Many investors wonder: do I need a financial advisor, or should I do it myself? Figuring out if you should hire a financial advisor or manage your own investments is a big decision. And make no mistake: not everyone needs an ongoing relationship with a financial planner. Here are a few signs that you may need a financial advisor and how to find the right one.
You May Need A Financial Advisor If You Don’t Have Time To Do It Yourself
Even if you have the skills to manage your own investments and financial matters, do you have the time? Executives, business owners, and working parents have a lot on their plate. Staying on top of constant tax law changes, researching financial questions, evaluating your options, and then moving forward to implement your own ideas is very time-consuming.
And if you can make the time, what’s the trade-off? Time is the only thing we can’t get more of. So if managing your own investments means less time with family, golf, etc., it may be worth it to work with a financial advisor.
After all, time is money, so there’s a cost to delaying good financial decisions or prolonging bad ones, like keeping too much cash or putting off doing an estate plan. So if you’re wondering if you should get a financial advisor or do it yourself, be realistic about your bandwidth. If your to-do list is endless and you never quite have time to review your investments or personal finances, you might need a financial advisor.
Siri And Reddit Aren’t Substitutes For Personalized Financial Advice
The Internet is a great resource. But it’s not a good substitute for personalized advice on matters like what index funds should be in your investment portfolio, what to do with your inheritance, or if you can afford to retire at 55.
In personal finance, the answer to most questions starts with ‘it depends’ because even the most basic financial decisions require knowledge and consideration of your financial situation. For example, it often makes sense to max out a 401(k) retirement account – but it’s not always the best investing or tax move.
Most clients believe their financial situation is simple. And yes, considering your financial goals and options in a vacuum simplifies things, but it doesn’t always lead to better decision making.
For example, imagine you’re considering putting a lump sum towards your mortgage. This decision isn’t just about the interest rate on your loan and your desire to be free of mortgage payments. In reality, you’d also want to consider whether those funds would be better invested in a brokerage account for retirement or needed to pay for college or another expense. It’s also helpful to quantify the value of the mortgage interest tax deduction (if there is one) and understand the impact on your monthly cash flows (unless the lender agrees to recast the mortgage, it won’t change your payment).
We don’t know what we don’t know. Our financial lives are complex and intertwined. Pulling one lever can have unintended consequences in another aspect of your life.
Aside from their financial knowledge, what often makes a financial advisor worth it is their ability to proactively identify financial risks and opportunities and help you pull all the pieces together before making a major financial decision.
If You Don’t Have A Strategy or Know Where Do You Stand Financially, It’s Worth It To Get A Financial Advisor
If you answer ‘no’ to any of the following questions, you may need to hire a financial advisor:
- Do you know how much money you’ll need in retirement? And if you’re on track?
- Do you know how much you spend and save every year?
- Do you know how your investments are allocated across your accounts and when combined into one portfolio?
- Do you know if you are already optimizing for tax efficiency?
If your accounts are scattered across multiple institutions, it’s hard to know where you stand financially, particularly if you don’t have a saving or investment strategy. This is another situation where it’s probably worth it to get a financial advisor instead of doing it yourself.
Managing investments is just one piece of what a financial advisor does. Helping clients get a clear financial picture by getting organized is a critical step towards being intentional about your money moves. A financial planner can also consider your entire financial situation to assess how you’re tracking towards your goals and revise plans when things change.
Do I Need A Financial Advisor Before A Major Life Event?
Some financial decisions don’t have takebacks. So it’s often worth it to work with a financial advisor before a major life change or windfall. Why? The consequences of getting it wrong, or how much you stand to benefit by getting it right, can be significant. Even life-changing for your financial future.
For example, we’ve helped clients diversify millions in employer equity and stock options – tax-free – by identifying their shares as qualifying for a little-known benefit in the tax code.
Our lives are filled with turning points. Some, like selling a business, may be expected. But others, like whether to take an early retirement buyout package, can be unforeseen.
Figuring out it’s time to get a financial advisor when facing an urgent decision or tight timeline isn’t ideal and can lead to more missed opportunities. After all, this may be the first time you’ve experienced the situation, but it’s probably not the advisor’s first rodeo.
There’s no good reason to shoot from the hip with so much at stake. A wealth manager (especially one who already knows you) can help quantify the options, understand the impact on other areas of your life, and assess alternatives.
What Does A Financial Advisor Do?
At many comprehensive wealth management firms, the answer depends on what the investor needs. Individuals may struggle with the question should I use a financial advisor or do it myself because they don’t know what a financial planner does. A wealth advisor or CERTIFIED FINANCIAL PLANNER™ professional can advise on a range of topics.
Though by no means an exhaustive list, here are several common ways financial professionals advise clients:
- Retirement planning and projections to stress-test a retirement plan
- Situational investment advice to navigate changing life events and goals so you continue to feel confident in your strategy
- Financial planning to meet short and long-term financial goals
- Ongoing investment management
- Tax-efficient investing and planning opportunities
- How to reach pre-retirement goals like a second home, financial flexibility, or college
Finding The Right Financial Advisor
Unfortunately, sometimes figuring out you need a financial planner is the easy part. Navigating the sea of advisory firms, services, and fee models can feel overwhelming. Here are the top questions investors typically have when looking to hire a financial advisor.
Is My Advisor Acting In My Best Interest As A Fiduciary?
Not all money managers are held to the same standards. A fiduciary duty is the highest standard of care under the law. Only registered investment advisors always have a fiduciary duty to act in your best interest. Other types of advisors may not be held to a fiduciary standard at all or only at certain points in the relationship, but they’re not a full-time fiduciary.
How Are Financial Advisors Paid?
Compensation methods and annual fees vary between advisors. There are three main types of fee structures but ultimately, what financial advisors charge will depend on the firm.
- Fee-only: A fee-only advisor is only paid by their clients; they do not sell products. Advisor fees are often a percentage fee based on the portfolio. So as your accounts grow, the advisor does better too. The fee-only financial advisor model is typically considered the most transparent and least likely to create conflicts of interest as product and sales-based incentives are removed.
- Fee-based: Fee-based advisors are typically paid in two ways: a percentage of the investor’s assets under management and by commissions from selling products, such as life insurance, annuities, mutual funds, etc. In a fee-based relationship, the client isn’t the only one paying the advisor. They also receive commissions and referral fees by third parties.
- Commission only: Some insurance agents, banks, stockbrokers, or large wirehouses may not charge the end client at all and rely on commissions from selling products instead. The relationship here will be the most transactional in nature and heavily focused on advice with a product-based solution.
How Much Does It Cost For Expert Advice?
How much it costs to work with an advisor depends on the advisory firm, your situation and services. While cost is an important component, the cheapest option today might be the most expensive in the long run. Consider how advisory fees can be offset by the financial benefits an advisor can provide, and your alternatives.
The Vanguard Advisor’s Alpha study aims to quantify the benefits of working with an advisor. They found an advisor has the potential to add a net return of about 3% for clients, through different advisory services and an ongoing relationship.
Do I Need A Financial Advisor Or Should I Do It Myself?
There are many reasons individuals choose to seek professional money management and financial advice. In most cases, if you don’t have the time, desire, and/or expertise required to give your life savings the attention it deserves, a financial advisor is worth it.
But not everyone needs professional support and some may not benefit from it. Working with a financial advisor is an ongoing and collaborative process. For it to be worth it, investors should not only be looking for guidance, but they also need to make time to implement recommendations, especially when the advisor cannot do so on their behalf. Because unless changes are actually made, financial planning may be of limited value.