Many young professionals are quite busy and don’t want to spend what little free time they do have learning the ins and outs of investing. If you, or someone you know, plan to hire a financial advisor to handle your money, there are 5 questions you should ask before you entrust that advisor to your hard-earned cash.
1. How are you paid? Believe it or not, many financial advisors have incentives to invest your money in suboptimal ways. They get large bonuses from insurance companies to sell you unnecessary whole-life insurance policies that are insanely expensive. They get even more money from their own companies to invest your money in actively-managed mutual funds that tend to underperform market expectations and cost you lots of money in added fees.
As if that weren’t enough, some financial advisors charge too much for their advice. Instead of charging a set rate of a few hundred dollars per hour or a few thousand per year, many advisors are “fee-based.” This means they charge much more than that and can even have rates around 1-2% of all the money you want them to manage. 1-2% may not sound like a lot initially, but average yearly returns are only about 7-9%, and 3% of that is inflation. Paying an advisor another 1-2% plus an additional 1% in added fees leaves you with a mere 2-3% return on your money, which isn’t much more than what you’d make in a savings account or with a government bond. My point? Ask the financial advisor how much they charge and inquire about all of the other ways they get paid or earns bonuses. The goal is to find someone who charges a flat fee at a reasonable price.
2. How much experience do you have working with people in my career? There are millions of different jobs in a variety of industries. Each job can have different pay structures and hierarchies that may influence your income and financial security level over time. Ensure the person you hire as a financial advisor is familiar with the financial incentives and barriers of professionals in your field.
If you’re a doctor, you should ensure your advisor knows the pay difference between a new resident and an established attending. Certain tax-advantaged accounts may only be available to you when you are in the smaller pay range, and exclusive investment opportunities may become available when you get into the large pay range. If the financial advisor you hire is not aware of how the pay structure works in your field, you may miss out on some valuable programs and investments that could save you thousands of dollars in taxes each year. My point? If you are going to spend your money hiring someone to handle your finances, make sure you are paying for advice specific to your own situation and financial goals.
3. Have you assisted clients with “X” amount of student loans recently? Many of us took out a substantial amount of student loans while we were in school. Paying them off is a priority, but navigating the different repayment options without going bankrupt in the process can be challenging. There are so many different repayment plans, and some may be more or less appealing for people in certain situations. Make sure the person you hire as a financial advisor is well-versed in all of these options.
There are pros and cons of each payment plan, and one-size-fits-all does not exist. Some of the repayment plans are on an expedited schedule to help you pay off your loans in 10 years. Others are income-based to ensure they aren’t taking a huge chunk of your income while still getting on your feet. There are even plans that provide government subsidies and may lower your taxes. If you have a substantial amount of student loan debt, make sure your financial advisor knows about all of the different options and can adequately advise you on which one to choose.
4. What training did you get to become an advisor? Unlike people in other professions, the vast majority of financial advisors did not go through years of training or pass a series of difficult board exams to get their current job. Many of them were trained in sales and became an advisor with a few weeks of on-the-job training. As a result, some of them may not be as helpful as they claim.
Money management can be complicated so ensure the financial advisor you hire is as qualified as possible. Some of the most knowledgeable financial advisors are the ones who elected to get extra certifications to become a certified financial analyst (CFA), certified financial planner (CFP), or a chartered financial consultant (ChFC), so it may be wise to look for someone who has these credentials.
5. What financial plan do you think would best meet my financial goals and why? Before you hire someone to manage your wealth, you should make sure that person gives you tailored advice that meets your specific situation and life goals. If you are in your late 20s with student loan debt, get an advisor who can help you make payments that don’t require you to eat Ramen noodles for the substantial future. If you are a young female planning to get married soon, you may want an advisor who can help you save for a wedding or the down payment on a home without charging too much or putting your financial future at risk. If you are a 32-year-old male who wants to save for a new car and lower your taxes, then someone specializing in tax-efficient investments like real estate may be a great fit.
Although we would all love to be wealthy one day, we each have different financial goals and priorities that change the timeline and route we take to get there. Hire an advisor that takes these things into account to help meet your needs. More importantly, make sure you understand why your advisor has made certain recommendations and investments. The more you understand, the better you’ll predict your investment returns and make better decisions in your life going forward. Once you understand your specific financial plan, follow up with your advisor once or twice a year to ensure you are still on track.
If you plan to hire a financial advisor to handle your money, make sure you ask the right questions so you can choose the best fit for you.
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