September 8, 2020

When to Get a Financial Advisor

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Financial advisors provide guidance on all money matters. But they can be expensive. Do you really need one? Learn when it's time to get a financial planner.

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Not sure how to plan your financial future? Have trouble prioritizing? Or maybe you just don't have time to manage your own money.

If you're not sure how to make a financial plan or how to invest, you could benefit from working with a financial advisor. An advisor helps you make the best money decisions, whether you want to get out of debt, grow wealth, plan for retirement, and everything in between.

However, financial advisors also come with high fees, which will eat into your returns. Are they worth it? In what situations should you hire one?

What Do Financial Advisors Do?

Financial advisors do more than simply execute trades. They look at the big picture to help you plan your entire financial life. Their main objective is to help you build wealth and achieve your financial goals, while minimizing risk.

They guide you to make the best money choices based on your current financial situation and goals. As your life changes, they can help to adjust the plan based on new goals and life events.

Some things financial advisors help with include:

  • Assess your current situation and create a personalized financial plan
  • Create a budget and debt payoff plan
  • Create a custom investment portfolio
  • Invest and execute trades on your behalf
  • Retirement planning
  • Estate planning
  • Tax planning and insurance assistance
  • Recommend different financial products

You can choose the level of service for your needs—whether you want a full-time financial planner/wealth manager, or just a one-time session to review your investment strategy or insurance products.

Financial Advisor vs Financial Planner

A financial advisor is general term for a professional who helps you plan and manage your finances. This could include stockbrokers, estate planners, investment advisors, wealth managers, and more. Financial advisors need to hold a FINRA license in order to sell investment products for clients.

A financial planner is a specific type of financial advisor. Typically, this refers to Certified Financial Planner, which is a prestigious designation by the CFP Board. After passing the exam, financial planners are certified to advise on investment, retirement, estate planning, tax, and insurance.

Make sure to choose a financial advisor who is a fiduciary. This means that they are legally bound to act in your best interests. They must seek the best prices and terms and avoid conflicts of interest. Advisory firms registered with the Securities and Exchange Committee (SEC) are fiduciaries.

6 Reasons to Hire a Financial Advisor

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Here are six good situations when it may be worth it to get a financial advisor.

1. You're Ready to Take Control of Your Finances

As a young professional out on your own, you may not know how to best plan for your financial future. Maybe you're having trouble prioritizing goals, budgeting, and saving. Maybe you have student loan debt to pay off and also want to buy a house in the next 10 years. How do you juggle everything with your limited income?

A financial advisor can help with putting together a plan. This can include making a custom budget, tackling your debt, and saving for emergencies, short-term goals, and retirement.

Keep in mind that hiring an advisor will cost some money, which may be tough if you don't have a lot. But if you really need help putting together a financial plan, it could be worth it to sit down with a coach for a one-time planning session.

A financial planning session is a great gift from parents to a new graduate.

If you don't have the budget for a financial advisor, check out one of these money management apps instead.

2. You Don't Want to Manage Your Own Money

Managing your own money takes a lot of time and willingness to learn. You'll need to learn about different investment products and do a lot of research on stocks. You also need to regularly monitor your portfolio and make changes as needed. Some people have no time or no interest in doing all this.

If you'd rather be hands-off and have others manage your money, you can hire a financial planner full time to look after your portfolio and make trades for you.

The advisor will create a custom investment portfolio for you with the ideal asset allocation, based on your goals and risk tolerance. They will also take care of more complicated tasks like rebalancing and tax strategies.

This is usually for individuals with more capital, as a lot of financial planners require a minimum to take you on as a client. Usually the minimum is at least $100,000, and a lot may have an even higher account balance requirement.

If you're a new investor without a lot of money to start, a robo-advisor is a good choice. Robo-advisors will automatically make investments and manage your portfolio for you, in exchange for a very small fee. Many have no account minimums.

3. You're Going Through a Major Life Event

A major life event can shake up your finances. If you suddenly have less income or extra money coming in, you may have to adjust your plans and goals. A financial professional will be able to offer advice, lay out different options, and answer any questions.

Some notable life events that impact finances include:

  • Getting a divorce or becoming widowed
  • Receiving an inheritance
  • Getting married and merging finances
  • Having a baby
  • Getting a new job or raise at work

For example, if you receive an inheritance, a financial advisor will be able to advise on how to invest that money and on your tax consequences. If you had a baby, you may need help planning for the child's future college education costs.

4. You're Nearing Retirement

Retirement planning is super important. After all, you'll most probably live for another 20 or 30 years after you stop working. A financial advisor will be able to help manage your retirement savings in the most effective way.

As you get nearer to retirement age, many people will have different concerns, like:

  • Asset preservation
  • Retirement income planning
  • Withdrawal strategy
  • Tax considerations
  • Insurance planning
  • When to collect Social Security

Financial planners can come up with methods to protect your assets, especially when you're at an older age and can't afford to take much risk. When it's time for you to start withdrawing from your retirement accounts, they can give recommendations on how to manage your withdrawals to stretch your savings and incur the least penalties.

Even if you're behind in your retirement savings plan, a financial advisor can help you figure out how you can catch up.

5. You Have a Complicated Financial Situation

If you have complicated finances, then it's definitely in your best interest to get a financial advisor.

For example, if you have an estate that includes investment accounts, life insurance policies, properties, a business, and other physical possessions, then working with a financial estate advisor is a must to create a plan. Get someone who you trust will have your loved ones' best interests in mind.

If you're planning for long-term care for yourself or a family member, the costs of custodial care can be insanely high. A financial advisor will be able to go over insurance options with you and help you plan for something you can afford.

6. You Want a Second Opinion

Maybe you're the type of person who loves managing your own money, doing investment research, and staying on top of financial news. That's great!

But getting a second opinion can be invaluable. No matter how much you know about investing, you will not have all the insights and knowledge of professionals. You may also be more prone to making rash decisions based on emotions, especially during times of market volatility.

An investment advisor can do an analysis on your current strategies to see if they're the best fit for your goals. In addition, they can spot opportunities you may have missed that may increase your investment returns.

When You Don't Need a Financial Advisor

You probably don't need a financial advisor if:

You don't have a lot extra
If you only have a couple thousand dollars, put it toward savings instead. You don't need to spend the money on a financial planner. At this stage, focus on saving and budgeting to grow your money. There are a lot of budgeting apps you can use to get your finances in order.

After you have an emergency fund, you can start to invest. For new investors without a lot of funds or experience, a robo-advisor is the easiest way to get into investing.

You still have debt
If you have a lot of debt, it probably doesn't make sense to pay more money for a financial advisor. Make getting out of debt your top priority. However, if you really have no clue how to make a debt payoff plan, a one-time financial planning session could help.

You only need tax advice
If you only need someone to handle your tax return or have a question about taxes, you can just hire a tax professional or CPA instead.

How Much Does a Financial Advisor Cost?

There are a few ways that financial advisors charge for their service.

Percentage
In this model, the financial planner will charge a percentage of your assets under management (AUM). For a traditional human investment manager, the average fee is 1% of your portfolio balance. For a robo-advisor, the fee will be lower, typically 0.25% - 0.9% of AUM.

For example, if you have $250,000 invested, you might pay $2,500 per year for a human advisor. With a robo-advisor, the fee may be $625 a year.

This model is usually used if you hire an advisor to oversee your portfolio. Investment management will be the main service, but the advisor may also provide guidance on other personal finance concerns.

Personal Capital offers wealth management services with human financial planners combined with robo-investing, starting at a 0.89% annual fee. In comparison, Betterment uses pure computer algorithms and costs 0.25% of AUM.

Hourly/Per Session
If you just need one-time (or occasional) advice, you can just pay for one session to sit down with a financial expert. Financial advisors usually charge between $200 and $400 per hour.

Retainer
If you're looking for financial advice on an ongoing basis, you can pay a fixed retainer fee. Then anytime you need help, the cost will come out from the retainer. Usually, financial planners require retainers between $1,000 and $3,000. It could be a monthly or annual retainer.

You may prefer this if you don't like the AUM model. The problem with the AUM model is that the cost may not align with the actual amount of work (as a $250,000 portfolio isn't much harder to maintain than a $100,000 portfolio). The retainer model more aligns the cost with the services you actually get.

Look for a fee-only financial advisor. This means that you are only charged for the services the advisor performs. The advisor makes no commissions from investment transactions or recommending financial products. This helps to make sure there's no conflict of interest.

Types of Financial Advisors

There are three main types of financial advisors:

Traditional
You can find a traditional advisor at a local financial advisory firm. The benefit is being able to meet in person and develop a more personal relationship. But, of course, they are the most expensive, so they're more ideal for higher net worth individuals.

You can also book just a one-time session to address a specific area of concern.

Robo-advisor
Robo-advisors mainly use computer algorithms to create and manage your portfolios. The cost is lower since there's no human oversight. Anyone can sign up for an account, so this is more ideal for those with less to invest.

Online planning services
This option is kind of a hybrid between the two. You can meet with a planner virtually, so it's not as expensive as an in-person advisor.

Some brokerages offer access to financial planners for an extra fee. Betterment and Ellevest both offer financial planning sessions for topics ranging from general financial advice to marriage planning to retirement planning.

Bottom Line: Is a Financial Advisor Worth It?

Financial planners help you make smart financial decisions. Whether you're looking to plan your future, want investment advice, going through a life change, or simply don't want to manage your money yourself, an advisor can help you find the best solutions to reach your financial goals.

Not everyone will have the ability to hire a financial advisor. And it will cost you some money. But in many cases, the benefits add value. If the advisor can use their expertise to help you create a better plan or increase your portfolio performance, then it's worth it.

Note: This website is made possible through financial relationships with some of the products and services mentioned on this site. We may receive compensation if you shop through links in our content. You do not have to use our links, but you help support CreditDonkey if you do.

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