Financial Literacy

When you hear the phrase "financial advisor," do you picture a person in a business suit offering money and wealth management tips to a member of the very upper class? While it's true that plenty of wealthy people use financial planners, advisors aren't only for the very rich. Even if you earn a modest income, you probably want to know what to do with your money to get the most out of it. A financial advisor can be a helpful ally at many stages of your financial life, but you might find one is especially handy in a few situations.

You've Recently Received A Large Sum of Money

Whether you've received a big inheritance or recently won the lottery, you might be wondering what you should do with your sudden influx of cash. A financial advisor can help you figure out where to put your money to potentially maximize your return and to help you reach future financial goals. Your advisor can also help you when it comes to taxes on the money and can recommend options that will result in a lower tax bill.

You're About to Go Through (or Are Going Through) a Big Life Change

Change seems to be the one constant about life today, and new changes in life can mean new financial goals or money challenges. For example, you might consider working with an advisor if you're about to get married or merge your finances with a partner. An advisor can provide a neutral opinion on the subject of your joint finances and help you navigate shared accounts, investments and incomes with as little disagreement as possible. If you're just starting your first job, an advisor can help you make sense of your company's 401(k) and give you guidance about creating a budget or reaching short-term financial goals.

You're Nervous About the Market

Given recent history, being a bit nervous about putting your hard-earned money into a market that seems less than stable is understandable. If you're hesitant to invest because of recent dips in the market, an advisor can help you pick a strategy that meets your needs and works with your tolerance for risk. An advisor can also be your rock in times of financial uncertainty. When you're watching stocks plunge and are ready to sell off all your shares and put your money under a mattress, an advisor can be the person who's there to gently remind you that things will get better.

When to Skip It

If there's one time when not working with an advisor is a better idea than working with an advisor, it's when the services offered cost more than you expect to earn on your money. Some advisors take a small percentage of your money's earnings each year -- usually about 1 percent. To justify you paying that advisor 1 percent of your earnings each year, the recommendations he or she makes need to perform at least 1 percent better than the rest of the market. Otherwise, the advice you're getting is more expensive than what you'd get if you worked alone.

For the most part, financial advisors don't work for free. If you are seeking investment help or want someone to help you lay out a financial plan, you are going to have to pay that person. How you pay your advisor depends on the type of fee structure he or she works under. There are two main payment structures for advisors, fee-only and commission-based. There's also a third category, fee-based, that's a bit of a hybrid of the first two.

So, which one is best? It all depends on what you want to get from your advisor.

Fee-Only

If you work with a fee-only financial advisor, the amount he or she charges for services doesn't have anything to do with what stocks or bonds you purchase or how well your assets perform. Instead, the advisor charges one rate. It can be an hourly rate, so that you only pay the advisor for the time he or she works. Another option is to charge a flat fee for services, such as $500 a month or $2,000 per year. The fee you pay could also be on a sliding scale, based on your total income.

A financial advisor who works on a fee-only basis is most likely to be a member of the National Association of Personal Financial Advisors (NAPFA). To become a member of NAPFA, an advisor needs to sign a fiduciary oath and agree to uphold a code of ethics. Members of the NAPFA can only work on a fee-only basis.

Commission-Based

A financial advisor who uses a commission-based fee structure gets a cut of whatever stocks or assets you purchase, whether those assets perform well and end up making money for you, or not.  For example, an advisor working on commission might get 1% of the sale price when you purchase a particular mutual fund.

Fee-Based

An advisor who is fee-based might charge you a flat fee or an hourly fee for the advice and services he or she gives, and can earn a commission on the products you purchase. If the advisor manages some or all of your assets, he or she might also earn a percentage of the annual yield of those assets.

What It Means for You

Understanding how your advisor gets paid doesn't just help you keep an eye on your wallet and spending. It can also influence the recommendations he or she makes to you. For example, when an advisor works on a fee-only basis, you're going to pay the flat or hourly rate, no matter what. The advisor has a greater incentive, and a responsibility to you, as the client, to only recommend stocks, mutual funds or other financial moves that he or she thinks will provide the greatest benefit to you.

When an advisor works on a commission basis, the lines between what's best for you and what will best boost the advisor's income can become blurred. If your advisor will get a 5% cut when you purchase a certain stock, he or she might be more likely to recommend that stock, even if the company behind it isn't doing so well and even if you're likely to lose money on the investment.

Find out how a financial advisor gets paid, before you agree to work with him or her. Doing so can mean the difference between someone who's working for you and someone who's working for a paycheck.

Once you've decided to hire a financial advisor, it's easy to assume that he or she is going to be working in your best interest and that the recommendations he or she makes are going to help you in the long run. While you want your advisor to work for you, not for his or her bottom line, that's not always the case. In fact, there's only one way to guarantee that your advisor is definitely playing on your team, and that's to make sure he or she has a fiduciary duty to you.

What Fiduciary Means

A financial advisor who has a fiduciary duty to his or her clients, sometimes called being bound to a fiduciary standard, must act in the best interest of the client.  When an advisor has a fiduciary duty to you, he or she needs to avoid any situations in which there is a conflict of interest, such as recommending you purchase a stock because the advisor will get a hefty commission if you do. As a fiduciary, your advisor has a duty of care, meaning that he or she needs to keep an eye on the investment and on your financial situation, and recommend changes when appropriate for you.

Although you commonly see fiduciary duty when people are talking about financial decisions, it's also an essential part of the attorney-client relationship and the relationship between a ward and guardian. When you tell your attorney something, you can rest assured that he or she will use that information to your advantage and not against you. The same should be true when you are working with a financial advisor.

Does Your Advisor Always Have a Fiduciary Duty?

Of course, nothing is so easy, and a person who calls him or herself a financial advisor might not actually need to uphold the fiduciary standard or act in your best interests.  In some cases, an advisor might only need to uphold the suitability standard. An advisor working under the suitability standard needs only to make sure that a particular investment is "suitable" for you at the time of purchase.

He or she might review your financial situation, recommend a mutual fund or other investment vehicle, give you information on it, and be done. Since the investment was suitable for you at the time you purchased it, the advisor doesn't have a further duty to make sure it continues to work for you.  Under the suitability standard, your advisor also doesn't have to reveal conflicts of interest, which can mean that he or she might steer you in one direction instead of another to improve the fee or commission he or she gets.

How to Know If Your Advisor Is Fiduciary

Since pretty much anyone can label himself a financial advisor, including brokers at a firm who want to make money for themselves and their employer, it's important to know what to look for in a fiduciary. One of the best things you can do is ask an advisor if he or she has a fiduciary duty or is acting under the fiduciary standard, and if he or she is willing to put that in writing.

Advisors with a fiduciary duty need to be registered investment advisors and should have the Series 65 license from the Securities & Exchange Commission. Finally, look at the fee structure your advisor charges. An advisor working under the fiduciary standard can charge on a fee-only basis, and can't work on commission.

You've reached a point in your life where you have more money than before. You might not be super-rich, but you want to make decisions about your money that allow it to work best for you. That's where a financial advisor comes in. Of course, not all financial advisors are created equally. Some are better suited to helping you than others. When you're on the hunt for an advisor, there are a few things to pay attention to.

Pay Structure

How you pay an advisor can influence the type of advice you get and even whether that advisor is willing to work with you. A fee-only advisor charges you for the services provided, either on a hourly basis or in the form of a flat rate. An advisor who works on commission gets a percentage of the sale price of the investments you buy. While an advisor who works on commission might give you great advice, there's also the risk that he or she will recommend a product to you to increase the money he or she earns. Some advisors who work on commission only work with clients who have a substantial amount of money (think tens of thousands, if not more) to invest, as working with people with less money means they earn less.

Fiduciary

There are two standards an advisor can follow: the suitability standard and the fiduciary standard. An advisor who follows the fiduciary standard, or who has a fiduciary duty to clients, must act in your best interests. For that reason, it's often a good idea to look for an advisor who has a fiduciary duty to you. While an advisor who follows the suitability standard won't necessarily make bad recommendations to you, if you work with a fiduciary, you have the guarantee that any advice you receive will really be in your best interest.

Current Credentials

An advisor should have the appropriate credentials and their licenses should be up-to-date. A certified financial planner (CFP) has passed a tough exam and upholds a standard of ethics. A registered investment advisor (RIA) is licensed by the Securities & Exchange Commission or the appropriate state regulator and has a fiduciary duty to act in your best interest. An advisor who is a member of the National Association of Personal Financial Advisors works on a fee-only basis, takes a fiduciary oath every year, and follows a code of ethics. Look for any of those credentials when choosing your advisor.

Range of Services

It can be helpful to understand what services an advisor offers before you hire one. An advisor might offer just investment advice, for example. It's also possible for an advisor to offer a fuller range of services, from retirement planning help to insurance products. If you're just on the lookout for investment assistance right now, it can make sense to work with someone who focuses on that. But, if you think you'll want a more comprehensive financial plan now or in the near future, it can be a good idea to hire a full-service firm.

References

References and referrals can be the icing on the cake or the final nail in the coffin when you're looking for a financial advisor. Ask friends and family if they can recommend someone. If no one you know has worked with an advisor, you can look at reviews online. Another option is to ask the advisor if he or she can provide you with references. Listen to what others have to say before you make your choice. If someone else had a great experience, you might too. And if they didn't, you might be likely not to, as well.

If you are trying to figure out what to do about saving for retirement or have recently inherited a hefty sum of money, you might appreciate the help of a trained and qualified financial advisor. While there are plenty of things a financial advisor won't do, such as help you create a budget or figure out a way to pay off debt, he or she can help you make sense of your current financial status and put a plan into place for the future.

Evaluate Your Current Financial Status

First things first, you can expect your financial advisor to hold a magnifying glass to your current financial situation. An advisor will help you figure out your net worth, or the difference between your assets and any debts you have. After looking at your current situation, an advisor will discuss your financial goals with you. You can expect an advisor to ask you questions about your ability to tolerate risk, about your values, and about your goals.

An advisor needs to have a full understanding of where you stand from a financial point of view, and also of what you want to do to increase your wealth or make your money work for you. If you are nervous about losing money in the stock market, for example, an advisor should know that, and should be able to recommend alternatives that better suit your tolerance for risk. If you don't want to invest in certain types of companies, your advisor should understand and accept that, too, and offer alternatives.

Create and Put Into Play a Financial Plan

After an advisor has an idea of where you stand financially and what decisions are appropriate for you, you can expect him or her to put together a plan to help you reach your goals. If you are working with on advisor to get your retirement planning underway or to give your retirement savings a boost, he or she can show you where to invest, help you choose the best account, such as a traditional or Roth IRA, or your employer's 401k, and give you a sense of the level of risk of the recommended investments. Alternatively, your advisor can help you figure out the best way to invest a large sum of money, such as an inheritance, to minimize your tax burden and to have the inheritance provide the greatest return on investment.

Keep an Eye on Your Plan

If an advisor has a fiduciary duty to you, he or she needs to act in your best interests. That means that your advisor can't simply show you a plan, tell you where to invest, and be finished with you. He or she also needs to continue to monitor the plan to make sure it is still the best choice for you. Markets change, tax laws change, and your employment or financial situation can change. A plan that was effective one year might not be so great in the years to come. If needed, an advisor can recommend adjustments to your plan so that it continues to be the best fit for you and your financial needs.

Since money doesn't grow on trees, when you hire and pay a financial advisor, you want to make sure you are getting the most out of the experience. While it can be easy to think that the advisor is the financial pro and that you'd better let him or her just do the job, it does pay to be proactive about your finances and about your relationship with an advisor. Don't just assume that what your advisor says is the best possible option. Go ahead and dig deeper to get the most out of your experience.

Ask Lots of Questions

When it comes to getting to know an advisor and what that advisor can do for you, there is no such thing as asking too many questions and no such thing as a dumb question. First, you want to ask questions to get a feel for the advisor's experience. Ask about his or her certifications and credentials, how long he or she has been in business, and the type of clients the advisor usually works with. Also, ask if the advisor has a clean record or if there has been any disciplinary action taken against him or her in the past.

Don't only ask questions the first time you meet with an advisor or during the "getting to know you" phase. If any concepts come up that you don't understand, ask the advisor what they mean or how they will benefit you.

Meet Regularly

You don't want an advisor who takes a hands-off approach to your finances. You'll get much more from the experience and will be able to see how your money is working (or not working) for you much better if you touch base with an advisor on a regular basis. You might meet monthly or quarterly, for instance, or your advisor might call you from time to time to check in. At some firms, you might not meet with the advisor regularly, but with a member of his or her team. As long as you know what's going on with your investments or at the advisor's firm, you won't be in the dark and will be able to get the most out of your experience.

Don't Feel Pressured to Take on More Risk

When you start working with an advisor, you might feel that since you have someone to hold your hand and help you figure out where to invest, that you can take on more risk than you would otherwise feel comfortable doing. Don't feel that you  have to raise your risk tolerance to get the most out of working an advisor. In fact, the opposite is true. Your advisor should understand and respect your risk tolerance and put together a plan with it in mind.

Make Sure You Feel Comfortable

When working with a financial advisor, you are building a relationship.  You want to develop a certain rapport with the person you work with, otherwise you won't feel comfortable going to him or her for financial help. If an advisor keeps interrupting you, won't answer questions, or just makes you feel uncomfortable in general, go ahead and find someone else to work with. You won't get much from the experience if you feel awkward around or just don't like the advisor.