How Much Money Do You Need to Hire a Financial Advisor?
There is a common misconception that you need to be wealthy to hire a financial advisor. While there are advisors who only work with high-net-worth clients, there are also advisors, such as Park 64 Capital, that open their doors to less wealthy clients. But what if you have minimal savings? This is common for young graduates as well as adults that haven’t put the pedal to the metal yet. These prospective clients find themselves in a tricky situation: they need professional advice to save that first $100,000 as quickly (and correctly!) as possible, but they need $100,000 to get advice in the first place. In these cases, the solution is to find a financial advisory firm that offers their services for a fixed monthly fee, meaning that you don’t need anything saved to get started.
Not all firms accommodate monthly billing for lower asset clients and every firm is going to have a preference depending on its ethos. Park 64 Capital, for example, has a good mix of wealthy and not-yet-wealthy clients. This goes hand-in-hand with our goal of making financial education and prosperity more broadly accessible.
Another worthwhile point to mention is that the minimum asset requirements financial advisors set falsely gives the impression to clients that value is only created when there are assets to invest. In reality, a good financial advisor helps clients with minimal assets by developing strategies to maximize their savings, minimize taxes, manage debts, and optimize insurance coverages. Financial advisors also serve as fantastic teachers and coaches for clients; it’s a huge advantage to have a knowledgeable touchpoint in your back pocket who knows the particulars of your situation and holds you accountable to the financial plan objectives.
Note: For the rest of the post, I’m going to focus on fee-only financial advisors, like Park 64 Capital, because these firms are held to a fiduciary standard, which means they put their clients’ needs before their own.
Asset Minimums and Monthly Billing
Financial advisory firms have minimum asset requirements to attract their desired clientele and ensure adequate payment for their services. Let’s look at some typical billing structures and how lower asset clients can easily be accommodated.
Most financial advisors charge a percentage of assets fee. For example, if a firm has a minimum $120,000 asset requirement and charges 1% per year, that equates to a $1,200 minimum annual fee. As your assets grow, so does the fee, which compensates the advisor for the complexity of growing and protecting bigger pools of your money.
If you’re just starting out, some advisory firms offer their services for a fixed annual fee, usually paid monthly, in lieu of having an asset requirement; this provides greater accessibility to financial advice. The monthly rate is usually equivalent to the minimum asset charge, but it can also be increased to account for complex client situations that require a larger time commitment from the advisor, such as for married couples or self-employed individuals.
Continuing our previous example, a financial advisor charging $100/month is equivalent to charging 1% of $120,000:
$100 per month = $1,200 per year
1% of $120,000 = $1,200 per year
When you’ve reached the minimum asset requirement, you’re moved over to the percentage of assets fee structure. In the example above, a $100 per month client would be moved to a 1% fee structure once their assets totaled $120,000.
How Lower Asset Clients Benefit From a Financial Advisor
When you fall into the lower asset category, you may be wondering what your monthly fee gets you. This is a common question, mostly because financial advising is commonly thought of as purely investment advice. While investments are definitely a big part of the overall service offering, the development of the comprehensive financial plan is the underpinning that keeps everything moving without interruptions.
For example, imagine you’re doing great in your career with a growing bucket of $50,000 saved. Then you get hit by an uninsured driver, indefinitely disabling you from your career. Your collision and uninsured motorist coverage wasn’t set up correctly, so you have to pay the enormous deductible for your hospital bill as well as the property damage to your car. Two years later, your employer’s disability insurance policy cuts you off based on a buried provision in the contract language. Now you’re hemorrhaging money to stay off the streets, and your loved ones are getting really tired of spotting you money.
The above example isn’t nearly as outlandish as you might initially think. Younger clients are generally at greater risk of financial ruin than older clients because they haven’t had time to save money yet. Thus, while the young may be in better health and are at a lower probability of having a risk-event, the devastation of that risk-event will be much worse. Not surprisingly, younger clients have a hard time imagining a worst-case scenario for themselves and often have little to no risk management measures in place as a result.
But it’s not all about reducing risks by making sure your insurances are set up correctly. Some of the other immediate advantages of working with a financial advisor, even if you don’t have a lot saved, include:
Building a complete strategy for financial success that considers all material details.
Creating mindfulness about your decisions and how they impact your financial goals.
Avoiding early mistakes that have lasting consequences (e.g. poor 401(k) allocations or suboptimal tax decisions).
Planning how much you need to save for emergencies, a first home, retirement, dependent education, etc.
Managing debt in the most efficient way possible.
Strategizing your investments. A good planner will help your portfolio blossom into a much larger one over time.
Teaching. An advisor is a fantastic resource for all financial questions, from beginner to advanced.
Coaching. You will be held accountable to your financial plan by a professional that cares about your success.
One of my favorite things about being a financial advisor is helping my clients discover just how much money (and risk!) they have been leaving on the table. It’s amazing to watch people’s eyes light up with motivation as they realize that becoming financially unassailable isn’t nearly as impossible as they once thought. If you’re reading the above eight item list and still feel like hiring a financial advisor isn’t worth it without having a large sum of money, I’d love the chance to blow away your expectations.
