Too many people are afraid to engage with a professional financial advisor because they do not believe they have enough assets.
You may have just started your first career job or recently gotten engaged to be married. Perhaps a family member has passed away and left a small inheritance. No matter what has prompted you to recognize the need for help, getting the right guidance can have the biggest impact on your long-term investment success.
Finding an advisor who is open to working with clients with fewer assets is definitely a challenge. Many financial advisory firms have high minimum thresholds before they are willing to accept you as a client. However, there are plenty of quality firms that have created compensation structures that enable them to work efficiently with clients with smaller accounts.
Clients with assets under $250,000 have a different range of financial needs than wealthier clients and will typically pay a higher fee for services. As assets grow, it is possible to reduce these fees over time.
If you’re an up-and-coming investor, here are the questions that you will need to ask and understand in order to match with the right person:
The typical compensation for a professional financial advisor’s advice is based upon the market value of all the assets that they manage on your behalf. The “assets under management,” or AUM fee, is typically expressed as a percentage of this calculation and is typically deducted directly from your accounts on a quarterly basis. The calculation and how often it is deducted can vary by firm, but is fully detailed in the firm’s Form ADV. This document, formally called the “Uniform Application for Investor Advisor Registration,” is required to be given to each client and remain easily accessible to them. Any person who provides investment services to their clients must file this document with both the Securities and Exchange Commission (SEC) and any state regulatory body that oversees them.
The average AUM fee is just over 1%. However, smaller account holders will typically pay a higher percentage, often as much as 2% per year. If you have $150,000 in qualifying assets and your advisor charges a 1.5% AUM fee, you would be charged $2,250 for the annual fee, with $562.50 deducted every three months.
Because AUM is based upon the market value of the underlying assets, your fee will fluctuate or change with the up-and-down investment results. Your advisor will recalculate your fees on a periodic basis which is also spelled out in the Form ADV.
As an account grows, the AUM percentage may be reduced. The lowest AUM fees are associated with accounts that typically exceed $5,000,000.
Smaller investors may choose a financial advisor that offers services on a flat-fee basis instead of an AUM fee. They may charge a stated fee for a financial plan, or bill an annual or hourly rate. A stand-alone financial plan may run $1,000 to $3,000. An annual flat-fee may be as much as $7,500 annually and an hourly fee is likely to be in the $200 to $400 per hour range.
It is important to ask your prospective advisor what they charge. A good financial advisor expects this question and will answer it openly and transparently. Do not be afraid to ask them to give you the specific dollar calculations for your account instead of just the percentages. This can be the easiest way to truly understand both the services that you will receive and what those services will cost. Be sure that they also show you the fee schedule in the Form ADV so that you will be able to reconcile their voiced explanation with the stated words.
Some advisors are paid on a commission basis rather than an AUM or flat-fee basis. In these situations, the advisor is being paid for their services by the product vendor. You are still paying a fee for the advisor’s services, but it has been priced into the product itself rather than you being directly billed. An advisor cannot receive both a directly-billed fee and a commission for the same recommendation.
A hybrid advisor must take extra care to ensure that you clearly understand at all times who is paying the advisor for their services.
There are two fees that an investor will pay. The AUM or flat-fee compensates the professional advisor for their advice, recommendations and management of the chosen investments.
When a professional advisor makes certain financial recommendations, there may be product fees that are payable in addition to the AUM fee. A client is not paying twice for the same benefit; rather, they are paying all parties to the transaction.
- The advisor is receiving compensation for the human side of the advice.
- The financial solution has fees associated with the investments secured to implement the recommendation. These fees are also fully disclosed in the account paperwork and may be referred to as expense ratios.
Investment fees are added to the advisor’s fee to determine the total fee. So, a client may pay a 1% advisor fee and a 1% investment fee, for a 2% total fee. The advisory fee is payable for as long as the client has a relationship with the advisory firm. The investment product fee is only payable for the time period that the client has the product in their portfolio.
As a smaller investor, you may need different services than a more affluent investor desires.
For example, it will be important for you to have a financial plan detailing your current state, specific goals, available cash flow to support these goals and the path the advisor is recommending to take to achieve those goals. This financial roadmap should be able to grow with you as your prosperity rises and you begin meeting each goal.
Many financial advisors will offer an individualized financial plan included with their advisory fee, but as a smaller client, you may be asked to pay for the financial plan separately.
In the beginning, you may not need as many services because you have fewer assets.
You are entitled to the same high caliber of service as larger investors as you will be paying a proportionally higher fee for those same services.
Now that you understand how a financial advisor may be compensated and that a financial plan should be part of the services available to you, there are many ways to find a competent advisor. Keep in mind that, in this digital age, you may choose an advisor anywhere in the country that is appropriately licensed to provide services to you. Many financial advisors, especially for smaller investors, are able to serve your needs completely by video, even from another state.
- Ask friends, family or colleagues for recommendations. These individuals are often able to give you firsthand knowledge about an advisor, including how responsive they are to communications and how well they explain complex topics.
- Ask other professionals that you work with for recommendations. Do you already work with a CPA to get your taxes done? Professionals network with each other as “centers of influence.” They can not only introduce you to a financial advisor in their network, but are already comfortable with them on a professional level. This can unify your advisors into a cohesive team that will be able to see your needs from more than one perspective. Your accountant, lawyer, insurance agent and even your mortgage broker can be an excellent referring source.
Use an online advisor search. These are professionally managed databases that include financial advisors that not only work with smaller clients, but also may cater to younger generations. Most advisors on these platforms are fee-only planners and you pay for their services with an AUM or flat fee.
- U.S. News (https://money.usnews.com/financial-advisors) This online database of financial advisors is searchable by location and firm name, and provides details on their specialties and experience.
- National Association of Personal Financial Advisors (napfa.org)
- Garrett Planning Network (Garrettplanningnetwork.com)
- XY Planning Network (xyplanningnetwork.com). These advisors work specifically with next-generation investors.
- The CFP Board (cfp.net). This network includes all advisors who have earned the certified financial planner (CFP) professional designation.
- Search online for business-to-client (B2C) service providers. The internet is filled with firms that are focused on connecting financial advisors with new clients. A quick internet search for “financial advisor near me” or “financial advisor for the middle class” will bring back innumerable options. Most of these services are free to the investor, but the advisor pays a subscription to be on their platform. If you prefer a fee-only advisor, include the word “fiduciary” in your search terms.
- Consider a robo advisor. Many financial firms and banks are offering automated portfolio management services and financial planning as a cost-effective option. While the financial advice tend to be include more broad-based information, artificial intelligence is now being utilized to bring more customized services to these platforms. You can do an internet search on “robo advisor” to find multiple lists of available services. While robo advisors can be cost-effective for many investors, others will find that the more personalized approach of an individual advisor can be equally valuable.
The U.S. Bureau of Labor Statistics recorded 327,600 financial advisors in 2022, a daunting number to winnow down to find the right advisor for you. While they have to licensed to work with you in your state, you may also want to consider:
- Firm size. Financial advisors can be a solo operation, a small boutique practice or associated with a practice consolidator, resulting in a much larger firm overall. There is not a perfect size. Larger firms may offer a broader range of services and have some economies of scale. However, smaller firms may be able to offer a higher degree of personalization and familiarity that is comforting to a newer investor.
- Credentials and expertise. Professional designations can signal that an advisor has completed advanced education and passed challenging exams in various specialties within the financial services industry.
- Niche market. Many advisors are willing to dive deep into a smaller pool of clients in order to provide highly customized services. Niche practices can be managed very profitably, enabling them to focus more on the individual, rather than the account size.
- Online presence. An advisor’s website and their social media profiles can offer a lot of information. Does the website tell a positive story of the advisor’s investment philosophies, firm values and the team’s background and experience? Do they offer insightful thought leadership on LinkedIn? Do their personal social media sites reflect a lifestyle that you value? Often our best relationships are with those who are similar to us. Your financial relationship with an advisor is as intimate as that with your doctor, so understanding them as an entire being is invaluable to building trust together.
- Regulatory record. Each advisor must disclose information such as a personal bankruptcy or criminal history, and all disciplinary actions are reported publicly. You can view your potential advisor’s record at the Security & Exchange Commission (SEC) database called Investment Adviser Public Disclosure or the Financial Industry Regulatory Authority (FINRA) database called BrokerCheck.
An astute advisor should not rush you when it comes to answering your questions. They should also answer them in simple language and not industry jargon. While most of the information will be in the Form ADV, there are still several questions that will give great insight. Here are a few:
- What services do you provide to clients with smaller accounts?
- What type of clients do you typically work with?
- Do you have a niche or special expertise?
- How often will we meet?
- What other communications will I receive?
- How much will I pay for your services in dollars?
- Are you a fiduciary?
- Will I work directly with you or someone else in your firm?
- How wide a range of professionals do you have available to call on so that all my needs are addressed with your oversight?
- If applicable: Will the person who referred me get any form of compensation from our working together?
If you have been upfront with your overall financial picture to them, give them an opportunity to be transparent with you.
Ask: “Am I a good fit for your practice?”
Their answer will confirm whether they are comfortable serving small accounts and are the right person for you.
U.S. News makes no representations or warranties in connection with the information provided herein, nor to the accuracy or applicability thereof. U.S. News does not give, offer, or render tax, credit, or legal advice. Before making financial or investment decisions, U.S. News recommends that you contact an investment advisor, or tax or legal professional.