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Financial planners aren’t just for rich people. They’re for you, too

Financial illiteracy can become a significant problem. But it’s a problem with a clear solution.
financial planning
Credit: Vincent Romero, Mathieu Stern / Unsplash
Key Takeaways
  • In any walk of life, if you need to learn how to do something, you often ask for help. Why should money be an exception?
  • When it comes to personal finance, the most beneficial advice is tailored to your individual circumstances.
  • Here’s how to determine when you need a financial advisor, which type of assistance is right for you, and what to look out for when seeking an advisor. 

Do you know the difference between interest and compound interest? Could you tell me what bonds, stocks, or mutual funds are? Can you explain inflation and how it affects your life? If not, don’t worry — you’re in good company. 

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According to the National Bureau of Economic Research, only one-third of people “have familiarity with the basic concepts that underlie everyday financial decisions.” The paper goes on to say, “only half of older Americans — who presumably had made many financial decisions in their lives — could answer the two basic questions measuring understanding of interest rates and inflation.”

The thing is, though, that financial literacy is not just for those who want a job on Wall Street. Money is everywhere. Yes, it’s the billion-dollar company mergers you read about in the economics pages. But it’s also the budget that you make for your weekly trip to the grocery store. 

A lack of financial literacy can have a huge impact on our day-to-day lives. Financial illiteracy can leave us without the confidence needed to make sound financial decisions. It can make us more vulnerable to exploitation by unscrupulous lenders. Meanwhile, gaining financial literacy not only gives us the skills and acumen needed to make good financial decisions, but also makes us more aware of financial strategies that we might not otherwise have known about, such as the benefits of employer matching in 401(k) schemes.

Financial illiteracy can become a significant problem. But it’s a problem with a clear solution: financial advisors.

When to get a financial advisor

There are many reasons to get a financial advisor (not least to improve our financial literacy). Many people assume that financial advisors are only for certain types of people — the wealthy or business owners, perhaps — and that they themselves don’t qualify for one. But that’s often not the case.

Here are just a few scenarios of when people might benefit from financial advice from a professional.

Tom has just come into a lot of money. He’s inherited money from a relative, he’s landed a huge bonus, or he’s even won the lottery. After the impulsive splurge and a few luxury purchases, Tom is left wondering what to do with his money. According to one study, 20% of baby boomers who inherited $100,000 or more “spent or lost it all.” That’s a lot of money to spend without advice.

Geraldine is coming up to retirement age, but she’s not sure what to do. Her husband has been retired for a few years, and she’d like to enjoy their time together, but she doesn’t know how to best plan her finances. She’s not alone: One survey found that only half of Americans have a good understanding of what retirement options are available to them.

Martha is getting stressed by how complicated her finances are. She has seven credit cards, four bank accounts, three pension pots, and two mortgages. She runs a small business as a sole trader, and she sometimes contracts but also works part time for a company registered in France. She’s going to be marrying a Canadian who owns a house in Sri Lanka and has a large portfolio of German bonds. Martha needs some help.

But financial advisors aren’t only for specific life events. Just as interest compounds over time in your investment accounts, the negative effects of inefficient financial planning can pile up over time, too.

“How you organize your finances is also very important, as lifetime drag from things like inefficient allocation and tax strategy can have a huge impact, especially later in life,” says financial advisor Curtis Crossland of Suttle Crossland Wealth Advisors.

Financial advisors and financial planners

No matter the size of your income or portfolio, we all get stressed about finances. Odds are everyone would benefit from some financial assistance. But there’s a difference between consulting a financial advisor and a financial planner. 

The confusing part is that the two tend to overlap a lot, as Brandon Gregg of BBK Wealth Management explains:

“I find the biggest difference is that typically most advisors do investment management only….[but] typically, planners have a more holistic approach to helping folks with all of their financial needs.”

Some people will benefit more from one, some from the other. A handful of people might need both. To help you sort it out, we can use a three-tier system. The kind and degree of help you need will depend on which tier you belong to.

Tier 1: You’re starting out in the financial world. You’re beginning to see some money coming into your accounts as you’re renting or living with family, with few bills and overhead expenses. Your finances are (relatively) simple.

Tier 2: This can be anyone from young professionals up to middle age. You have a mortgage or a sizable rent. You’ve got credit card debts, many bills to pay, and at least a few big-ticket purchases to make (e.g., holidays and cars). In the older bracket, you might also have to care for elderly relatives and consider the costs of childcare.

Tier 3: This is when you have a degree of affluence, perhaps through inherited wealth or a high salary. You have a small mortgage and only a few credit card and loan debts. Your bills are manageable. Your big-ticket items are luxuries, and you have healthy savings, disposable income, and pension arrangements. Any children you have will, probably, have left home and are more or less self-sufficient.

People in tiers 1 and 2 are the ones who will probably need the most financial assistance, potentially through both financial planners and advisors. They are new to all this and need to learn the skills necessary to navigate the financial world.

Tiers 2 and 3 might benefit more from financial advisors: people who manage money on your behalf and are often given the power to direct your investments. They are likely more expensive, but they’ll take away the stress of money management.

What to look for in a good financial advisor

Say you’ve decided that getting a financial advisor is a good idea. However, there’s no beating around the bush — getting expert and tailored advice will cost money. Many people just can’t afford that. 

In these cases, the first point of call is to check out what reputable, useful free advice you can find. One resource is the Consumer Financial Protection Bureau, which is a repository of helpful information on everything from buying a house to getting an auto loan to preparing for retirement.

If you’re looking for investing advice, the Financial Industry Regulatory Authority is a good start. It offers tools, calculators, and methods of verifying third-party organizations. The Securities and Exchange Commission (SEC) also offers free educational information on topics like the fees associated with various financial products, assessing risk tolerance, and how to protect yourself from financial fraud. 

Suppose you have the money needed to get a financial advisor. The next step is finding the right one for you. It’s not always easy. A quick Google search reveals the issue: There are so many to choose from. To get started, one solid resource website is the National Association of Personal Financial Advisors (NAPFA), which hosts only those who are qualified and reputable. 

But even within that selection, the options are plenty. Here are three tips to help narrow down the decision:

1. Check their qualifications. What you’re looking for is a Certified Financial Planner (CFP), Chartered Financial Consultant (ChFC), or Chartered Financial Analyst (CFA), who deals more specifically with investing. You can check on each on their respective websites to see if an agent actually has the qualifications they claim. This doesn’t mean there aren’t some very good FAs with different or even no credentials. But if you’re investing, it makes sense to be sure.

2. Check their employment history. As a general rule, check to see whether their resume is full of short-term roles or job hopping. That’s a red flag. There are a few ways to do this. LinkedIn is a start (but this isn’t verifiable and can sometimes be faked). There are also other sites you can try, including BeenVerified and TruthFinder. When in doubt, you can simply ask the financial advisor for their resume — if you have any questions, just ask.

3. Sit down and ask them questions. Brandon Gregg, a wealth advisor at BBK Wealth Management, suggests a few examples:

Why do they believe planning is important?

Are the planning process and investment management program unique for each client?

Does the FA find building relationships with their clients important? (Planning is very personal, and the more that the FA knows and understands about their client’s planning needs, the better. 

Does the advisor focus only on goals or also on a client’s values?

What does the agreement between the advisor and the client entail (costs, responsibilities, etc.)?

4. Understand how your planner or advisor gets paid. Financial advisors and planners generally get paid through either commission or fees (though some may receive both). 

NAPFA recommends choosing a fee-only advisor or planner because this payment method minimizes conflicts of interest and self-dealing.

“[The fee-only model] ensures that your financial planner acts as a fiduciary,” NAPFA says. “Fee-Only planners are compensated directly by their clients for advice, plan implementation, and the ongoing management of assets. All NAPFA members are required to work only within the Fee-Only structure, accepting no commissions for their work.”

Financial planning is rarely simple or easy, practically and emotionally. A little guidance can go a long way. We’ve seen how a lack of financial support can have negative outcomes. And we’ve seen that everyone will have some aspect of their financial lives that could use some help. 

Amir Noor, Director of Financial Planning at United Financial Planning Group, summed it up by saying that planning for a healthy financial life is similar to planning for a healthy physical life.

“I often make the analogy that financial discipline is similar to physical discipline. If you ask, ‘When should you start going to the gym?’ the answer would be, ‘You should always be at least a little active or exercising.’ If you’re an athlete, you’re staying in shape. If you’re unhealthy or just starting, you still go to the gym. [Financial advice] is no different.”