What Type of Financial Advisor Should You Work With?
When you go in to buy a cell phone, it’s easy to spend an hour playing with them and still not make a decision. Droid, iPhone, Samsung, Microsoft… Does it really matter?
That depends on what you’re looking for. Phones that run on the Droid system are much more customizable, while iPhones have a more rigid and, as a result, simpler operating system. Droids tend to be the phone of choice for the “techie” crowd who want that customization, while iPhones are favored more by design-minded individuals. You might choose an iPhone now and then jump to a Droid someday down the line when you decide you want to be able to tinker a little more.
It’s like looking for a financial advisor – you can end up overwhelmed by the variety of options and firms available, but there are some guidelines that can help you tell which one might make the most sense for you at this point in your life.
Maybe you’re just beginning to plan ahead for your long-term financial needs, or maybe you’re already investing successfully – either way, when you’re ready to hire an advisor, here are some pros and cons of the three main types to consider:
Thanks to advances in technology and the relatively low fees, robo-advisors are growing in popularity. While investment firms have been using algorithm-driven software for a while now, robo-advisors have been available directly to consumers since 2008.
Throughout history, when we’ve figured out how to automate something, the price of that product or service has dropped considerably. It’s the same way with robo-advisors. You tell them a little bit about yourself and how you want to invest, and their algorithms take care of everything else with little to no human intervention, which translates into the lowest fees in the industry (with some even offering their services for free).
Some financial advisors have a strong distaste for robo-advisors because they see them as cut-rate competition, but I believe they have their place, and here’s why: It’s important to start investing and get a taste for it no matter how little money you have, and most fee advisors won’t work with you until you have at least six figures to invest. Robo-advisors have lower or even no minimum asset requirements, which means anyone can invest.
Pros of using a robo-advisor:
- High degree of hands-on, real-time control over your money, if you prefer to manage it personally.
- Low fees. Most robo-advisors charge less than 0.5 percent on investments, while advisors’ fees typically fall somewhere between 1 and 2 percent.
- Low or no account minimum. Minimum amounts range from $0 up to $50,000
- Speed and accuracy. Since these machines make all their decisions based on algorithms, they can make them quickly and consistently.
Cons of using a robo-advisor:
- While robo-advisors are great at making trades on your behalf, they can’t offer advice based on the nuances of getting to know you. This is okay when you don’t have millions of dollars and your situation is fairly simple, but have you ever heard the saying “You don’t know what you don’t know”? Financial advisors have an in-depth knowledge of specific strategies for financial planning, tax efficiency, goals-based investing, and more that can help save you money, and studies have shown they can help you earn more, too. For those with a complex financial situation and different risk factors, human analysis and planning is highly desirable. Sure, Sophia the robot is a neat development in robotics (as you can see by clicking here), but you wouldn’t expect her to understand the nuances of your risk tolerance, personal goals, and retirement dreams.
- While speed and accuracy are good, it doesn’t necessarily guarantee consistency.
Robo-advisors are a good fit for:
- People who are just getting started in the world of investing.
- People who don’t have enough assets to meet the minimum requirements of advisors.
- People with fairly simple financial situations.
- People who are do-it-yourselfers.
2. Advisors Who Don’t Do Financial Planning
Robo-advisors aren’t for everyone, but to a large extent, technology is here to stay. Going back to a legal pad just isn’t going to cut it.
Even if you use a robo-advisor, there’s still a good chance you’ll reach a point where you want something more. That’s when people start looking into financial advisors. Advisor services come in all shapes and sizes (and we’ll talk a little more about that some other time), but today we want to focus on two types of human advisors: non-planning advisors and holistic financial planners.
Non-planning advisors fit under the “financial advisor” umbrella, but their services are fairly different from those of a holistic planner like TFS. Their primary service is as a middleman of sorts to help you buy stocks and/or bonds, as well as general financial advice. Holistic planners can help you in these areas, but that is a small part of what we do (more on that later).
People often come to us looking for something like a non-planning advisor – someone who will suggest and buy stocks for them. We know a good number of non-planning advisors and we’ll typically refer these clients to them. We have a larger focus on financial planning and helping people prepare for retirement and other life events, so this type of client doesn’t necessarily need those services.
That being said, non-planning advisors serve an important role in the financial industry that many people find is valuable.
Pros of using a non-planning advisor:
- They often have lower fees than planning advisors.
- Typically, you will collaborate with them, but they will recommend the specific trades to make.
Cons of using a non-planning advisor:
- Since non-planning advisors primary role is investment management, they may be paid by commission or fee. While being paid a commission doesn’t mean their advice will be tainted, it does leave the door open to the question of why a trade is being made. On the other hand, many advisors work in a fee environment rather than commission, thereby eliminating this question.
- Non-planning advisors typically don’t offer in-depth financial planning services.
Non-planning advisors are a good fit for:
- People who want to collaborate with their advisor on their investments.
- People who don’t feel the need for financial planning advice from a professional.
3. Holistic financial planners
When your portfolio starts getting a little larger and your goals and investments start getting a little more complicated, it may be time to upgrade to a holistic planner who will take into account all of your resources, including those they’re not managing. They’ll look at things beyond the numbers, including your health, life goals, and more.
I call these advisors “holistic financial planners” because they focus on giving proactive guidance with the intention of helping you have a better probability of accomplishing your life goals. TFS Advisors falls squarely into this category. Holistic planners like us will get to know the nuances of you and your family in an effort to understand your goals and help you reach them. They will tell you which way they think will work best for you, and they’ll even tell you when they think you’re making a potentially damaging decision.
We’ve had a lot of clients over the years, and several have told me they wanted to pull money out of their retirement accounts for some item or another, whether it’s a home remodeling project or a family vacation. When this happens, I always look with them at how this could affect their retirement plans.
Sometimes there’s a way to make it work without making too much of an impact, but I have had to deliver the bad news that this is not a great idea. Of course, it’s their money, so they can do whatever they want with it, but it’s our responsibility to help our clients think about their entire financial picture.
Often, people make the mistake of seeing holistic planners and non-planning advisors as one and the same. While we do everything that a non-planning advisor does, we go beyond that to include life planning and coaching.
Pros of using a holistic planner:
- When you delegate to an advisor, you’re still part of the process, but it allows you to spend your time and energy in areas of your life that are more important to you than financial matters. A large portfolio requires regular maintenance, and tracking a wide array of complex investments and risks is almost a full-time job.
- A wider array of services. A holistic planner not only tracks investments, but manages risk, monitors cash flow and income, and plans ahead for retirement and your estate, in addition to working with your other advisors, such as attorneys and CPAs – and that’s only a piece of everything they do. It can be difficult to list our services for someone because we are available to help our clients in every area of life, financial or not. We strive to be a trusted life advisor.
- An ongoing, holistic relationship. When you work with a holistic planner, they know a lot more about your life than a non-planning advisor (and certainly more than a robo-advisor). A relationship like that means their advice takes your big picture into account.
Cons of using a holistic planner:
- Because these services are comprehensive, individualized, and specialized, they tend to cost more than robo- and non-planning advisors.
- Most holistic planners can be out of reach for people with smaller portfolios. In fact, they often have a required minimum asset level (typically somewhere between $250,000 and $500,000).
Holistic planners are a good fit for:
- Delegators – People who want to entrust the lion’s share of financial management to a professional so they can focus on other things.
- People who want more than just advice, they want a guide and partner.
- People with larger portfolios.
- People with more complex financial situations.
- People who want a financial professional to help make sure they’re on track to meet their goals.
There have never been more ways for a beginner to enjoy the benefits of investing (more than we could ever list in one article), and it’s also never been more complicated to manage a large, diverse portfolio. If you only need help with investing, then a robo-advisor or non-planning advisor may be the way to go. If you want someone who can help you look at the big picture of your life, beyond just the financial, then you will probably want to look for a holistic financial planner.
Take your time to consider the pros and cons of different advisors, as well as how each one fits your current and future financial needs.
If you want to talk about whether TFS Advisors would be a good fit for you, feel free to drop us a line today to learn more about how we can help.