|Britt Erica Tunick is an award winning financial journalist who has spent the past 17 years writing about virtually every aspect of finance.|
What You Should Know before Choosing a Financial Advisor
By Britt Erica Tunick
While it is important to take control of your own retirement planning and budgeting, it is equally important to admit what you do not know. Paying a financial advisor may seem like an unnecessary expense but, depending on your individual circumstances, hiring a professional could ultimately mean the difference between falling short of your long-term savings goals and surpassing them. Before you begin looking for professional advice, however, it is important to know the different ways that financial advisors are compensated and how that can ultimately impact you.
Let’s face it, nobody likes to pay fees. But fees are what ultimately pay most financial advisors’ salaries, so it is important to know about the fees an advisor may be charging, and the impact on where their loyalties lie. In the case of fee-only financial advisors, the sole source of their salary is the fees they are paid by clients, whose best interests they are legally required to be looking out for when making investment decisions and giving advice. But there are other fee structures that financial advisors may use as well, where they may be compensated through commissions in addition to the fees you pay.
In the case of financial advisors who are paid through a combination fee and commission structure, a portion of their salary is derived from the commissions they are paid by recommending and steering clients into specific investment vehicles, such as mutual funds, insurance products, or annuities. Though this practice is perfectly legal, it makes it more difficult for these advisors to remain completely objective when it comes to the advice that they provide to clients and the products they are likely to encourage people to invest in.
Before choosing a financial advisor, make sure to find out exactly how they are getting paid and which organizations are paying them commissions. It may be tempting to choose the advisor with the lowest fees, but it is important to dig a bit deeper and determine why those fees are lower —particularly if it is because they are being offset by commissions. If paying higher fees means you can be certain that your advisor is putting you into what they believe is the best investment for you, instead of one that is merely suitable, it may ultimately be worth it and could leave you better positioned for the long-term. However, just because an advisor gets commissions from a specific investment or insurance company doesn’t mean that the investment products they offer aren’t good for you. It is just important to know this information upfront, particularly since certain institutions charge significantly higher fund management fees than others.
Prior to choosing a financial advisor, make sure to do a bit of homework. Ask around to make sure other people who have already used a specific advisor are satisfied with the results they have seen and make sure you know exactly how they are being compensated. And keep in mind, while fee-only advisor services are more expensive, many firms are starting to become a bit more flexible, charging fees based on the complexity of a client’s financial needs. So, before passing up an advisor because their fees seem too high, make sure to ask if there is any flexibility in what they will charge for your specific needs.