Even if you're somewhat financially savvy, it really can make sense to at least consult with a financial advisor. Because the costs of making a mistake is so great that can dramatically affect your future - or could affect your entire family's future.

Particularly if you are not extremely financially savvy, it makes sense to have a financial advisor guide you. Just as it would make sense for you to have a mechanic work on your car if you don't know how to work on a car yourself. Or if the issue with your car is particularly complicated, you want a professional who has the education, the training, and the experience to get the job done right.

A financial advisor can help you plan for and have answers to important questions such as what happens if I become disabled? What happens if I need some kind of care for the long-term? Do I need some kind of long-term care insurance? Can I afford to self-insure? Or how do we address that should that happen so that I can best protect my family?

How Much Money Should You Have to Hire a Financial Advisor?

That can vary. Certainly, if you're wealthy, it makes sense to have a financial advisor. If you have a few hundred thousand dollars, it makes sense for most people to hire a financial advisor who could guide them and give them advice on everything from retirement planning to estate planning, to education planning, or family protection.

The situation varies, but generally at $200,000 plus, it makes sense to have an advisor. If you have less capital than that, it may still pay to hire a financial advisor or a financial planner to at least set you on the right course to build for your future.

What Type of Financial Advisor do I Need?

It’s highly recommended that you work with someone who acts as a fiduciary. A fiduciary is someone who must always act in their client’s best interest. Even if it means that the advisor themselves might make less money, or not steer the business to someone who they have a close relationship with.

That's very important and extremely valuable!

Certified Financial Planner

One way to know you are working with a fiduciary is knowing that all certified financial planners must act as fiduciaries. That fact alone is a good reason why you want to work with a Certified Financial Planner™ or CFP®.

A Certified Financial Planner™ has been awarded the CFP® designation by the CFP board that assures they are highly qualified to advise you on a wide range of subjects. They have passed an exam and worked for thousands of hours to attain this level of certification.

Wealth Managers

A Certified Financial Planner™ is very often also a wealth manager. In fact, in most cases they are. And while any advisor may not be an expert in all fields - meaning tax management, investment management, family protection and estate planning - a good certified financial planner will have relationships with other professionals to whom they could refer their clients to make sure they get that proper care.

If the client already has a trusted advisor in the other field, they should be willing to consult with that advisor to make certain all bases are covered and that the different parts of the client's plan mesh together.

Robo-Advisors

For someone who's starting out, whether it's a young person or just someone without a lot of money, a robo-advisor can at the least be better than nothing.  It can help with the minimum needs as far as making sure the client has an appropriate asset allocation to their investments and it's appropriate for where they are in life.

But if there's anything more complicated, obviously there are somethings that you want to have more of a conversation with a live financial advisor to discuss. Whether it's a family member with special needs, or maybe a special concern such as one of the beneficiaries may have a spending problem. Or may not be responsible with money, that's something that needs to be built into an estate plan and a robo-advisor would not generally be able to give you that feedback. A human advisor is always preferred.

How do Financial Advisors get Paid?

Financial advisors can get paid in numerous ways. One of the most common is fee-only advisor who just charges a flat fee or a percentage of the assets under management on an annual basis.

Depending on the size of your portfolio, the standard fee is usually 1% to 1.5% of your assets that are managed annually.  If a client has less money, it can sometimes go as high as 2% and for those with larger (multi-million dollar) portfolios, it can be less.

Sometimes that's broken down monthly or quarterly. If someone's charging significantly more than that, just be sure that you're getting your money's worth, and the value is there.

A fee-only advisor receives no compensation or commissions from the sale of financial products such as stocks, mutual funds or insurance. The great benefit of a fee-only advisor is that it aligns the client's interest and the advisor's interest, because the more successful the client's investments are, the more the advisor will make the next year. There is no incentive for the advisor to trade the account more often or less often.

Commission-Based Advisor

A commission-based advisor on the other hand is like the typical stockbroker, which every time they make a buy or sell trade, they earn a commission. They are often not fiduciaries, raising the question as to whether the financial advice they are giving is motivated by a higher commission rather than what is necessarily good for the client.

What is the Difference Between Fee-only and Fee-based Financial Advisors?

A fee-based advisor is a hybrid model where an advisor not only receives payment for the services that they offer a client, such as a percentage of assets under management, but they can also receive commissions on certain products they sell such as insurance policies.

When it comes to insurance products, whether it’s an annuity, life insurance, long-term care insurance or disability insurance, the insurance company pays a commission to the advisor. This is a commission instead of a fee, so it is not in addition to the cost of the insurance product. The financial advisor’s commission comes straight from the insurance company and is usually a one-time fee.

Fee-based advisors are a hybrid combination of fees for services a percentage of assets under management, as well as a commission paid to the advisor.

If there's heavy trading in the account, or if there will be on-going planning or other needs, the fee-only or fee-based make will generally make more sense for the client as there's not a question of was this trade made because the advisor is a little short on cash this month or is it in my best interest? Commission-based advisors are becoming less and less favorable as people are increasingly preferring fee-only and fee-based advisors.

Flat Fees and Hourly Rates

These are more for putting together a financial plan for a client. Fees to create a financial plan can run anywhere from under a $1,000 on up.  A complicated financial plan could be over $10,000 with most plans falling in the $1,000 to $5,000 range.

As far as hourly fees, that would be more for special questions or special situations where the client has a situation that they need the advisor to spend some significant time speaking with them about, as well as doing research and putting together some kind of a plan or process for the client.

In Florida, hourly rates will vary depending upon several factors, including the geographic location with the coastal communities generally having higher rates than the interior sections of the state. Again, it's still dependent on the services offered, the amount of money being invested and, and the client's needs.

In fairness to the advisor as well as the desire to get the best advice and research that you can, if it's going to require a significant amount of the advisor's time, he should and will need to charge a fee that should be fully disclosed in advance of what it will take. Or approximately what the amount of time and the cost will be to the client.

Main Factors Affecting the Cost of a Financial Advisor

The main factors affecting what a financial advisor should cost is the amount of time that the advisor will need to spend with the client. That could be based on the different types of accounts the client has, and the kind of financial planning they need.

Do they need help with their tax planning, their estate planning, family protection? How often does the client want to meet with the advisor or need to meet with the advisor? And quite honestly, it can even depend upon the personality of the client. Are they a needy person or client who requires to speak to their advisor more often to have their hand held? All these factors you must figure into the compensation for the advisor and what's a fair price.

Another thing that can affect the cost of the financial advisor is their experience, their qualifications and education. Are they a fiduciary? Are they a Certified Financial Planner™ (CFP®)? What designations does that person have and how do they apply to each client's situation? And again, what services does the advisor offer?

Do they meet with you once a year or on an as needed basis? Do they meet with you quarterly? Are they willing to consult with your accountant and your attorney without an additional charge? Will they be available to you to discuss new situations that arise?

The cost of opening an account for a client and the regulation and the scrutiny has increased the cost of running an investment advisory business. The advisor and the client both want to agree on a fair price that works for both of them.

It needs to be fair for both the advisor and the client and the advisor should be willing to discuss his fees, how he came to the fees, and how it's fair. If both people are not comfortable with that, they should not pursue the relationship.

How Does an Up or Down Market Affect the Cost of a Financial Advisor?

Sometimes the portfolio will go up, generally about seven out of 10 years, and sometimes it goes down. The portfolio should increase in value over time when you are fee-only or fee-based. Generally, when the market goes up, the advisor will make a little bit more money the following year and when the market goes down, the advisor will make a little bit less money the following year.

Just because the market goes down does not mean the advisor did not earn his money. Sometimes the market will go down and the advisor will use that opportunity to do what is called harvesting tax losses. Meaning taking losses that could be written off either on your taxes that year or can be carried forward in future years to offset future gains that will save the client money on their taxes at some point that has a big value.

Again, advisors work harder in down years than they do in years that are up and very profitable. There's a lot of monitoring accounts, there's a lot more decisions to be made as far as tax losses, portfolio protection, making sure that the asset allocation and the risk profile is appropriate for the client when the market is down. A good advisor checks and double checks to make sure that they're not losing more than they should.

Losing money in any given year is not only a fact, but it's necessary and it's a benefit in the long run because when the market goes down, there are certain stocks that go down more than they should.

A common analogy used is throwing the baby out with the bath water. Even good companies that are extremely profitable will go down in a bear market, which is a market where the stock market in general goes down 20% or more, or a correction, which is 10% or more.

But that is a time when portfolio managers reevaluate the holdings, decides what to hold, what to sell, and sets the portfolio up for future gains when the market comes back, which it always has. Because, by definition, after the market bottoms out, it has always come back!

The advice given and the time spent monitoring portfolios remains the same or even increases in a down market. So, the client should keep in mind the long-term benefit and the long-term value that the advisor offers.

Florida Based Financial Advisor

Florida is a very popular area for financial advisors to set up their practice. Partially because there are a lot of retirees who move down to Florida who have worked their whole lives and saved, and often having sold their houses up north tend to have a lot of disposable and investable income and assets.

So, when a Florida retiree is ready to hire an advisor or switch advisors, it's extra valuable for them to get the right person because a Florida client is usually a senior client. A Florida financial advisor client is generally someone who is past their peak earning years and they want to make sure that their assets can generate income to last them and their spouse the rest of their lives without having to worry about whether they will have enough to live on, enough to vacation on, or enough for their new car.

Peace of mind, especially as we get older, is a very valuable and sought after state to be in.

Another concern of many Florida seniors is the legacy that they're able to leave to their family. That's especially important as we get older. People want to make sure that their family - whether it's their spouse, their children, or their grandchildren - have something for them to remember them by. That they are left in a better position because of the senior's hard work, sacrifices to save and desire to see their family better off than they were.

A Financial Advisor is Someone Your Spouse Can Rely Upon if Something Happens to You

One thing senior couples often don't consider is that it is very common for just one of the two - whether it's the husband or their wife - to handle the finances.  And it's not unusual for the other spouse to not understand a lot about it or not have an interest in it. This is not always the case, but is often the situation.

It's important for many seniors retiring in Florida to have a relationship with a local financial advisor, even if the person currently handling the money is very competent financially. Because if they pass away, they are leaving their spouse relatively clueless - and subject to every well-meaning person's advice - whether that advice is appropriate for your surviving spouse or not.

Even if you currently feel you can handle most of your finances yourself, think about your spouse if you should pass away suddenly or become incapacitated. That’s something people, especially men, tend to overlook. These are major issues. It is important not to be pennywise and pound foolish when it comes to your family's future and your surviving heir’s well-being, whether it's a spouse or children.

How do You Know if You're Getting Value from a Financial Advisor?

The way to judge if you are getting value is often not by the investment returns. Whether or not you outperform the S&P 500 or get returns that are greater than your neighbors or your friends is usually not the way you want to judge the job the advisor's doing.

You want to build a financial plan that is goal-oriented setting up a retirement distribution plan to ensure they have money to last you the rest of your life. In retirement, that is often a more important goal than beating the S&P 500 when preserving capital and having a more limited lifespan to recover from losses become important considerations. This is also where the goal of peace of mind becomes so important.

A financial advisor wants to achieve the client's goals, whether it's a set amount of income that they cannot outlive or a legacy that they want to leave to their heirs, or to benefit a charity, their church or synagogue with the least amount of risk as possible.

Regarding the value you are receiving from the financial advisor, the question is, are you meeting your income needs and can the advisor show that you with your balance and your portfolio? Is your financial life set up and performing to continue and achieve your goal of lifelong income where you don't have to lose sleep worrying about it even in a down market?

To many, that is the most important thing. One of the greatest values a financial advisor can provide to you is presenting a plan that’s tailored to your specific needs on how you can achieve that goal.

If the advisor is not providing value, in the client's view, you should discuss that with the advisor. And if after that discussion the client does not feel satisfied, they should pursue looking for a new advisor.

Managing Taxes

Managing a portfolio for tax efficiency, depending on the client's situation, can be very important. Tax harvesting to minimize taxes in the future is important because it's what ends up in the client's pocket that is the most important thing, not their gross return.

For example, if you make 10% a year but you end up paying 4% a year in taxes, only 6% ends up in your pocket. However, if there's a way to design the portfolio where the gross return is 8% and you only pay 1% in taxes, that will yield you the greatest return.

So, it's very important not to focus on the top line number. A comprehensive approach to financial planning is very important, and the time that your advisor spends with you on the different areas of your life that he can assist with. Helping to plan for your needs and goals and to explain how your plan will help to make sure you are provided for is really the most important thing.

Your Spouse and Your Family’s Well-being

Making sure that if one of you dies, that the surviving spouse is provided for along with the children, as well as addressing any special needs or special situations that need to be covered, like a mortgage that needs to be paid off or educational or current and future healthcare expenses.  All of these are values and benefits that a good financial advisor will help to plan for if you let them.

It's important to be a partner with the financial advisor and be honest with them. Whether it's about your health, some finances, some debt that you have or if you or a family member have a gambling or substance abuse problem. Each of these things is important to share with your advisor as you would normally share with a therapist. An advisor can only do their best if they have all of the important information regarding your situation!

Would You Like to Know More?

Steven Fenyves, CFP®, CFS, founded Valued Wealth Management in 2005. He and his team of professionals help successful professionals prepare for retirement on their terms and stay comfortably retired. They also design corporate retirement plans to serve businesses and their employees.

Steven graduated from Hofstra University with a BA in Accounting. He holds the Certified Financial Planner™ (CFP®) designation and he is also a Certified Fund Specialist (CFS).

Deeply involved in his community, Steven sits on the Professional Action Committee for the Anti Defamation League and is a member of the Greater Boca Raton Estate Planning Council.

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