Although the use of financial planners is growing, most Americans still tend to take a do-it-yourself approach to building a portfolio and saving for retirement.
Forty percent of respondents in a 2015 survey by the Certified Financial Planner Board of Standards say they utilized financial advisors, an increase from 28 percent in 2010. And while most people are handling their own finances, there are distinct advantages to hiring a professional.
A financial advisor can give investors the discipline to resist investing or divesting reactively, says Angela Coleman, fiduciary investment advisor at Unified Trust Co., headquartered in Kentucky. "We take the emotion out of it," Coleman says.
With the Internet, the world is awash with financial advice, and professional financial advisors can act as a filter, says Andrew Barnett, relationship director at Global Financial Private Capital in Sarasota, Florida.
Financial advisors are a good option for helping clients assess their risk tolerance and then build a portfolio that actually meets what they want, says Drew Horter, founder and president of Horter Investment Management in Cincinnati. He says many people who want to be conservative with their money actually have portfolios that are riskier than they'd like.
Kimberly Foss, founder and president of Empyrion Wealth Management and author of "Wealthy by Design: A 5-Step Plan for Financial Security," recommends interviewing two or three advisors and having one to two meetings with each because this is a relationship that will last "hopefully for the rest of your life," she says.
There are hundreds of thousands of personal financial advisors in America — 249,400 in 2014 according to the Bureau of Labor Statistics — so how should retail investors pick an advisor, whether they are independent or work with a large brokerage, a regional bank or an insurance company?
Consider the fiduciary standard. Barnett advises people to seek advisors who are fiduciaries, which means they are legally responsible to put the clients' best interest in mind before their own.
Non-fiduciary advisors are required only to sell clients what they think is suitable for them. "Dealing with a fiduciary, I think, is critical," Coleman says.
The Department of Labor recently approved a new rule that would require all financial professionals who offer investment advice for retirement accounts to follow the fiduciary standard. But while that rule covers investments in IRAs and 401(k)s, it doesn't impact advisors who are recommending investments for a taxable brokerage account.
Know the pay structure and fees. Coleman recommends that people not pick advisors that are paid solely on commission. An alternative is fee-based advice, where clients are charged a set percentage of assets under management, she says.
Clients with fewer assets to manage may want to choose a fee-based advisor that charges by the hour or a flat annual fee, Coleman says.
Barnett notes that there are now more products such as annuities or real estate investment trusts available as fee-based products.
Opinions vary, but advisor fees could be anywhere from 1 to 2 percent of assets under management. If you have a lot with a financial advisor, that extra percent could be a tidy sum.
This fee is separate from other fees, such as those that come with mutual funds that are disclosed in the prospectus, so it's important to ask advisors if they can break down all the costs of investing, which can include trading, custodial, accounting and sales fees, Barnett says.
Do your homework. Investors should also check into an advisor's background, Coleman says. Know what certifications the advisor holds, and ask advisors for a list of current clients as references.
If an advisor won't provide references, that is a sign of a problem, she says.
In addition to references, investors should ask for an advisor's performance track record, Foss says.
Because a client may have a financial advisor for decades, it's important to find someone they like and trust.
Sometimes that can be accomplished by getting to know the advisor, Coleman says, "Find someone you've got a good rapport with."
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