Financial advisors. Most people don’t really know what a financial advisor does. You can probably guess from the name “financial advisor” that that person advises you on your finances (duh). But what does that really mean?
A financial advisor can do more than just advise you on your finances. They can perform a bunch of different tasks. A financial advisor can roll over your old retirement account from a previous employer to their accounts to manage. They can sell you various different kinds of insurance. The advisor can put together a full financial plan for you to take you through retirement and even past your death. Or a financial advisor could simply give you a place to buy and sell your own investments.
It really just depends on what you want from a financial advisor.
So with that said, let’s get into the different kinds of financial advisors, and ask the question; do you need a financial advisor at all?
Three Main Types of Financial Advisors
There are three main types of financial advisors:
- Robo Advisors
- Online Advisors
- In-Person Advisors
(1) Robo Advisors
Robo advisors are the most simple form of advisor. A robo advisor will simply manage your investments based on algorithms and data. You can adjust (change out) the different accounts that you are invested in (but it might cause a taxable event) most of the time with a robo advisor.
Robo advisors typically charge the lowest fees. The fees are generally 0.25-0.50% of the amount that you have invested. There are some robo advisors that charge a flat fee, but for the most part they charge a percentage of your money that you have invested with them.
One of the really nice things about robo advisors is that you do not generally need a minimum balance to start investing with them (unlike most online and in-person financial advisors).
FAQ: Do robo advisors charge their commission (usually 0.25-0.50%) monthly, quarterly, annually, etc.?
Answer: That amount is charged annually. The total amount you pay will generally be divided by four and you pay ¼ of what you owe every quarter.
The good of robo advisors:
- They are the least expensive of all the different types of advisors.
- The platforms are generally pretty intuitive and easy to use.
- Great for small accounts or just getting started.
- No minimum amounts to start.
The bad of robo advisors:
- If you need more detailed financial planning then you won’t get it here.
- Your investments will generally be dictated by algorithms instead of human decision (which could be a positive thing though).
(2) Online Financial Advisors
An online financial advisor is a step above a robo advisor in terms of sophistication. An online financial advisor is a financial advisor (an actual person) that you can either call or chat online with that will help you with your investment decisions. The fees for online financial advisors are usually higher than robo advisors but less than in-person financial advisors. Typically the fees will be less than 1% of the total amount that you have invested with them or based on a subscription payment.
Online financial advisors are good for financial situations that are more complicated than simply dumping your money into an account and watching it grow. If you need some simple and basic estate planning, financial guidance, and investment management then an online advisor might be right for you.
Online advisors typically have relatively low minimum amounts to start investing with them. I have pretty consistently seen a $25,000 amount as the minimum amount to start. But I have also seen ones that are $100,000 and some that are $0.
The good of online financial advisors:
- You generally will get a dedicated person to talk to who will be “your” financial advisor.
- There are a lot of different options to choose from.
- Fees are generally pretty reasonable compared to some in-person financial advisors
The bad of online financial advisors:
- A minimum of $25,000ish can be daunting if you are just starting out.
- You never get to sit kneecap to kneecap with your financial advisor.
(3) In-Person Financial Advisors
This is the traditional one. An in-person financial advisor is likely the firm (or individual) in your town that sponsors the youth soccer tournament, has a physical office, and/or can usually be seen rubbing elbows with the people in your town or city.
A traditional in-person financial advisor will generally meet with you at least once just to get to know you and see if you are a good fit (both personality-wise and monetarily). If you decide to go forward with a professional relationship, you will probably meet with that person at least annually.
In-person financial advisors typically charge the highest fees of all the advisors. But that makes sense. An in-person financial advisor has an office space and several other expenses that a robo advisor or an online advisor just won’t have. It’s pretty common to see fees above 1% of your investable assets. And I have even seen fees as high as 3% (yikes). (Pro Tip: If your fees are greater than 1.5%, don’t use that advisor.)
But with those higher fees, an in-person financial advisor will generally offer a lot more services. An in-person financial advisor might offer tax advice, legal advice, estate planning, insurance, and a whole host of other services. Some of those services might be beneficial to you but some may not.
Final Thoughts
Picking a financial advisor is a big decision. The type of financial advisor that you need (or even if you need one at all), is likely going to be different than the next person. You shouldn’t take it lightly. Make sure not to rush the decision. If it takes you six months or a year to find a financial advisor, that’s okay. Your money will still be there a year from now.
There will be more articles on this topic in the future. As I have been writing it, I realized that I have hardly scratched the surface of the topic of financial advisors.
But with that, I hope that you have grown your Money Muscle.
Remember, you are the captain of your ship and only you can make your life awesome!
Until next time!
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