Do I Need a Financial Advisor and How to Choose One?
Financial advisors are the wizards that can help you make the most out of your finances by advising you on the decisions you need to make.
Also known as financial planners, these advisors can help you with many aspects of your economic life. You can employ them for everything from planning for your retirement to helping you choose your mortgage or sorting out your investment portfolio.
Each advisor has an area of expertise, so it is difficult to come up with an accurate financial advisor definition. Instead, here are some examples of what they can do:
- Help you assess your current financial status.
- Help set financial goals based on your needs: a good advisor can help prepare you for retirement, sort out your insurance or assist in college planning.
- Develop a plan to reach that goal.
- Set up the needed accounts, provide advice on assets, and make the investments required.
- Provide advice on any financial issues that may occur.
There are different types of advisors, and this is something you should consider when looking to find the one that will help you reach your financial goals.
Types of Financial Advisors
There are five main financial advisor types:
- Investment advisors: The most common type of advisors. This professional or company focuses on advising you on your investments. Frequently, these investors can manage your assets for you.
- Broker-dealers and brokers: These individuals or companies can buy and sell securities on your behalf. Depending on their level of expertise and credentials, they can purchase and sell different types of securities.
- Financial planners: The definition of a financial planner is broad and involves many different advisors, but it mainly revolves around planning. You should consider hiring a financial planner when you need help creating any kind of budget, a plan for paying off debt, or planning for your retirement.
- Investment managers: These professionals typically manage clients’ investment portfolios.
- Robo advisors: These types of advisors are growing in popularity and may be just the ticket if you’d like to try something new and different. These AI-powered investment management services use algorithms to develop and manage your portfolio based on your goals for a small commission.
Now that we have covered the basics let’s check whether you need a personal financial advisor.
The DIY Approach
Many people are taking a DIY approach to handling their finances, especially now that technology makes everything more accessible. If you are interested in crunching numbers and willing to dedicate enough time, you will likely be able to develop an efficient plan for your financial future by yourself.
Some of the main financial challenges people usually face are setting themselves up for comfortable retirement, getting rid of debt (or at least managing it effectively before it becomes too much to handle), and investing smartly.
Set Yourself Up For A Comfortable Retirement
Probably the most common advice you’ll get when hiring any retirement-focused financial advisory service is this: if you want to relax in your golden days, you need to start saving up on time. However, you shouldn’t simply open just any savings account to accomplish this - you need to set up an IRA account.
IRA accounts are tax-advantaged accounts that you can open up with any bank, credit union, or brokerage company. Doing your research on the IRA accounts available to you and choosing the right one can help you save a lot of money, as the taxes don’t eat up a large chunk of your savings with this type of account.
Settle Your Debt on Time
Living a debt-free life is the dream, but it’s not easy to accomplish without help. It takes a lot of budgeting and planning, but mostly persistence. If you are struggling with paying back your debts, hiring a debt settlement company to help you with this goal might be a good idea, as it might be cheaper than hiring a financial advisor.
Invest Your Time Into Investing
People may tell you that investing is a gamble or that it’s not for everyone. But, with the evolution of robo advisors and beginner-friendly online investment platforms, the secret world of investing is not so secret anymore.
With the right robo advisor, you essentially get an online financial advisor, for a fraction of a price. Considering how effortless it is to set everything up and get advanced financial planning services, everyone should give it a go.
It has never been easier to have your money work for you while you sleep. You won’t become a millionaire overnight, but you will likely be able to make a profit with stocks in the long run, which will be beneficial for your financial future.
Now, with these three steps outlined, it wouldn’t be strange if your next question was:
Do You Need A Financial Advisor?
Many people believe they can figure out financial planning by themselves. In many cases, that’s absolutely true. However, just because you can learn to knit doesn’t mean you should dedicate time and effort to it when you can buy a pair of socks for cheap within just a few clicks.
Personal finance isn’t something everyone is interested in - even if you have time for it, maybe you could put it to better use. With an experienced person handling it for you, you can use the time to do whatever you actually enjoy doing.
People who realize that time is money understand the main advantage of working with a financial advisor. Learning how to manage your finances will take time, and asking Google for its help in figuring it out might not yield the desired results.
So, if you are wondering whether you should do it yourself, make sure you are realistic with your expectations of yourself. Check out your to-do list - if it is overly long and on stand-by for some time now, you might be better off hiring someone to do it for you.
It is also important to mention that managing your finances is not a one-time thing. You need to stay updated on changes in the investment market and on top of all the new and popular financial products at all times. It can be incredibly time-consuming.
You should also estimate your knowledge of finances correctly before you attempt to do everything by yourself. Do you know how to make profitable investments? Can you evaluate, monitor, and make appropriate changes to your portfolio to ensure you are earning the most on your investments? What about researching those assets in the first place - are you confident in your research skills?
When Hiring a Financial Advisor Is The Best Route To Take?
Seeking financial advice in times of change is always a good idea. Young couples that just got married might consider asking for advice on managing joint finances. Divorcees might need help moving forward as singles.
It is also excellent for people nearing retirement who are worried whether their lifelong savings will be enough and could use some professional reassurance or help.
Ultimately, it all boils down to whether you like handling your finances or not. Yes, it’s that simple: If you have no interest in it whatsoever, hiring a financial advisor to help ensure your financial future is almost mandatory.
Here’s the thing, though: even if you like handling your finances, getting a second opinion is not a bad idea, as there might be more that you could do to ensure a bright future for yourself, and an outside view could open up new avenues of looking at your finances.
Comparing Pros and Cons
If you need help with long-term planning, financial strategy making, or would like to outsource the research, shopping, or even the complete management of your portfolio - you should hire a financial advisor.
On the other hand, financial advisors don’t come cheap. This could also influence your decision on whether or not you need an advisor. Paying these professionals might be a significant expense you cannot wiggle into your budget that easily.
Additionally, the advisor might not have your best interests in mind - but rather theirs. This is not a norm, but it could happen, so finding the right financial advisor is crucial.
Choosing a Financial Advisor
With so many types of advisors out there, here are some things you should consider to help with your selection process.
Which Type of Advisor to Choose
The first step is streamlining your goals as much as possible so that you can find a specialist in the field you need.
You should ask your family members, friends, or even Google for recommendations. But, keep in mind that just because they come highly recommended by someone doesn’t mean that they will perfectly fit your needs.
The Fiduciary Standard is More Than Advisable
Finding an advisor with a fiduciary standard to have in your corner might also be a sensible move. The fiduciary standard can distinguish whether an advisor is working in your best interest or their own. Realistically, though, any good advisor will realize that in the long run, your best interests will work out for them too, and bring more work (and money) to them as you recommend them to others.
Still, finding a financial advisor with a fiduciary standard is always recommended, as these advisors are legally bound to make decisions with your best interest in mind.
Do a Background Check
Additionally, make sure the advisor you decide to go with is licensed and certified, and don’t take just what they say on the topic for granted. Vet the advisors carefully, and do your research on them before putting your finances in their hands.
You can check whether your advisors have earned their credentials by using the Investment Adviser Public Disclosure. Don’t hesitate to do an in-depth Google search as well.
Shop Around Through Interviews
It’s good practice to shop around to find the right fit when it comes to this type of service, too. Once you have your list narrowed to a couple of advisors based on their type, fiduciary standard, and credentials, you should set up interviews with the shortlisted candidates to help you decide which one to choose.
Have a list of questions to ask them, and their answers might prove invaluable when making your decision.
What Are Some Good Questions To Ask a Financial Advisor?
These interviews are very individual, and they depend on your current financial situation, so there is no one-size-fits-all list of questions you might ask your new advisor.
However, here are several questions that can help you estimate the kind of relationship you could have with a particular advisor to find out whether they are the right choice for you.
- What services do you offer?
- Do you have experience working with clients such as me?
- How often should we meet or keep in touch?
- How much do you charge?
If the advisor has experience working with retirees and IRAs, but you are looking for one because you want a roadmap to pay off your student debts fresh out of college, they may not be a good fit.
Additionally, you want to make sure your advisor has their clients’ best interests at heart and isn’t trying to earn a higher commission by encouraging you to make riskier investments than you are comfortable with.
Furthermore, with the rapid expansion of technology, the advisory field has changed as well. If meeting in person with your advisor is not your cup of tea, then looking for an advisor willing to have virtual meetings with you to discuss your portfolio is a good idea.
Ultimately, you can always try a robo advisor and avoid the human touch altogether. Still, you will be missing out on customized advice, hand-holding, or any unique strategies that experienced human financial advisors bring to the table.
How Financial Advisors Get Paid
Financial advisors obviously need to get paid for their services, but how an advisor charges you for their services might play a key role in your decision to pick one over another.
Some planners will charge you by the hour or have a set rate for a specific set of services. Others charge a commission for every transaction they make. Some have a hybrid pricing system that includes both options.
Both pricing options have their pros and cons, so it is up to you to decide which you are more comfortable with. Those that charge a commission for transactions might have some serious conflict of interest - the higher the transaction, the higher the commission. This may cause them to advise riskier investments than you may be comfortable making.
On the other hand, advisors that take hourly fees can charge you an hour or two for anything and might not have any tangible results to show in return. Considering that these fees can be as high as $100 per hour, it might seem a lot to pay, and you could have put those finances into your IRA instead.
I have always thought of myself as a writer, but I began my career as a data operator with a large fintech firm. This position proved invaluable for learning how banks and other financial institutions operate. Daily correspondence with banking experts gave me insight into the systems and policies that power the economy. When I got the chance to translate my experience into words, I gladly joined the smart, enthusiastic Fortunly team.
