Should You Use a Financial Advisor?

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, you have probably felt anxiety when making choices with your money. Perhaps you sensed that you might make better investing decisions if you knew just a little more and could invest without emotion. If this is the case, consulting a financial advisor makes perfect sense.

Key Takeaways:

  • The desire for a financial advisor usually stems from an investment loss, the need to save for retirement, or the receipt of a windfall of capital.
  • Expect to pay between 0.5 to 2% each year of your principal to your advisor.
  • Many people switch from managing their own investments to using an advisor when they need to start making retirement distributions.
  • Financial advisors are everywhere, so it is a good idea to ask friends and family for a referral before you make a selection.

Understanding the Need for a Financial Advisor

To help determine whether you should hire a financial advisor, ask yourself the following questions:

  • 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 your investments, 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 of making emotion or fear-based mistakes when it comes to your finances.

Critical Life Events Such as Retirement

Professional advisors say there is no magic asset threshold that pushes an investor to seek advice. Rather, it is more likely that an event spooks a person and sends them scurrying to an advisor's door. Those who have succeeded on their own over a long period typically will not seek help unless they want to retire from investing themselves but remain 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 on the verge of retirement, the decisions that need to be made are more critical because there is a need for the money to last. Take the 401(k) plan, for example.

Retirement Distributions

When the time for retirement distributions comes, an individual either receives or has access to a large sum of money that they did not have access to before. The individual might have to manage assets themselves, for example, taking required minimum distributions from a tax-advantaged account like an IRA or 401(k) plan.

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 arrives, and you can access the funds, you may wonder what you are going to do with them. For many, this can feel overwhelming and lead to the realization that they need some portfolio management from an expert. A good rule-of-thumb is to seek advice if you are afraid that you're going to make a mistake with your investments.

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 (CPA) 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, on the other hand, receive their income from the company behind the products they sell, which can influence their recommendations. Commission-based advisors 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 per hour or more.

The Bottom Line

The decision as to 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.