This article is for educational purposes and does not constitute legal, financial, or tax advice. For specific advice applicable to your business, please contact a professional.
According to a 2020 Northwestern Mutual Study, 29% of Americans work with a financial advisor. If you’ve recently started to consider outside financial help for the first time, there are different options depending on your goal. You could work with a financial advisor or a financial coach.
“A financial coach is a lot more education based. Think about it as teaching someone to fish versus selling them a fish. They’re ultimately going to be trying to help you so that you can learn to invest your money on your own,” said Stephanie Xenos, financial coach and founder of The Money Muse, specializing in investing and financial independence. When it comes to working with her clients, she can help them look at things like their income expenses, assets and debts, and help them optimize the inflows and outflows of money to make sure they’re going into the right accounts. Going with a financial coach could be an option if you are interested in becoming self-sufficient in managing your finances.
On the other hand, she says a financial advisor could be a good fit for someone who is short on time and doesn’t want to learn all the ins and outs themselves. “It’s a little bit more like turning over the keys to someone in a financial advisor situation,” said Xenos. “So maybe you want a will and a trust, or you need to do some more normal paperwork with them so you can transfer your assets under the name of their institution. They’re actually going to be doing the buying and selling, and usually making the decisions about what you’re invested in.
For those considering a financial advisor, here are a few questions Xenos suggests you have at the ready for that first meeting:
Question 1: Are they a fiduciary?
“I think the very first and most important thing to ask an advisor, if you decide that you want to work with one, is if they are a fiduciary. A fiduciary is someone who has basically signed something saying that they promise to act in your best interest from a financial perspective,” says Xenos. She recommends checking in advance because working with a financial advisor that is not a fiduciary means they might have agreements with financial institutions where they receive kickbacks or other incentives.
Question 2: How is that person being paid?
Traditionally, financial advisors would be paid a percentage of asset management fees, for example, 1%. “So, every year however much money you have in the account, 1% of that money goes to the advisor.” said Xenos “If you’re paying 1% or 2% of your returns to an advisor every year, that can actually be quite expensive, it can turn out to be something like 25–33% of your overall gains.” This, she says, is because the fee is compounding. As an alternative, Xenos suggests working with an hourly paid advisor or a flat-rate paid advisor, an option that’s gained popularity in the last five to ten years.
She adds that an hourly or flat-rate paid advisor can be a good solution for someone that isn’t sure if they want to invest in an advisor full time. This can be a good way to start working with an advisor to see if this is a good fit for you.
Question 3: What is their investing philosophy?
“I would have a conversation with your advisor about their investing philosophy, what types of investments they normally choose,” said Xenos. “For some people, it may be really important that they have high index fund investing options because they want to pay low fees.”
Here are some of the things Xenos says fall under an advisor’s investment philosophy and some questions that can help guide you:
- How will they diversify your portfolio?
- Will they be choosing mutual funds or individual stocks?
- How will they determine your risk tolerance?
- How will they determine your overall asset allocation?
- Can they cater to your investing preference?
If you’re interested in investing in socially responsible stocks, that’s something she advises communicating up front, as not every advisor can cater to your preferences and could result in limited options or higher fees.
Question 4: What are your advisor’s goals?
By having a conversation with your advisor about their goals, Xenos says you can get a good sense of why your advisor is putting specific stocks in your portfolio. “If you find an advisor, for example, that puts you in all individual stocks, it’s probably because they’re trying to beat the average of the market. Whereas if you have an advisor that puts you in index funds or an array of funds that are broad based across various markets, you’re probably going to be just meeting those market returns or maybe doing a little bit less than that because of the fees associated with those funds.”
Some advisors specialize more in growth while others specialize in maintaining the money you have, something you can also address as a part of your risk tolerance conversation, she says.
Regardless of whether you choose to go with a financial coach, advisor, or go it alone, there are different options that can meet your needs. Before you embark on your journey, Xenos advises you to ask yourself how much you can afford to invest each month. With many small businesses seeing fluctuating income month to month, a good place to start is by gauging the minimum amount you can afford to invest each month and go from there.