Once youve determined you need a financial advisor there are some basic things you need to know about them. Such as, what credentials they have and their past work experiences. You will want to know if they get paid by commission or directly from you.

I asked Mark to write about hiring financial planners/advisors because occasionally you guys email me wanting to know if you should hire one andif sohow to go about it. (Figured it was better to ask an actual financial advisor than try to answer on my own.)

I will say first that, in my opinion, few twentysomethings need financial planners. (The possible exception: You have $500,000 or more of investments that you got from grandma or the sale of your tech company.)

Of course, I certainly can see why many people would like to work with one. Making sense of money is no easy task (its what keeps blogs like mine in business), and it would be nice to have somebody in your corner who seems to know what shes doing.

But from a financial planners perspective, the harsh reality is that working with relatively poor twentysomethings is rarely profitable. (I might argue that planners should think long-term and take on young clients in the hopes of retaining them as they grow wealthier, but I understand that clients who can pay the bills today take precedence.) So if youre determined to work with a financial advisor, youll need to do some groundwork to find one to take you on.

As you go about your search, youll want to consider the following. Enter Mark:

For some people, money is confusing, daunting, even terrifying.

Others may be more comfortable with money, but might still benefit from a professional opinion.

Enter the financial advisor.

Financial advisors help clients reach financial goals by recommending how to allocate and invest the clients money. For many, those goals include a comfortable retirement and perhaps education funds for children, but goals might also be pursuing a second career, buying a vacation home, or starting a business.

Although every financial advisor performs similar work, there are big differences among the services provided by different types of advisorsand how these services are priced.

For a bit of background, Ive worked as a financial advisor for the past six years, specializing in investment management. Ive learned a lot about the industry. I also know a number of financial advisors and can tell you that the quality of services they provide ranges from outstanding to virtually worthless.

As with any profession, there are some great financial advisors who do everything that they can to help their clients and that really care about their clients needs. Unfortunately, there are also some who are just in it for the money and only exist to sell the products that put the biggest commission in their pockets.

Before you even consider hiring a financial advisor, you must educate yourself about the difference between the two.

Types Of Financial Advisors

Financial advisors come with different titles. Sometimes they are financial advisers with an E, financial planners, or investment advisors, or wealth managers. They may (or may not do the same thing). In general, financial planners may be able/interested in helping you with your entire financial picture, including budgeting and debt, whereas investment advisors/wealth managers will be solely focused on helping you choose investments.

Despite the different titles, the most important difference among advisors is not what they call themselves, but how they get paid.

FEE-ONLY FINANCIAL ADVISORS

Fee-only financial advisors provide financial help to investors for a fee. The fee may be an hourly rate or per-planning session fee, or it may be charged as an annual percentage of assets under management (common among investment advisors).

Fee-only advisors may offer financial planning, retirement planning, wealth management, budgeting, debt help, etc. All of the fees are disclosed up front to clients so that they have an idea of the exact services that they are getting for their money. Fee-only financial advisors can charge by the hour or by the project.

One of the biggest advantages of fee-only financial advisors is that they are able to offer clients unbiased advice since they are not compensated by companies to sell products. They receive no commission or sales fees from companies, so they are not motivated to put clients in any particular product. Clients do not have worry about conflicts of interest with fee only advisors. For these reasons, fee-only financial advice has become increasingly popular in the industry.

COMMISSION-BASED FINANCIAL ADVISORS

Unless an advisor or planner explicitly advertises hes working on a fee-only basis, chances are hes being compensated in some way by an investment company.

Commission-based financial advisors may offer the same services as fee-only advisors but are compensated differently. They receive a commission by fund companies or brokerages for the sale of financial products. They often receive a percentage of the total amount clients invest in particular funds or products.

As you can imagine, the chances to earn big commissions on certain productseven if theyre not the best investment for the clientcan create an ethical dilemma for these advisors.

Although many, many of these advisors may be reputable and try to act in their cleints best interest, as long as they are paid by selling certain investments, theres at least the perception that youthe clientmay not always come first.

For example, let’s say you are in the market for a few funds for your retirement portfolio and you decide to get a financial advisor. You hire a commission-based advisor that works for Acme Investments, a mutual fund company. Your financial advisor can sell you mutual funds from a number of different fund companies, including Acme. However, she will likely be more motivated to sell you Acmes own mutual funds because she will get a higher commission. For example, if you invest $200,000 in Acme funds, she may earn $1,000, but if you put the same amount of money in other mutual funds, shell only earn $250.

If you decide to work with an financial advisor or planner that does not promote themselves as fee-only, ask them to detail for you how they are compensatedincluding what commissions they earn on any products theyre selling you. If they wont give you a straight answer, find a new advsior.

Common Questions To Ask When Hiring An Advisor

Now that you know a little bit about the background of financial advisors, let’s take a look at some of the more common questions that you might have when it comes to selecting a financial advisor.

When should you hire a financial advisor?

Heres the cop-out answer: its personal. If you have questions about investing, saving money, retirement planning, taxes, or just need some help getting your finances in order, a financial advisor may be able to help.

On the other hand, you may be just fine managing your own money and investments for a long time. If, however, you have $500k or more in investments (and certainly more than $1 million), its probably time to get an advisor. Even if you know a ton about investing. Heck, even if youre an investment professional yourself, half of hiring an advisor is to get an outside, unemotional opinion about your financial choices.

How much do you need in assets to hire a financial advisor?

Although you may find some advisors willing to take you on with any amount of assets, you may find many advisors will only advise high net worth clients and impose investment minimums of $100,000 on the low end ranging up to $1 or $2 million.

How much does a financial advisor cost?

Fee-based financial advisors average $150 to $300 per hour. Commission-based advisers will receive a percentage of the total number of transactions that you make. Financial advisers that offer managed portfolio services may charge anywhere from 0.5% to 2% of the assets under management.

What determines whether or not you have a good financial advisor?

Finding the right financial advisor depends on a number of factors. You want to fund someone that is trustworthy, knowledgeable, ethical, and has experience. But most importantly, your financial advisor should listen to your goals and be willing to help you craft a plan to meet them. Do your homework, and talk to several advisors before hiring. Ask for references. And dont be afraid to switch advisors if you dont get a good feeling.

Some financial advisors and planners hold specific designations such as Certified Financial Planner (CFP) or Chartered Financial Analyst (CFA) both designations that require certain combinations of education, experience, and exams. Others may be accountants, attorneys, or other professionals who also offer financial planning services. No single degree or title guarantees a cracker-jack advisor, goods ones may be out there that dont hold these titles, but its a place to start.

Have you used a financial advisor? How did you find him/her? What have you gotten out of the relationship? Share your story in a comment.