This episode is the third part in a series on managing your finances after divorce. Although it might feel far away, the day will soon come when you need to plan for the rest of your post-divorce life. This series will help you do that. In the first part, we discussed three key goals to keep in mind for your life after divorce. The second part covered different types of financial advisors, as well as the one question you need to ask to find out if a financial advisor will act in your best interest. If you have not listened to those two episodes yet, please do!
In this episode, we will discuss how to choose a financial advisor in more detail. Feel free to meet with several financial advisors throughout this process. They will not charge you for the initial meetings until you hire them. It is recommended that you interview at least 3-5 financial advisors to find one that is right for you. Then you can compare proposals and get the financial advisors to compete with each other. This episode will give you tips about what to ask during the interview process.
There are three main questions to cover when interviewing a financial advisor. They will not be quick answers. You will have to work together to get to a final answer. The three topics are:
1) Can they make a budget and financial plan for you?
Remember the three key goals from the first part of this series:
- Get out of debt.
- Save for retirement.
- Have an emergency fund.
A financial advisor can help you prepare a budget to meet these goals. You will need to share information about your income, assets, and debts to make a plan. Even if you are not in the place that you want to be (or you have made some financial mistakes in the past), a financial advisor can help you reach your goals. Ask them to prepare a budget and a financial plan. Make sure they explain it and that it makes sense to you. You can compare the different financial plans from the 3-5 advisors that you are interviewing, and see which one you prefer.
2) What kind of investment portfolio do they recommend?
They may recommend stocks, bonds, mutual funds, index funds, or a combination. A future episode in this series will talk about these different investments in-depth. Get a detailed proposal from each prospective advisor, compare them, and do your own research. You can even give each advisor the proposals from their competitors, and ask them to explain why their proposal is the best one.
3) What fees do they plan on charging you?
Broadly speaking, there are two levels of fees:
- Fees for the specific investments they recommend
- Fees that the investment advisor charges to manage your assets (typically a percentage of your assets)
There is an entire chapter in Managing Private Wealth: Principles that is devoted to fees. It is a complicated topic, so this episode will only cover the basics. To simplify, you can ask each financial advisor what the total annual fees will be for all of the investments they are recommending. Typically, they will quote it to you in terms of a percentage of your assets. Be sure to translate that percentage into a dollar amount, so you will know exactly what you will be paying.
You can often negotiate better fees by considering multiple advisors at the same time, because they will compete with each other. These fees will add up over the years. Depending on how much you are investing, you could save tens or hundreds of thousands of dollars by negotiating lower fees.
There is one red flag to keep in mind as you interview advisors: if they guarantee you a certain return, run away. Responsible financial advisors will not guarantee anything, but scammers will.
The next episode will cover some important financial terminology, so that you can be better prepared for conversations with financial advisors. Then you can plan for your post-divorce life.
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