What to do when you hire a financial adviser?
Financial advisers have a reputation for being salespeople in disguise. Most of them are incentivised by commissions to sell financial products to as many clients as possible. But not all financial advisers are selling to you. Some work on a fee basis with the best intentions at heart for their clients. Does everyone need a financial adviser, though? No, hiring a financial adviser can be better for some people, but they are unnecessary for most people. The nature of the advisory field is changing. Most people now manage their financial matters on their own, especially investments, since most of them have been digitalised. However, you may still want to hire a financial adviser if you think it helps you more than it does not.
Learn from our article what you should do when you do decide to hire a financial adviser:
There are no specific rules on when to hire a financial adviser. Hiring a financial adviser may suit and improve your financial situation, and it would not be considered a waste of money. A financial adviser, however, should not harm your finances. Therefore, avoid financial advisers if you have a limited budget or are in debt. If you are in a dire financial condition and need help, look for state-provided financial or debt/credit counsellors who work with people for free.
You also do not need a financial advisor if you require advice or help for specific topics, like taxes. In those cases, it is better to hire an expert in that field or a tax adviser under the example.
Regardless, there are some key questions to ask a financial adviser before hiring them to ensure that your interests align with theirs:
- Do they have experience working with clients under specific circumstances?: Everyone is unique, and so are their financial circumstances. You may be a retiree or nearing retirement who simply wants to enjoy retirement and let the adviser deal with money matters. You might be a business owner dealing with complex matters regarding ownership, business structure and employees and needs a financial adviser who understands the issues and opportunities related to self-employment. You may also be an ultra-high net worth person looking for tax breaks, managing multiple properties and real estate and even taking care of public relations. It helps when the financial adviser has experience handling specific clients with that particular unique scenario
- What is their fee structure? : Is it percentage or fee-based? A percentage-based fee structure typically ranges from 1% to 2% of a client's net assets. You might pay your adviser 10,000 EUR per year in fees for a standard 1% yield on a million-dollar portfolio. You will pay the most under this fee structure since the more you earn, the more you pay your adviser. On the other hand, you benefit from this fee structure since it encourages advisers to avoid taking large risks or those they would not take with their own money. Advisors are motivated to manage their customers' portfolios successfully since they are paid a portion of their clients' assets. If you want to reduce the fees, you should hire a financial adviser based on a fixed fee because the adviser is not motivated to sell you any products for which they would have received a commission. They are also not motivated to involve your money in risky investments simply to earn a large amount. And in the long run, you will save far more in adviser costs under a fixed-fee structure than you can under a percentage-fee structure
- Do you really need a financial adviser, or do you just need an expert for a specific issue?: It will give you an outline of whether you truly need a financial adviser or whether you need a specific solution to your situation. For example, many people realise that they simply need help with taxes or legal matters. Therefore, hiring a financial adviser may not be the most optimal solution for your particular circumstances
A financial adviser, no matter how good or well-intentioned he is, is not always right for you. You can lose a lot of money if you choose an inept (or worse, dishonest) adviser. When working with an adviser, check for the following red flags:
- Pushing you towards riskier investments, pressuring you to trade more frequently than necessary to earn larger commissions for themselves
- Pushing you towards expensive investments and pointing you to investment assets with more fees and expense ratios (e.g. mutual funds) than a low-cost investment asset (e.g. index funds)
- Pushing you to buy financial products and plans you do not need or is suitable for you, just to receive commissions on it (e.g. life insurance with high premiums)
- Simply bad planning even when the intentions are in the right place. An adviser who does not have the critical thinking skills required to navigate the financial space is not capable of helping you in terms of being flexible, having a financial backup to cushion losses, diversifying, taxes and inflation, etc. An adviser should be aware of the other factors impacting your finances
Some people may be put off by the prospect of paying hundreds of euros just to manage their money, but it could be an investment for you. The services for the money may have some quality that will last you your wealth for the next 20 years.