Working Together and Compensation - How Investment Advisory Accounts Work
How to Work with a Financial Advisor: A Guide to Managing Your Financial Future
Working with a financial advisor can be a critical step in securing your financial future. Whether you're planning for retirement, managing investments, or aiming to improve your overall financial health, a financial advisor can offer expert guidance tailored to your specific needs. But how do you work effectively with a financial advisor, and how are they compensated? This blog will guide you through the process and help you understand the costs involved.
Choosing the Right Financial Advisor
Before you begin working with a financial advisor, it’s important to find one who aligns with your goals and values. Here’s how to start:
- Identify Your Financial Goals: Determine what you want to achieve—whether it's retirement planning, investment management, estate planning, or debt reduction. Understanding your goals will help you find an advisor with the right expertise.
- Research and Vet Potential Advisors: Look for advisors with related credentials, such as Certified Financial Planner (CFP) or Chartered Financial Analyst (CFA). Check their background, experience, and client reviews. Resources like the Financial Industry Regulatory Authority (FINRA) or the Certified Financial Planner Board of Standards can help you verify their qualifications.
- Interview Multiple Advisors: Meet with several advisors before making your decision. Ask about their experience, approach to financial planning, and how they tailor their advice to individual clients. Ensure you feel comfortable with their communication style and that they understand your financial goals.
How Investment Advisory Accounts Work
An investment advisory account is a financial arrangement where a professional advisor manages your investments on your behalf. When you open an advisory account, your financial advisor takes on the responsibility of making investment decisions based on your financial goals, risk tolerance, and time horizon. These accounts are ideal for those who prefer professional guidance, especially during the uncertain transition into retirement.
Investment advisory accounts are governed by the fiduciary standard, a legal requirement established by the Investment Advisers Act of 1940. This standard obligates financial advisors to act in their clients’ best interests, putting your needs above their own. Advisors must provide unbiased advice, disclose any conflicts of interest, and ensure that all investment decisions are suitable for your financial situation. The CFP Board also requires adherence to the fiduciary standard, offering an added layer of protection and assurance, particularly for retirees who may need to safeguard their savings.
How Financial Advisors Are Paid Through Advisory Fees
Financial advisors who manage investment advisory accounts are typically compensated through advisory fees, usually charged as a percentage of the assets under management (AUM). For example, if an advisor charges a 1% annual fee and manages $500,000 for you, the fee would be $5,000 per year. This fee structure aligns the advisor’s interests with yours—both benefit from the growth and success of your investments.
Advisory fees cover the costs of portfolio management, ongoing financial advice, and adjustments to your investment strategy as your needs evolve.
Case Study: A Retiree’s Journey to Financial Security
Meet Barbara, a 65-year-old retiree who had diligently saved for retirement but was now fearful of losing money in the stock market. She knew she needed a professional to help manage her savings and ensure her money lasted throughout retirement. Barbara decided to hire a Certified Financial Planner (CFP) to build a comprehensive financial plan and manage her investments.
Barbara’s CFP, Sarah, assessed her financial situation, including goals, risk tolerance, and income needs. Understanding Barbara’s fear of losing money, Sarah created a diversified investment strategy designed to minimize risk while still providing growth potential. This plan included a mix of safer, income-generating investments and some exposure to growth assets to combat inflation.
Sarah managed Barbara’s investments through an advisory account, charging a 1% annual fee based on the assets under management. Operating under the fiduciary standard, Sarah ensured that all investment decisions were made in Barbara’s best interest. She regularly reviewed and adjusted the plan to stay aligned with Barbara’s goals, providing ongoing support and guidance.
Over time, Barbara’s anxiety about her financial future decreased as she saw her investments being managed prudently, focusing on protecting her savings while generating the income she needed. The personalized financial plan and professional management gave Barbara the confidence to enjoy her retirement without constantly worrying about her finances.
Conclusion
Investment advisory accounts offer retirees like Barbara a way to manage their investments with the help of a professional advisor who is legally obligated to act in their best interests. By working with a Financial Professional under the fiduciary standard, you can appreciate that your retirement savings are managed prudently, focusing on achieving your financial goals and securing your future. Advisory fees align your advisor’s interests with your own, making this relationship a key component of a successful retirement strategy.
Opinions expressed in the attached article are those of the author speaker and are not necessarily those of Raymond James. All opinions are as of this date and are subject to change without notice. Prior to making an investment decision, please consult with your financial advisor about your individual situation. Every investor’s situation is unique and you should consider your investment goals, risk tolerance and time horizon before making any investment. The foregoing is not a recommendation. The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material.
