How to Choose a Financial Advisor for Retirement
A generation ago, you didn’t have to know how to choose a financial advisor for retirement.
Because most Americans had a company pension to provide sustainable income for life.
Today, that’s no longer the case except for a fortunate few. Everyone else has to self-fund retirement primarily with savings in employer-sponsored 401(k)s, IRAs, and brokerage accounts.
Relying on your own financial decisions is a huge responsibility, and unfortunately, a lot of Americans are unprepared.
A 2019 study showed that 56% of Americans have no idea how much money they’ll need to retire, and 1 in 5 seniors enters retirement with less than $5,000 in savings.
Even with a powerful retirement checklist to serve as a guide, people still struggle with retirement decisions.
Retirement planning isn’t really a luxury anymore; it’s an essential part of your financial blueprint—and even your health.
Dave Ramsey discovered that 74% of Americans who are worried about their retirement savings have high levels of anxiety and report frequently losing sleep compared to just 17% of those who feel confident about their savings.
When it comes to retirement, working with a Certified Financial Planner™ professional may deliver concrete results when it comes to getting the financial advice you need. The same Dave Ramsey research showed that 44% of people who partnered with a financial advisor had $100,000 or more in retirement savings; only 9% of those flying solo achieved that particular milestone.
Before you learn how to choose a financial advisor for retirement, there are a couple of questions you may want to answer first.
Do you need a financial advisor for retirement planning?
Everyone’s financial situation is different, and there are certain scenarios where a long-term relationship with a financial planner may not be necessary. If you’re a young adult, for example, and just starting your career, you may only need an initial plan to get you started in the right direction.
People in their 20s and early 30s are probably fine with an annual financial planning checkup unless they make a lot of money or have unusually complex finances. A yearly meeting with a fee-only financial planner is usually enough to establish short- and long-term goals and fine-tune your savings strategy.
However, by the time you hit your 50s, the DIY option exposes you to potential pitfalls. As your income increases and your career plateaus, you have less time and your finances become more complex. Increased complexity can provide financial opportunities, but it can also snowball minor problems into big ones.
From developing a sound investment plan, to reducing income taxes, to creating sustainable income in retirement, your 50s and 60s are a pivotal moment for retirement preparation.
Ultimately, hiring a financial advisor for retirement can help you retire on your own terms with the peace of mind you need.
What does a financial advisor for retirement do?
The short answer is that a financial advisor helps you clarify your goals for retirement, develops a plan to help you achieve them, and monitors your progress so you stay on track.
That might sound like something you should be able to do on your own, but the fact is, most people seriously underestimate their income needs in retirement. Others use outdated savings models that leave them underprepared. The 4% rule, for example, is still a fairly popular rule of thumb for estimating savings goals, but it may not work with today’s longer lifespans, higher health care costs, and low bond interest rates.
A Certified Financial Planner® helps you clarify and prioritize your goals expenses. Together, you’ll develop a spending plan for housing and home maintenance, health insurance and medical costs, charitable giving, new vehicles, travel, and gifts. You’ll also look at different scenarios for assisted living, private duty nursing, and long-term care so you’re prepared for those possibilities.
Once you have a realistic budget, your advisor analyzes your cash flow in retirement by looking at your income sources and evaluating them against your fixed and discretionary expenses and tax scenarios.
At this stage, you’ll begin to have a clearer view of your retirement savings goal.
The next step is to develop a retirement income plan. Your advisor will weigh strategies to maximize your Social Security benefits, analyze any pension and annuity payout options, and create an investment plan to generate income from your portfolio to fill the gaps.
These steps are the foundation of retirement planning, but the process doesn’t end there. A retirement advisor also manages your investments, ensuring your asset allocation - the right mix of stocks and bonds - strategy is sound. He’ll also discuss diversification strategies and periodically rebalance your portfolio. Be sure to ask your financial advisor the right questions about your portfolio for maximum benefit.
As your income and assets grow, the best financial advisors will review your tax return and recommend strategies to minimize your tax liability now and in retirement.
Although a financial advisor can’t draft your will, he or she is an essential part of your estate planning team. A financial planner helps you understand how life changes affect your estate plan and explains how any changes you make—or don’t make—could impact your finances.
Perhaps most importantly, your financial advisor regularly evaluates your retirement plan against economic conditions, market performance, and life events and tracks your progress. If you’re not on track to retire with the money you need, your advisor develops strategies to help you hit your target.
How to choose a financial advisor for retirement
The term “financial advisor” actually covers a lot of different services, so it’s important to understand the different types of financial professionals who offer these services and how each might suit your needs.
Professional designations are important. But when it comes to financial planning for retirement, one designation stands out among the rest - the Certified Financial Planner™ or CFP®.
A Certified Financial Planner™ has completed a rigorous four-part certification process that includes education, experience, examination, and ethics.
CFP®s are bound by strict standards set by the Certified Financial Planner Board of Standards. As the name suggests, a Certified Financial Planner™ helps you manage your money today and plan for your future needs. The CFP® designation is widely accepted as the premier credential for astute financial advisors.
Other designations which can be helpful as part of your team may include a Chartered Financial Analyst (CFA) or Certified Public Accountant (CPA) designation. For example, we have advisors who have the CFP and CPA designations here at Covenant Wealth Advisors.
Fiduciary financial advisors hold a fiduciary duty to their clients. This means they are ethically and legally required to put their clients’ best interests above their own. The fiduciary standard requires that your advisor acts in good faith, provides all relevant facts, and discloses potential conflicts of interest.
Working with a fiduciary financial advisor gives you peace of mind because you know the person managing your money is legally obligated to make decisions in your best interest, not his own. If your financial advisor is not a fiduciary, you have fewer legal protections if you feel that person isn’t putting your interests first. A lesser standard of care may put your financial future at risk.
How do you know if your financial advisor is a fiduciary?
Ask him to sign a fiduciary oath. If he doesn’t sign it, don’t hire him. Download a fiduciary oath here.
There are three ways a financial advisor is paid:
Fee-only: Fee-only advisors charge a flat fee for their services and they don’t represent a particular financial services company or sell financial products. Fee-only advisors typically charge a percentage of assets under management, an hourly fee, or a fixed fee for a particular service. Some fee-only advisors may ask you to sign a retainer agreement based on net-worth or the complexity of your situation.
Commission only: Old school stockbrokers and life insurance salesmen typically receive commissions only. This means they are paid directly from the mutual funds they sell or from third parties. Advisors who receive commissions may have elevated conflicts of interest since they have incentive to offer products with higher commissions rather than products with lower fees.
Fee-based: Not to be confused with fee-only, a fee-based advisor charges you a combination of fees and commissions. For example, you may be charged $1,000 for an investment plan and pay a 3% commission on any funds the advisor manages on your behalf.
Fee-only advisors may be more transparent and cost-effective. You know in advance exactly what your costs will be for advice and management services and there are no hidden charges.
Will your financial advisor still be guiding you when you need him most?
In an ideal situation, you’ll have a relationship that lasts 20 years or more—your advisor will be with you as you build your retirement nest egg, and when you’re ready to retire and reap the rewards of your plan.
For that reason, it’s a good idea to choose a financial advisor who is at least ten to fifteen years younger than you if you’re close to retirement.
Trust but verify
Ronald Reagan made this Russian proverb famous, and it’s applicable for choosing a financial advisor. Before you hire someone to manage your retirement funds, check credentials and make sure there are no complaints or disciplinary actions.
The Financial Industry Regulatory Authority (FINRA) regulates the securities industry and plays an important role in protecting investors. You can verify that an advisor is legally registered and licensed to sell investments and provide advice and view any complaints or disciplinary actions using FINRA’s BrokerCheck tool.
If your advisor is a Certified Financial Planner, you can verify his or her certification and background at the CFP Board.
Interview before you hire
Most financial advisors are happy to do a phone interview or a free in-person consultation before you sign on the dotted line. Take advantage of this opportunity to make sure the advisor is someone who shares your values and is committed to helping you achieve your goals.
Here are some questions to ask a financial advisor about retirement and his approach to retirement planning:
What are your qualifications? Are you a fiduciary?
How long have you been practicing and have you ever been disciplined?
How would you describe your ideal client? Do you have many clients like me?
What retirement planning services do you provide?
What is your retirement investment philosophy?
How do you develop your retirement cash-flow projections?
How often do you meet with your retirement planning clients?
What happens to my money if something happens to you?
How will you help me achieve my retirement goals?
How are you paid?
(Note: If you're like a lot of people nearing retirement, you may not know what questions to ask a financial advisor for retirement. Here's a comprehensive list of questions that we give prospective clients. It does a great job helping people find the right financial advisor)
Finally, it’s a good idea to ask the advisor to explain a concept to you, such as sequence of return risk or active versus passive investing.
You’ll get a feel for whether this is someone who will take the time to help you understand the reasons behind different recommendations, and why those reasons make sense for your situation. If the advisor talks over your head or shows impatience, move on.
You need to feel confident in—and comfortable with—your retirement plan.
Knowing how to choose a financial advisor for retirement is critical to getting the clarity and confidence you need to enjoy retirement without the stress of money.
Don't be afraid to ask tough questions. Every good advisor that I've ever met is comfortable answering questions around fees, fiduciary duty, their services, and how they can or can't help.
Just like hiring a good doctor, the advisor you choose should have the experience, credentials, and communications skills necessary to deliver great advice.
At Covenant Wealth Advisors, we specialize in helping individuals plan to and through retirement.
Our process is specifically focused on all aspects of retirement planning.
Before the first meeting, we’ll ask you to complete a brief pre-meeting questionnaire to help us understand your financial picture. Then, we hold a free, no-obligation introductory conversation to learn more about your financial needs, concerns, and your vision for retirement.
If you feel that we’re a good fit based on our conversation, we’ll develop a detailed financial plan that covers retirement income planning, tax planning, social security maximization strategies, investment advice, charitable giving, and any other elements you need to be addressed to get on track. We’ll work together to implement your plan, and schedule regular checkups to track your progress and make adjustments.
Covenant Wealth Advisors is one of only a handful of independent and fee-only retirement planning firms in the Richmond and Williamsburg areas.
As Certified Financial Planners, we have a fiduciary duty to look after your best interests now and in retirement. We believe retirement planning should be proactive and anticipate your changing needs and circumstances, not simply respond to them. We want you to be confident in your ability to meet retirement on your own terms.
If you’d like to see how we can help you achieve your retirement goals, get in touch today to start the conversation. We help clients all over the country.
Mark Fonville, CFP®
Mark has over 18 years of experience helping individuals and families invest and plan for retirement. He is a CERTIFIED FINANCIAL PLANNER™ and President of Covenant Wealth Advisors.
Disclosures: Covenant Wealth Advisors is a registered investment advisor. Past performance is no guarantee of future returns. Investing involves risk and possible loss of principal capital. The views and opinions expressed in this content are as of the date of the posting, are subject to change based on market and other conditions. This content contains certain statements that may be deemed forward-looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected. Please note that nothing in this content should be construed as an offer to sell or the solicitation of an offer to purchase an interest in any security or separate account. Nothing is intended to be, and you should not consider anything to be, investment, accounting, tax or legal advice. If you would like accounting, tax or legal advice, you should consult with your own accountants, or attorneys regarding your individual circumstances and needs. No advice may be rendered by Covenant Wealth Advisors unless a client service agreement is in place.