Many people hesitate to seek a financial advisor because they think they don’t have enough money to qualify. Traditionally, it was challenging for those with fewer assets to find advisors willing to work with them. Most advisory firms still have high minimum investment requirements, but fortunately, more firms are now able to work with smaller accounts.
Maybe you’ve recently graduated, and student loan payments are due, or you’ve been inspired by the “financial independence, retire early” (FIRE) movement on social media but aren’t sure it’s right for you. Perhaps you’ve received an inheritance that could fund a full-time business, or you’re facing life changes like starting a career, marriage, or buying a home. These milestones can create a need for financial guidance.
Early guidance can have a big impact on long-term financial success. Here are some questions to consider when looking for a financial advisor:
How much will a financial advisor cost?
Are there additional fees to expect?
What services do I need?
Is a fiduciary advisor better?
Where can I find a financial advisor?
What should I consider when choosing a financial advisor?
What important questions should I ask a potential advisor?
How Much Will a Financial Advisor Cost?
Financial advisors usually charge based on a percentage of the assets they manage for you. This percentage, known as the “assets under management” (AUM) fee, is disclosed in the Uniform Application for Investor Advisor Registration, or Form ADV. Each firm has its own rate, and this document explains how fees are calculated and taken from your accounts. Advisors are required to provide you with Form ADV at the beginning of your relationship, and it must be available at any time. This form is filed with the Securities and Exchange Commission (SEC) and relevant state regulators.
The AUM fee, which is usually about 1%, is automatically deducted from your accounts. Smaller accounts may face higher fees, potentially up to 2% annually. For example, with a 1.5% AUM fee on $150,000, you would pay $2,250 each year. As the value of your assets changes, the fee adjusts accordingly, with higher account values sometimes qualifying for lower percentage fees.
Some smaller investors prefer advisors who charge flat fees instead of AUM fees. These may include a one-time fee for a financial plan, an annual fee, or an hourly rate. A standalone financial plan can range from $1,000 to $3,000, while annual flat fees might reach $7,500, and hourly rates vary from $200 to $400.
Ask your advisor about their fees, and request specific dollar amounts in addition to percentages so that you fully understand the costs. Review your statements to confirm fees are charged as outlined in Form ADV. Fee-based advisors bill clients directly, and errors can occur.
Some advisors are compensated by commissions rather than AUM or flat fees, meaning they’re paid by the product vendors they recommend. In these cases, you pay indirectly through the product’s cost rather than a separate bill.
Hybrid advisors may charge fees to some clients and earn commissions from others. However, they cannot both charge a fee and earn a commission from the same client recommendation. Hybrid advisors must clearly explain who is paying them for their services.
What Other Fees Might I Incur?
In addition to the AUM or flat fee, you might also pay for specific investment products. The advisor’s fee covers their advice, recommendations, and management, while product fees cover investment-related costs. These product costs, known as expense ratios, are disclosed in your account paperwork.
For example, if your advisor charges a 1% fee and the product fee is 1.5%, your total fee would be 2.5%. The advisor’s fee is payable as long as you work with them, while the product fee only applies when the product is in your portfolio.
What Services Will I Need?
As a smaller investor, your financial needs may differ from wealthier clients’, but you should still receive high-quality service. An initial financial plan is typically helpful, detailing your financial goals, cash flow, and an advisor’s strategy for achieving these goals. Many advisors include a personalized financial plan in their service fees, though smaller clients may need to pay for the plan as a separate flat fee.
Does a Fiduciary Advisor Give Better Advice?
Some investors wonder if working with a fiduciary advisor is important. A fiduciary advisor must prioritize the client’s interest over their own. Although fiduciaries have a strict standard, it doesn’t eliminate all conflicts of interest, as no system is foolproof. For example, under the AUM fee model, an advisor’s income rises with a client’s assets but decreases if the stock market drops—precisely when a client may need more help. Fiduciaries must disclose conflicts, and some advisors work hard to ensure transparency regardless of whether they’re fiduciaries.
Both fiduciary and non-fiduciary advisors can offer valuable guidance, so it’s wise to ask how your advisor is paid and why they recommend certain products.
Where Can I Find a Financial Advisor?
Understanding how advisors are paid and what services they provide can help you find the right fit. Location matters less now, as licensed advisors can work remotely. Consider finding an advisor based on experience, specialization, and shared values rather than proximity.
Here are some ways to search:
Ask Friends, Family, or Colleagues: Getting recommendations from people you trust can give you insight into an advisor’s communication style and responsiveness.
Ask Other Professionals: If you use an accountant or other professional, they can often recommend a financial advisor. Financial professionals often network, and advisors value referrals from someone who already knows your finances.
Use an Online Advisor Search: Several databases list advisors for smaller clients and young investors. Popular resources include U.S. News & World Report, National Association of Personal Financial Advisors, Garrett Planning Network, XY Planning Network, and the CFP Board.
Match Online with an Advisor: Many firms connect clients and advisors through online searches. A quick internet search for “financial advisor near me” will yield results, but if you want a fee-only advisor, include “fiduciary” in your search.
Consider a Robo Advisor: Banks and online brokers often offer affordable, automated financial planning options.
What Else Should I Consider When Choosing a Financial Advisor?
With hundreds of thousands of advisors in the U.S., consider these factors to narrow down your choices:
Firm Size: Advisors can operate solo, work in small firms, or belong to large firms. Larger firms may offer more services, while smaller ones may provide a more personalized experience.
Credentials and Expertise: Advanced designations show an advisor’s specialized knowledge.
Niche Market: Some advisors focus on particular groups, enabling them to offer more personalized service.
Online Presence: Review advisors’ websites and social media to learn about their values and expertise. Understanding an advisor’s philosophy and background can help build trust.
Demographics: Though financial advising is still predominantly male and Caucasian, more women and minorities are entering the field. Some advisors also serve specific communities, like the LGBTQ+ community.
Regulatory Record: Advisors must disclose disciplinary actions, criminal history, and bankruptcies. You can find this information in the SEC’s Investment Advisor Public Disclosure database or FINRA’s BrokerCheck.
What Key Questions Should I Ask a Prospective Advisor?
When interviewing advisors, ask questions that will help you assess their fit for your needs:
Who are your typical clients?
What services do you offer for clients with smaller accounts?
Do you specialize in any specific area?
How often will we communicate, and by what means?
How much will I pay for your services, in actual dollar terms?
Are you a fiduciary? Can you earn a commission?
Will I work directly with you or someone else in your firm?
Do you work with other professionals?
Does the person who referred me receive any compensation?
Finally, ask if you’re a good fit for the advisor’s practice. This will help ensure the advisor is open to working with someone at your investment level.
