the same time?

Yes, certainly!  It will depend on the scope and nature of the services provided, the adviser should be able to explain which hat they are wearing at which time.

The next natural question is, do you need a financial advisor?  Well, it depends.

 

Do you need a financial advisor?

Whether or not you need a financial advisor depends on a variety of factors:

  • Do you enjoy managing your money and investments?
  • Do you have time to manage your money and investments?
  • Are you a do-it-yourselfer?
  • Are you confident in your abilities to manage your money and investments?

There is no right or wrong answer, it simply boils down to how you answer these questions.  I like to make the analogy of managing your health.  A lot of things you can do on your own, like eating right, exercising, taking vitamins, going for regular checkups, etc.  And to know how to do these things in a beneficial way you are able to self-educate.

But, what if you have a more complex financial situation?  Like your health, you reach a point where you don’t know what to do and then seek the advice of a professional (i.e. a doctor or financial adviser).

Your needs are unique, thus you should not make your decisions, about your money or health, based upon what your friends or family are doing.  They are different people with different situations and needs.

It has been my experience, given that I work with a lot of technology founders & entrepreneurs, that they simply don’t have the time to manage their own money and investments.  And/or they are simply not passionate about it and would rather outsource their financial & investment planning so they can pursue their life’s passions.

They understand the value of outsourcing. 

Even though paying a financial advisor does cost something (more on this later), entrepreneurs understand that their time is worth more doing what they do best, building their company, and that it makes more sense to pay someone to help them then to try and do it themselves.

So, do you need a financial adviser?  Maybe.  If you feel like you do, then when should you hire one?

 

When should you hire a financial advisor?

If you feel you could benefit from hiring a financial advisor, then the question becomes when you should engage their services.  It has been my experience that those that are successful with their money look to hire a financial adviser earlier on in their life and business journey.

You may be saying “I don’t have any money now, why do I need a financial advisor?”  Back to the health analogy.  Living a healthy lifestyle is one that is proactive.  You manage your weight, eat healthy foods, workout, and see the doctor on a regular basis because you want to be healthy.  It is the foundation your health is built on.

Your financial health can be thought of the same way.  You may not have much to work with today, but you are hoping to be more financially successful and sound in the future.  Thus, you have to put in a solid foundation to build upon, just like your health.  You can also think about it like competitive sports.  You don’t wake up one day and compete in the Olympics, you have to train for years.  The same is true for your financial life.

Even though you may not have a lot of needs, a financial adviser can help you crystalize what is important to you, what your hopes, dreams & goals are for the future, and then help you design a roadmap to realize them.  With a highly customized financial plan you now are able to set a baseline of where you are today while also identifying specific strategies that will help you get where you want to be in the future.

There is a major lack of formal education in our society when it comes to money.  If I had my way I would make sure it was a core subject at all schools.  For example, the state of Wisconsin recently enacted a bill making it mandatory for all K-12 schools to start teaching some basic financial literacy.  This is a great place to start, but so much more can still be done.

So, when should you hire a financial adviser?  Sooner than later.  This also takes me to my next question; how do you find a financial advisor?

 

How to find a financial advisor?

This is important because you want to make sure you find someone you trust.  Without the trust being established there is a good chance you won’t tell your advisor everything they need to know and subsequently the advice given back won’t be as good as it should be.

It has been my experience that the most successful relationships between client and advisor are the ones where the people simply get along.  They share similar passions.  They share similar hobbies, activities, and ideals.

We as the human species are wired to connect with people.  We look for people who are like us, who do similar things, who share similar traits and interests.  In short, we understand each other better when we share things.

When looking for a financial advisor, I find it best that you are able to connect with them on these levels.  But where do you find them?

  • Start by asking some people you trust and respect who their financial advisor is and ask probing questions to learn more about them. 
  • Search online for the type of adviser you would like to work with.  Is it someone who embraces technology?  Are they local or virtual?  Do they specialize helping a particular type of person?

You can learn a lot by searching online. 

  • Once you find a couple advisers that seem like they could be a fit, dig into their website. 
  • Are they transparent about who they are, on a personal level,
  • What their credentials are, if they are a generalist or specialist,
  • What their fees are, etc. 

If you can find all of this, then you are making progress.

Once you have identified a short list, which should include 3 or so, verify they are who they say they are by checking them out both on the SEC and FINRA BrokerCheck websites.  You will be able to learn what licenses & designations they hold, what states they are currently licensed in, if they have any complaints filed against them, and if they have ever filed bankruptcy. 

If they pass muster here, then it is time to reach out to them.  This can be done via a form on their website, emailing, or calling them.

Chances are most advisers you speak with will have a defined process which usually starts with an introductory conversation to get acquainted and see if working together is the right fit for both of you.  Ask them things like:

  • What types of services do you provide?
  • What are your fees?
  • Who do you specialize in helping?
  • What is your process?
  • What do they do outside of work for fun?

The answers to these questions will give you a gut feeling if working together is right or not, go with your gut.  If you feel something is off, then be polite but walk away.  If you are not entirely comfortable with the adviser, then you will not be able to get the maximum benefit from working with one. 

There are plenty advisers out there, find the one that is right for you. 

During the process of finding an advisor you will want to know how much it costs to work with one and what services are available.  I will explain this in detail below.

 

How much does a financial advisor cost?

There are a lot of ways financial advisers can be compensated.  Unfortunately, the industry has not been terribly clear of forthcoming on the different fees.  Although you can find most of them, they are usually in long and confusing documents that are hard to read.

I will do my best below to outline them in a clear and simple manner.

Financial Planning Fee:

This fee is typically charged for the initial financial planning engagement to conduct a thorough analysis of your current situation, test different strategies, and eventually make recommendations based upon what you are trying to accomplish.

The actual price ranges anywhere from a free plan up to many 10’s of thousands on the high end.  There is no set fee. 

Financial planners usually have some formula to determine what the plan will cost, but as you can see it ranges greatly.  Although there is a lot of talk about flat fees, they are still usually determined with some formula by the advisor based upon their current business structure and overhead.

This fee is usually paid once and can be charged upfront before the plan is done, a combination of half up front and half on delivery, or all on completion. 

There usually is an ongoing financial planning fee for access to your planner and regular review meetings.  What the advisor charges on an ongoing basis can be the same fee each year or a discounted fee.

Hourly Financial Planning Fee:

Similar to the regular financial planning fee, this hourly arrangement is usually suited for people who like to do most of their money management on their own but want the advice from a professional from time to time.

This is a cost-effective way to get some extra help for do-it-yourselfers and can be a nice way to get a second opinion on what you are currently doing. 

This hourly rate also ranges quite a bit depending on the advisor/firm and what you get for their time.  I have seen in at low as $50/hour up to pushing $1,000/hour.

Assets Under Management Fee (AUM):

This model bases its fees as a % charged on your investments managed by an advisor.  Say you have a $250,000 IRA that you would like professional advice and ongoing service with.  The advisor would simply charge a % of the account balance and would collect their fees this way, without you having to write a check.

Example:  $250,000 X 1.00% = $2,500/year in asset management fees, usually charged monthly or quarterly and debited from your account at these times.

 

This fee ranges quite a bit again depending on the advisor & firm.  Commonly the fees range from 0.25% on the very low end to above 1.50% on the high end.  Most advisers will have breakpoints for lower fees based upon your account balance, thus the more you have invested the total % of fees typically goes down.

Keep in mind that this advisor fee is only part of the AUM fee since frequently there are additional management fees for use of sub-managers, custodians, and platforms.  All of the fees should be laid out clearly when they are being presented to you.

This fee is also negotiable.  Even though most advisors will tell you it isn’t, it is.  Make sure you are getting the value you expect when paying these fees.  Some advisers will waive their ongoing financial planning fees if you invest your money with them in an AUM model.  This is ok, but make sure you are then getting both the ongoing financial planning service as well as the investment management under this arrangement.

A benefit to paying fees in the AUM model with traditional IRA assets is that you get to pay your advisor with pre-tax dollars.

See this great article by Michael Kitces to learn how the industry is pricing their financial planning & investment management fees.

Commission & Brokerage Account Fee:

Sometimes, due to a client’s particular needs and/or how the advisor is licensed to operate, there are fees from a variety of products and platforms.

Most insurance-based contracts (life insurance, long term care insurance, disability insurance, health insurance, annuities, etc.) pay the broker/agent selling them a one-time commission.  Now, this word commission has got a lot of bad press. 

For the right reasons with the right planning, commissionable products certainly have their place.  But they should be recommended because they solve a certain problem better than any other option, not because the adviser selling it is getting the commission.

Most advisors will not disclose what they are getting paid for a commission.  But, all of them know what it is.  If you feel something is off, then ask them to tell you what the commission is and if there are any better available products or services that could better solve the problem for which it is being recommended.

As for specifics on these fees, it would be almost impossible to list all of them.  They vary greatly so it is best to simply ask if the product pays a commission, and if it does, ask what it is.

 

Do entrepreneurs need a financial advisor during the early stages of their business, and should they pay for them?

Although I specialize in working with entrepreneurs, this question could be asked about people who are at the early stages of almost anything or for those without a lot of money.

In my opinion, the sooner you engage the services of a financial adviser the higher the likelihood that you will achieve the things that you are striving for.

So yes, and yes!

Entrepreneurs have unique challenges and needs like not having much money in the early stages of their business to suddenly coming into a large amount of money when they exit their company.  Going from close to broke to very wealthy can be a stressful and confusing time.

One of the biggest mistakes I see people making is that they don’t prepare for certain events in their life until they actually happen.  It would be like selling your business or retiring today and then saying to yourself “I should probably have a plan for what’s next!”.  This happens all the time, but that doesn’t mean it works.

In fact, I see most financial mistakes happen this way.  Therefore I encourage people, entrepreneurs or not, to focus on financial planning as early as possible.  In the early stages you may not have a lot of financial strategies that you can benefit from but assessing where you are and where you want to be is one of the first steps to take if you actually want to realize your hopes, dreams & goals.

Being able to model the sale of your business, or transition to retirement, to figure out how your life will change is of great value.  It also allows you to formulate a plan on what to do before the event actually happens instead of trying to figure things out last minute.

It has been my experience that people think more clearly and objectively before they have a bunch of extra 0’s in their bank account!  Being prepared makes it much easier to make good decisions with your money once the time comes.

Hopefully I have established that there is value in doing your financial planning earlier than later.  But should you have to pay for these services in the early stages of your business when you are already strapped for cash?

Well, here is a little plug for me and my firm.  I actually waive the financial planning fees for entrepreneurs[C14] [DN15]  who are in the early stages of their business and meet certain criteria.  This way they get the advice and help they should have without having to pay for it. 

In other words, I am taking on some risk by not charging for my services.  I do this because I understand all the risks you take as an entrepreneur and would rather take the ride with you then be the person asking you for your business once you have sold your company.

You may now be thinking, this is all great information, but what is the value of working with a financial adviser?  See below.

 

What is the value of paying for financial planning & investment advice?

This has been a tough question to answer because financial planning and investment advice is mainly an intangible service, so it is hard to quantify.

In my opinion I think there is a ton of value.  From helping people identity their hopes, dreams & goals, protect their family & business, saving for the future and helping them not make bad decisions during volatile times in the markets, I would argue all of this makes a difference.

But, I am biased.  So instead I think it is best if you read a study done by some researchers at Morningstar Investment Management.  In short, they “present a concept they call ‘Gamma’ designed to quantify the additional value that can be achieved by an individual investor from making more intelligent financial planning decisions.”

I encourage you to read the Morningstar study called Alpha, beta, and Gamma here.

They do a great job of showing how working with a financial advisor can add value for consumers.  In other words, If your passion is not financial planning, then consider using a firm that possesses an objective track record and whose philosophies match your own.  Then go forth and pour yourself into those facets of life that will keep you springing out of bed each morning, eager to face each day.  (this part is already approved on my website)

Thank you for taking the time to read this post.  I realize it is a lot but knowing more about what it means to work with a financial adviser is frankly your right as a consumer.  I hope you learned a few things!

Best Regards,

Derek