How to choose a financial advisor


If you decide to make use of a financial advisor, there is a wide range of available choices. The key is to find an excellent financial advisor that works in your interest, and guess what’s necessary to find a good financial advisor? Financial knowledge! That’s why it’s advisable to build up basic financial understanding first.

How to choose a financial advisor?

It will depend on what you want to invest in, and what price you are willing to pay. There are different types of financial advisors out there, such as Fee-Only Advisor, Bank Advisor, Insurance Broker, Asset Manager, and Robo Advisor.

If you want to learn more about the different kind of financial advisors, and what to look out for, read on.


Why you shouldn’t trust financial advisors unconditionally

Even if a financial advisor is looking for the best possible protection or investment for you, he will always act in his own financial interests. So it’s vital that you follow and understand what is advised to you. Never put your money into anything, you don’t understand. Before you sign a contract, you should have thoroughly read and understood it to the last word. In any doubt, you might want to run the contract through a financially savvy friend or another independent advisor.

You do also good in checking, what education and certification your financial advisor and company has.


Fee-Only Financial Advisor

The fee-only financial advisor is paid directly by the customer. A fee advisor calculates his fee based on the amount of effort. There are either flat-rate fees or hourly fees that range between $ 100 and $ 200. A fee advisor should be registered officially as a financial advisor.

Consulting costs: For investment sums over $20,000, the consulting costs are usually lower than the investment costs of comparable financial advisors, as a flat fee is charged for the advice. For investment amounts below $10,000, the costs might be higher.

Investment costs: The Fee-Only Advisor will not get commissions or kick-back fees for the products he advises to you. So there should be less conflict of interest, and he will usually recommend inexpensive investment products.

Service costs: As a rule, a fee advisor charges an annual service fee. Any hidden commissions (so-called “kickbacks”) will be refunded.
Service costs (75%): As a rule, a fee advisor charges an annual service fee. Any hidden commissions (so-called “kickbacks”) will be refunded.

Financial independence: By rule (or by law), the fee-only advisor may not receive any remuneration from product providers, as the customer pays a premium for sound investment advice without conflict of interest. If the fee advisor charges an annual service fee for support, he has an interest in the customer investing his money with him.

Product variety: A fee-only financial advisor can theoretically advise on all kinds of products without any limitation, tailored to his clients needs.


Bank Advisor

As the name suggests, the bank advisor works for a specific bank. As a rule, the bank advisor is employed by the bank and receives a fixed salary. Any bonus payments depend on the amount of the deals.

Consultation costs: No costs are charged for the consultation.

Investment costs: Fees will be charged to buy-in to the financial products such as mutual funds. Usually, there is also a fee charged, if you want to pull the money out. Always ensure that you know what these fees are.

Service costs: There are usually annual fees which can vary between 0.4% and 2%. There might be hidden commissions (so-called “kickbacks”) which might, or might not be paid out.

Financial independence: The bank advisor does not receive any commission on the product he sells you, and the bonus will usually be defined through the amount invested.

Product variety: The bank advisor can only offer in-house products, which includes insurance products. The product range depends on the investment amount.


Insurance Broker

The insurance broker is paid by insurers and product providers. The majority of an insurance broker’s income comes from commission income. Insurance Brokers are usually officially registered as financial investment brokers.

Consultation costs: No costs are charged for the consultation.

Investment costs: Insurance brokers will get a commission for the sale, which will usually be a percentage of the sum invested. In some cases, there is also a fee charged, if you pull the money out.

Service costs: There are usually annual fees which can vary between 0.4% and 2%. There might be hidden commissions (so-called “kickbacks”) which might, or might not be paid out. Most of the time, the service fees are higher than those of bank advisors.

Financial independence: The insurance broker receives money, when you invest with him. There is a risk of a conflict of interest.

Product variety: Can offer almost all products, but will focus more on products that pay higher commissions, and might be more expensive.


Asset Manager

The asset manager is paid directly by the client by demanding a percentage fee of the investment amount upon closure. In some cases, asset managers also set up their own funds. The asset manager will have a special officially registered license.

Consultation costs: No costs are charged for the consultation.

Investment costs: A percentage fee of the investment amount is charged at the time of conclusion.

Service costs: Fees will be charged to buy-in to the financial products such as mutual funds. Usually, there is also a fee charged, if you want to pull the money out. Always ensure that you know what these fees are. Experience has shown that the service costs for asset management are usually the highest.

Financial independence (0%): The asset manager only receives his fee when making a financial investment. There is a risk of a conflict of interest.

Product variety: Can offer most products thanks to the special license.


Robo-Advisor

The robo-advisor is the digital alternative to classic advisors or asset management. The company behind the robo-advisor has usually a license as a financial investment broker or an asset manager. The risk and investment determination is carried out digitally and without any human consultant.

Consultation costs: No costs are charged for the consultation.

Investment costs (100%): No costs are charged for the closure of the deal.

Service costs: Robo-advisors generally use low-cost investment products. Either a percentage service fee and/or a percentage of profit-sharing is charged. The costs are lower compared to human consultants.

Financial independence: Since the advice is carried out digitally and automatically, there is no conflict of interest at the beginning, but the robo-advisor receives a percentage service fee or profit-sharing for the support.

Product variety: Usually there is a fixed amount of portfolios, from which the robo-advisor will chose from. Alternatives are not possible.


So which one should you choose?

The best possible advice depends on your needs and investment opportunities. It is particularly important to pay attention to what your financial advisor specializes in and which registration he has. If you wish personal and qualitative financial advice without conflicts of interest, then the model of the independent fee-only advisor might be the best solution. The fee-only based consultant might also be a good alternative for those who want a neutral and second opinion on existing financial products. Bank financial advisors or insurance brokers might be good choices, as they don’t charge for their time, but take a commission upon closure of the deal. If you chose this option, then it is advisable to build up some financial knowledge so that you understand what you sign up for.


My personal opinion about Financial Advisors

I have used insurance brokers, and bank advisors to invest money. 

The insurance broker offered me a very defensive product with 80% Bonds and 20% Stocks, as I have my pension money invested in it. The commission was charged as a lump sum and was relatively high, but in return, I can pull the money out any time at no further costs. There was no minimum holding fee. The company that invests my money, is registered by state and licensed to invest pension money. One thing you have to be careful about is on which account the money is stored. I have paid in my money onto a bank account of a regular bank. The account is a special investment account. Neither the company investing my money or the insurance broker can access my account. The company that is investing my money can only invest my money, they can’t withdraw money from my account. This acts as a separation of concerns. My current averaged annual return on this investment is around 6%.

I’ve also invested money into mutual funds, over a bank advisor. I’ve invested all in stocks, 70% in Chinese stocks, and 30% in the rest of the world. The money is in 3 different funds. One of the funds I selected is a fund managed by a very reputable fund manager with a decade of experience in Chinese stocks, and a long history of consistent profit. I did pretty well with these investments as well. My current averaged annual return on these funds is around 10%.

Additionally, I have money invested in cheap ETFs (Exchange Traded Funds), which give me an average annual return of 8%. The majority is invested in Vanguard VGT (Tech ETF), VOO (S&P500), VUG (growth), and VT (whole world ETF).

My point here is that the price you pay (regardless if it’s upfront, commission, and so on), will have to be put into relation to the yearly performance. For example, there are many people, that will say, that low commission funds, will produce better returns, because of lower fees, and that the majority of fund managers didn’t beat the market. And while this might be true, some still do, and if you invest with them you’ll also have no issues if they charge a yearly percentage cut. In the end, you’ll need to take an educated guess and judge on yearly performance.

What you can do is to study the funds and performances (which are usually publicly available), understand in which areas the fund invests the money, and take a forward view and think if these market areas most likely will do well in the future too.

For beginners that don’t want to trust or rely on any advisors, investing into ETFs is a good choice, to tap the toes into the water.

Chris

Chris is an IT Project Portfolio Manager within the financial industry. Due to the nature of his role, he is engaged to study Financial Markets and is an active investor.

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