If you do your own investing, have you ever wondered whether you should turn things over to a professional financial advisor? If you have significant assets pertaining to your situation, you will have probably felt the anxiety regarding making choices with your money. You have probably thought that you would make better investing decisions if you knew just a little more, and could invest without emotion. This is when a financial advisor makes perfect sense.
- Needing a financial advisor usually stems from scenarios such as a loss of investment, the need to save for retirement, or a windfall of capital.
- Expect to pay between 0.5-2% each year of your principal to your advisor.
- A lot of people switch from managing their own investments to using an advisor when they need to start making retirement distributions.
- It is easy to find advisors almost anywhere, although it is generally considered good practice to ask friends and family first. You might even get a lower rate, and you can trust their opinion and have a real-world testimonial.
The need for critical self-evaluation is vital when determining whether to hire a financial advisor. Usually, the person who is least likely to know oneself is, of course, themselves. The following questions should help you sort it out:
- Do you have a fair knowledge of investments?
- Do you enjoy reading about wealth management and financial topics and researching specific assets?
- Do you have expertise in financial instruments? Do you have the time to monitor, evaluate them and make periodic changes to your portfolio?
If you answered "yes" to the above questions, you may not need an advisor or financial planner. However, even if you answered yes to the above questions, you could still be at risk for making emotional mistakes with your investments.
When the Time Comes
Professional advisors say there is no magic asset number that pushes an investor to seek advice. Rather, it is more likely an event that spooks a person and sends them scurrying through an advisor's door. Those who have succeeded on their own over a long period of time typically will not seek help unless they want to retire from investing themselves, but still be active.
Often, someone who has never spent or managed more than a few thousand dollars is looking at managing six figures or a group of accounts. If this happens to someone just about to retire, the decisions that need to made are more critical, as there's a need to make this money last. Take the 401(k) plan, for example.
Needing an Advisor for Retirement Distributions
According to Charles Hughes, a certified financial planner in Bayshore, N.Y., the event typically involves either the receipt of or access to a large sum of money that the individual didn't have before. Or it could be something that requires the individual to manage assets themselves—like beginning to take required minimum distributions from a tax-advantaged account, like an IRA or 401(k) plan.
"When you reach a point in which you're constantly afraid that you're going to make a mistake with your investments, then you need professional advice," says Raymond Mignone, a certified financial planner in Little Neck, N.Y.
When you're contributing to the plan, you may feel like it's not your money: you can't withdraw and spend the funds, because you'll be penalized. But when retirement is coming and you can access that money, the question often arises about what you are going to do with it. For many, this can spark the realization that they need some portfolio management from an outside authority.
Finding the Right Financial Professional
When you are ready to start looking for the right financial advisor, begin by asking for referrals from colleagues, friends or family members who seem to be managing their finances successfully.
Another avenue is professional recommendations. A Certified Public Accountant or a lawyer might make a referral. Professional associations can sometimes provide help. These include the Financial Planning Association (FPA) and the National Association of Personal Financial Advisors (NAPFA).
Paying your Advisor
The client must also consider how the advisor gets paid. Some advisors charge a straight commission every time they make a transaction or sell you a product. Others charge a fee based on the amount of money they have been given to manage. Some fee advisors assess an hourly fee.
Fee advisors claim that their advice is superior because it carries no conflict of interest: Commission-based advisors receive their income from the company behind the products they sell, which can influence their recommendations; they might also have an incentive to "churn" your account – that is, rack up transactions to generate more commissions. In response, commission advisors argue that their services are certainly less expensive than paying fees that can run as high as $100/hour or more.
The Bottom Line
The decision about whether to seek advice can be critical. If you do choose to seek advice, carefully choose the right professional for the job, and you should be on your way to a better financial plan. If you decide to go it alone, remember if at first you don't succeed, you can try again—or call an advisor.