How to Find A Financial Advisor If You’re Not Rich | Investing

Too many people are afraid to engage with a professional financial advisor because they do not believe they have enough assets.

You may have just started your first career job or recently gotten engaged to be married. Perhaps a family member has passed away and left a small inheritance. No matter what has prompted you to recognize the need for help, getting the right guidance can have the biggest impact on your long-term investment success.

Finding an advisor who is open to working with clients with fewer assets is definitely a challenge. Many financial advisory firms have high minimum thresholds before they are willing to accept you as a client. However, there are plenty of quality firms that have created compensation structures that enable them to work efficiently with clients with smaller accounts.

Clients with assets under $250,000 have a different range of financial needs than wealthier clients and will typically pay a higher fee for services. As assets grow, it is possible to reduce these fees over time.

If you’re an up-and-coming investor, here are the questions that you will need to ask and understand in order to match with the right person:

The typical compensation for a professional financial advisor’s advice is based upon the market value of all the assets that they manage on your behalf. The “assets under management,” or AUM fee, is typically expressed as a percentage of this calculation and is typically deducted directly from your accounts on a quarterly basis. The calculation and how often it is deducted can vary by firm, but is fully detailed in the firm’s Form ADV. This document, formally called the “Uniform Application for Investor Advisor Registration,” is required to be given to each client and remain easily accessible to them. Any person who provides investment services to their clients must file this document with both the Securities and Exchange Commission (SEC) and any state regulatory body that oversees them.

The average AUM fee is just over 1%. However, smaller account holders will typically pay a higher percentage, often as much as 2% per year. If you have $150,000 in qualifying assets and your advisor charges a 1.5% AUM fee, you would be charged $2,250 for the annual fee, with $562.50 deducted every three months.

Because AUM is based upon the market value of the underlying assets, your fee will fluctuate or change with the up-and-down investment results. Your advisor will recalculate your fees on a periodic basis which is also spelled out in the Form ADV.

As an account grows, the AUM percentage may be reduced. The lowest AUM fees are associated with accounts that typically exceed $5,000,000.

Smaller investors may choose a financial advisor that offers services on a flat-fee basis instead of an AUM fee. They may charge a stated fee for a financial plan, or bill an annual or hourly rate. A stand-alone financial plan may run $1,000 to $3,000. An annual flat-fee may be as much as $7,500 annually and an hourly fee is likely to be in the $200 to $400 per hour range.

It is important to ask your prospective advisor what they charge. A good financial advisor expects this question and will answer it openly and transparently. Do not be afraid to ask them to give you the specific dollar calculations for your account instead of just the percentages. This can be the easiest way to truly understand both the services that you will receive and what those services will cost. Be sure that they also show you the fee schedule in the Form ADV so that you will be able to reconcile their voiced explanation with the stated words.

Some advisors are paid on a commission basis rather than an AUM or flat-fee basis. In these situations, the advisor is being paid for their services by the product vendor. You are still paying a fee for the advisor’s services, but it has been priced into the product itself rather than you being directly billed. An advisor cannot receive both a directly-billed fee and a commission for the same recommendation.

A hybrid advisor must take extra care to ensure that you clearly understand at all times who is paying the advisor for their services.

There are two fees that an investor will pay. The AUM or flat-fee compensates the professional advisor for their advice, recommendations and management of the chosen investments.

When a professional advisor makes certain financial recommendations, there may be product fees that are payable in addition to the AUM fee. A client is not paying twice for the same benefit; rather, they are paying all parties to the transaction.

Investment fees are added to the advisor’s fee to determine the total fee. So, a client may pay a 1% advisor fee and a 1% investment fee, for a 2% total fee. The advisory fee is payable for as long as the client has a relationship with the advisory firm. The investment product fee is only payable for the time period that the client has the product in their portfolio.

As a smaller investor, you may need different services than a more affluent investor desires.

For example, it will be important for you to have a financial plan detailing your current state, specific goals, available cash flow to support these goals and the path the advisor is recommending to take to achieve those goals. This financial roadmap should be able to grow with you as your prosperity rises and you begin meeting each goal.

Many financial advisors will offer an individualized financial plan included with their advisory fee, but as a smaller client, you may be asked to pay for the financial plan separately.

In the beginning, you may not need as many services because you have fewer assets.

You are entitled to the same high caliber of service as larger investors as you will be paying a proportionally higher fee for those same services.

Now that you understand how a financial advisor may be compensated and that a financial plan should be part of the services available to you, there are many ways to find a competent advisor. Keep in mind that, in this digital age, you may choose an advisor anywhere in the country that is appropriately licensed to provide services to you. Many financial advisors, especially for smaller investors, are able to serve your needs completely by video, even from another state.

The U.S. Bureau of Labor Statistics recorded 327,600 financial advisors in 2022, a daunting number to winnow down to find the right advisor for you. While they have to licensed to work with you in your state, you may also want to consider:

An astute advisor should not rush you when it comes to answering your questions. They should also answer them in simple language and not industry jargon. While most of the information will be in the Form ADV, there are still several questions that will give great insight. Here are a few:

If you have been upfront with your overall financial picture to them, give them an opportunity to be transparent with you.

Ask: “Am I a good fit for your practice?”

Their answer will confirm whether they are comfortable serving small accounts and are the right person for you.