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:
- What to ask when you hire a financial adviser
- Red flags to watch out for when you hire a financial adviser
What to ask when you 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:
Why would I hire you?
It encapsulates a few questions within, such as whether the adviser is qualified, if their fees and schedule are flexible or if you really need a financial adviser at all. You could just need an expert for a specific financial problem, but you may not have the basic knowledge to understand who to reach out to. 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.
Once you do figure out that you need a financial adviser, you can proceed to ask the next questions regarding the qualifications of your adviser and other important factors.
Is this person spending enough time to understand my financial goals?
Financial advisers putting effort on their clients can add returns between between 1.5% and 4% over long periods, making them a great value to improve your financial situation. The value of advise, of course, varies depending on your preferences and financial circumstances. You may be a retiree or a business owner or an ultra-high net worth person, each with its own financial requirement. You may prefer doing everything by yourself and let experts handle more complicated matters or you may want to be involved in all processes with your advisers. Regardless, what you need is personalised attention from your adviser and they must be willing to put in sufficient time to get satisfactory results.
Is this person pushing me to make decisions I don’t feel comfortable with?
Advisors who market a product instead of providing fiduciary advice run the danger of engaging in unethical behaviour. Avoid any counsellor who pushes any product, regardless of its nature, because they have a financial incentive to do so. This may include pushing you towards riskier investments, pressuring you to trade more frequently than necessary to earn larger commissions for themselves; or 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); or 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).
Most advisers make money through commissions, so it's evident that they're pressuring you to buy a product you do not need just so they can be paid.
Is this person speaking to me in a condescending tone?
Of course, whether you're a novice or a seasoned pro, you will have additional questions regarding your finances. Asking as many questions as possible of your financial adviser is not only expected but also advised. If your adviser simply claims to know better, insists you to do as the adviser says, or uses industry jargon instead of teaching you, the adviser is most likely advertising their product rather than focusing on your finances. You should feel free to ask more questions of your counsel, and your advisor should acknowledge to their clients that markets are uncertain. Clients should also pay attention to the inability of an advisor to describe their financial strategy or any fee agreements in a clear and understandable manner.
Is this person giving me vague answers regarding payment structure?
Ask yourself, how much does a financial adviser cost? Fee arrangements for financial advisors will vary depending on the services they provide. Keep in mind that rates vary depending on your financial status and the services you require. Fees can be percentage or fixed-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.
Of course, if the financial adviser is evading questions about fees, it's time to seek a second opinion and transfer to a fixed-fee based consultant.
Red flags to watch out for when you hire a financial adviser
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. Most of the red flags have already been discussed above when explaining the questions to ask. When working with an adviser, check for the following red flags:
Anyone claiming to work with everyone with various financial situations is unlikely to be an expert in the industry and is more like a financial coach who is not to be taken seriously anyway.
Your adviser will not be able to dedicate enough time to you if they have too many clients. A good financial advisor will be held accountable to a fiduciary obligation that prioritises the client's needs.
If they lack the required certifications to perform the job. Look for advisers that have certifications like CFP, CFA, PFS, and/or ChFP, and who are paid on a fee basis rather than commissions.
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.
Before you hire a financial adviser, you need to determine whether you require the services of a financial consultant at all. You could need help regarding something else entirely. And if you do need a financial adviser, ask yourself - will they bring additional value to your financial situation through personalised attention? A good financial adviser generally brings greater returns to your portfolio. Are they marketing to you or pandering or patronising you instead of educating you to get you to make hasty decisions? Any adviser forcing or rushing you to make decisions only has financial incentives and not the best intentions for you as their client. Are they unclear about their pricing? What other red flags are there to watch out for? Your advisers must have credible qualifications and sufficient experience. They should also have enough space in their schedule to provide you with more personalised plans.
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.