As you grow older and wealthier, the odds that you will need professional help with financial planning increase, but, is a financial advisor worth the money?  That very question has been pondered by many others in your exact situation, whatever it may be.  I worked as a financial advisor from 2005 to 2008 and learned a lot about the business, what clients look for and whether a financial advisor is worth the money or not.  Good financial advice is priceless, but beware that not all financial advisors provide “good” advice.  Also, be aware of how your financial advisor is compensated.  Compensation methods generally steer advisors toward certain products, which may or may not be in your best interest.  So let’s take a look at a breakdown of the financial advice industry shall we?


What Do Financial Advisors Do:  The responsibility of financial advisors depends mostly on the age of you, the client.  The basic functions however are the same.  A financial advisor has a fiduciary responsibility to his or her clients, to act in their best interest and to provide them with sound financial guidance.  Financial advisors sell life insurance, they build tax advantaged plans for succession and business continuity and they manage assets.  Most financial advisors will use life insurance as the vehicle of choice to navigate their clients’ financial future.  We will go over why they choose this route shortly.  If you want to learn EXACTLY what financial planners do, I recommend Scott Budge's The New Financial Advisor: Strategies for Successful Family Wealth Management


What Qualifications Should My Advisor Have:  Most financial advisors at smaller shops are required to carry a Series 6 License as well as a Life & Health Insurance License.  Larger firms will require Series 7 Licenses from their advisors, which is preferable.  The industry standard certification is the CFP®.  CFP stands for certified financial planner, and is a rigorous exam, similar to, but much less difficult than the CPA exam.  A CFP® should be a minimum requirement when deciding if a financial advisor is worth the money.


How Do Financial Advisors Get Paid:  I’m sure some of my old colleagues would hate for me to disclose this information, but, what the heck, I’m here to help you, not them.  Financial Advisors get paid a couple of different ways, depending on their firm’s pay structure.  They generally work solely on a commission basis, with maybe a small salary to keep them afloat during lean times.  They eat what they kill, so do not be surprised when they try to sell you a slew of products to secure your family’s future.  Some financial advisors have moved towards a fee-based system whereby they charge an hourly rate for planning services.  Always beware of what you are paying for.


So How Do Advisors Earn Commission:  From my experience, over 75% of most financial advisors’ income is linked to life insurance sales.  That’s right, life insurance.  This is the moneymaker for them.  The commission rate is typically “50% of FYC” which means that whatever your premium is for the first year of your policy, the advisor is paid half.  Think about this next time you sit down with an advisor and they are pushing you away from the $100/month Term Policy and towards a $400/month Whole Life or Variable Life Insurance product.  Their commission range for the two would be $600 vs. $2400.  Now can you see why he or she is so high on the power of the Variable Life product?  Just keep this in mind.  Advisers also earn money on assets under management.  The average rate here is 4%.  Therefore, an advisor who nets a $1,000,000 portfolio to manage will earn $40,000 from the transaction.  However, like I said this is generally a smaller portion of their revenue.  If you happen to own a business, a financial advisor will aim to build out your business plan as well.  They will do this through buy-sell life insurance policies, trust planning and succession planning.  Most business advising is fee based since there is a lot of independent legal and tax planning involved with the process. 


How To Choose an Advisor: There are a few criteria that you will want to look over when it comes to choosing a financial advisor.  Most young advisors are sales people and nothing more.  They are taught which products to sell and which to avoid and are sent on their way.  They will show up at your home and attempt to extract personal financial data from you in order to put together a proposal aimed at selling you mass amounts of life insurance.  Find an advisor that is Series 7 Licensed, has a CFP® and works for a reputable firm, (Morgan Stanley, Fidelity etc).  These will be the most reputable advisors in their field.  You should be able to trust them to do what is right for you, not what produces the highest commission rate.  Find and advisor that is at least your age or older.  You want somebody who understands your situation, your goals and where you are coming from.  Find and advisor that is at least as successful as you are.  Successful advisors are successful for a reason, they provide quality advice and receive a steady stream of referral business.  Also, check with your own circle of trusted advisors for recommendations.  Your accountant or lawyer may have a relationship with a financial advisor with whom they have done business.  A recommendation from a trusted source is one of the best ways to find a reputable financial advisor.


Is a Financial Advisor Worth The Money:  As you have read, some financial advisors cost you nothing to provide you with quality financial advice, since their payout is a result of commissions paid on products suitable for your needs.  If you are dealing with a fee based advisor, be sure to check references and ask about the results of their work.  If you find a good financial advisor, you will be able to build a lasting relationship that will prove beneficial to both parties involved.  This is the best case scenario.  And in this case, an advisor is a priceless cog in your financial machine.  Choose wisely my friends.