Do I Need a Financial Advisor?
As you’re sorting through your finances, you might be asking yourself this question: Do I need a financial advisor? The answer depends on your financial situation. But in most cases, you can benefit from a financial advisor’s knowledge.
Before hiring a financial advisor:
- Evaluate your financial situation
- Consider which type of financial advisor you need
- Ask about their fees
- Investigate their qualifications
- A financial advisor helps people manage their money and map out a plan for the future, including retirement.
- Whether they focus on financial planning in a broader form or focus on niche topics, financial advisors draw up plans or recommend specific investment products and vehicles to meet the needs of their clients.
- Before deciding whether you need a financial advisor, you’ll want to take an extensive look at your financial situation, including your net worth, expenses, and financial goals.
- If you choose a financial adviser, always make sure that they abide by fiduciary standards and legal obligations to act in your best interests and disclose any conflicts of interest.
What Does a Financial Advisor Do?
Broadly speaking, a financial advisor helps people manage their money and map out a plan for the future, including retirement. Some financial advisors might offer a wide range of services, while others may narrow their focus to a niche topic.
Among the tasks that financial advisors might undertake on behalf of clients are:
- Plotting a long-term financial strategy, including a retirement plan
- Helping handle financial matters such as buying a house, saving money for a child’s college education, devising a tax plan, purchasing insurance and coming up with an estate plan
- Researching and recommending investment opportunities
- Managing investment portfolios
For more guidance on building your financial goals, order a copy of Investopedia's What To Do With $10,000 magazine, today.
How to Evaluate Your Financial Situation
Before deciding whether you need a financial advisor, you’ll want to take an extensive look at your finances. This will give you a better sense of where you stand financially and what a financial advisor may be able to help you with.
Here are four things to consider and ask yourself when figuring out whether you should tap the expertise of a financial advisor.
What Is Your Net Worth?
Your net worth is not your income, but rather an amount that can help you understand what money you earn, how much you save, and where you spend money, too.
You can calculate your net worth by subtracting your liabilities (what you owe) from your assets (what you own). Assets include investments and bank accounts, while liabilities include credit card bills and mortgage payments. Of course, a positive net worth is far better than a negative net worth.
Looking for some direction as you’re evaluating your financial situation? The Consumer Financial Protection Bureau offers an online quiz that helps measure your financial well-being.
How Much Are You Earning and Spending?
Another key to assessing your financial situation is examining your monthly income and expenses. Even if you don’t hire a financial advisor, monitoring your income and expenses can give you an idea of whether you need to reduce expenses or to bump up your allocations toward retirement and savings.
If you don’t already have a budget, now might be a good time to set up one. You can use a spreadsheet or a budgeting app, for instance, to keep on top of your monthly income and expenses.
What Are Your Financial Goals?
Do you dream of retiring at age 60? Do you hope to someday buy a home? Setting and working toward financial goals is a key part of healthy money management. Figuring out your short-term and long-term financial goals can steer you toward a decision about hiring a financial advisor.
How Much Investment Risk Are You Comfortable With?
Are you fearless when it comes to up-and-down movements in the stock market? Or do you get anxious when you see turmoil in the stock market? Nailing down your risk tolerance regarding investments can help you determine an investment strategy—and can help you choose a financial advisor if you wind up going down that path.
When to Hire a Financial Advisor
Once you’ve evaluated your financial situation, it’s time to make up your mind about hiring a financial advisor. It’s worth noting that you don’t need to be wealthy to seek advice from a financial advisor. In most cases, a large life change or decision will trigger the decision to search for and hire a financial advisor. Below, find six possible scenarios.
You Need Help Realizing Your Financial Goals
OK, so you aim to retire at age 60. Or you yearn to buy a home. But how are you going to accomplish these and other goals? A financial advisor can draw up a roadmap with you that can help you achieve both short-term and long-term financial goals.
You’re Unsure How to Invest Your Money
A financial advisor can hold your hand, so to speak, as you make your way through the risky and often confusing investment landscape. They may able to point you in the right direction regarding:
- How much money you should invest, along with how much money you put in an emergency fund
- What types of investments, such as a 401(k) or IRA, would work best for you
- When to rebalance your investment portfolio to account for changes in the stock market
- What tax consequences you face if you withdraw money from retirement accounts
You’re Going through a Major Life Event
You just got married and need help merging finances. Your baby is on the way. Your divorce is pending. You’re nearing retirement. These and other major life events may prompt the need to visit with a financial advisor about your investments, your financial goals, and other monetary matters.
You Received a Lump Sum of Funds
Let’s say your mom left you a tidy sum of money in her will. Now what? How do you make the best use of the inheritance? A financial advisor can help you make smart choices about your inheritance, or any other large windfall, whether it’s a lump sum of money, an investment account, or a life insurance policy.
You Need Accountability
You may have sketched out your own financial plan, but have a hard time sticking with it. A financial advisor may offer the accountability that you need to put your financial plan on track. They also may recommend how to tweak your financial plan in order to maximize the potential outcomes.
You Need Help Managing Debt
Many people in the U.S. struggle with debt management. In fact, 30% of all adults—representing over 4 in 10 people who received higher education—said they incurred at least some debt for their education, according to 2022 data from the Federal Reserve.
No matter the debt you may be working to pay off, it can be overwhelming tackling it by yourself. A financial advisor may be able to help ease your debt burden by developing a debt payoff strategy.
Types of Financial Advisors
Several types of financial professionals fall under the umbrella of “financial advisor.”
In general, a financial advisor holds a bachelor’s degree in a field like finance, accounting or business management. They also may be licensed or certified, depending on the services they offer. It's also worth nothing that you could see an advisor on a one-time basis, or work with them more regularly.
“Financial advisor” is a broad term referring to financial professionals such as financial planners and investment managers. Anyone can say they’re a financial advisor, but an advisor with professional designations is ideally the one you should hire.
In 2021, an estimated 330,300 Americans worked as personal financial advisors, according to the U.S. Bureau of Labor Statistics (BLS). Most financial advisors are self-employed, the bureau says.
Generally, there are five types of financial advisors.
A registered representative, also known as a stockbroker, buys and sells stocks, bonds, mutual funds, exchange-traded funds and other investment products on behalf of their clients. Brokers typically earn commissions on trades they make. Brokers are regulated by the U.S. Securities and Exchange Commission (SEC), the Financial Industry Regulatory Authority (FINRA) and state securities regulators.
Registered Investment Advisor
A registered investment advisor, either a person or a firm, is much like a registered representative. Both buy and sell investments on behalf of their clients.
However, registered investment advisors supply financial advice, while registered representatives do not. Also, unlike a registered representative, is a fiduciary who must act in a client’s best interest. Furthermore, a registered investment advisor earns an advisory fee for managing a client’s investments; they don’t receive sales commissions.
Depending on the value of assets being managed by a registered investment advisor, either the SEC or a state securities regulator oversees them. FINRA typically doesn’t regulate registered investment advisors.
A financial planner might be a registered representative or an insurance agent, for instance. Most often, though, the term refers to a Certified Financial Planner (CFP).
A CFP must adhere to strict education and training standards. For example, they must hold at least a bachelor’s degree or have at least three years of full-time financial planning experience or an equivalent amount of part-time experience. They also must complete 30 hours of continuing education every two years.
As a whole, though, financial planning professionals aren’t overseen by a single regulator. But depending on the services they offer, they may be regulated. For instance, an accountant can be considered a financial planner; they’re regulated by the state accounting board where they practice. Meanwhile, a registered investment advisor—another type of financial planner—is governed by the SEC or a state securities regulator.
A wealth manager advises wealthy clients on their financial goals and investment approaches. Offerings can include retirement, estate and tax planning, along with investment management.
Wealth managers generally are registered representatives, meaning they’re regulated by the SEC, FINRA and state securities regulators.
A robo-advisor is an automated online investment manager that relies on algorithms to take care of a client’s assets. Clients generally don’t gain any human-supplied financial advice from a robo-advisor service.
The SEC regulates robo-advisors. They make money by charging a fee for each trade, a flat monthly fee or a percentage fee based on the dollar amount of assets being managed.
Questions to Ask a Financial Advisor
Investors looking for the right advisor should ask a number of questions, including:
- Do you have experience working with a client like me? A financial advisor that works with you will likely not be the same as a financial advisor who works with another. You may be looking for someone who specifically works with retired people, same-sex couples, divorced people, surviving spouses, a woman, a Black or Indigenous Person of Color (BIPOC), an LGBTQ+ individual, or any applicable niche.
- What services do you offer? Depending on whether you’re looking for a wide-ranging financial plan or are simply looking for investment guidance, this question will be important.
- How do you charge your clients? Financial advisors have different methods of charging their clients, and it will often depend on how often you work with one. Be sure to ask if the advisor follows a fee-only or commission-based system.
- What sort of education do you have? If you’re working with a human advisor, you’ll undoubtedly be curious about their education. For instance, do they have a college degree in a field like accounting or finance? You want to make sure their education matches the type of advisory services you need.
- What are their credentials? Are they regulated by the SEC, for example, or certified by an organization like the National Financial Educators Council? Resources that can help you investigate whether an advisor is registered, certified or in trouble include FINRA’s BrokerCheck tool, the CFP verification tool, and the SEC’s Action Lookup tool.
- How often will they contact you, and by what method? Are there any limitations on how frequently they can be contacted?
The nature of the advisory field is also changing. Investors now usually have access to their accounts digitally and thus, beyond traditional in-person meetings, may meet with their advisors virtually for some or all of their portfolio review sessions.
Situations Where You Can Do It Yourself
It is possible to create a do-it-yourself financial plan. If you have little-to-no debts and are comfortable investing on your own, for example, you likely can track your financial situation on your own and set financial goals on your own. Generally, a basic, suitable financial plan includes the following elements:
- Your determined net worth
- Financial goals
- A budget to account for expenses
- Debt management
- A plan for retirement
- An emergency fund
While you may feel comfortable managing your finances on your own now, this may change. It’s always important to check in on your financial situation regularly. As your personal life changes, your finances likely will too, and a financial advisor may come in handy.
Do I Need a Financial Advisor if I Don’t Have Much Money?
Even if you have little to no money, you may be able to benefit from a financial advisor’s expertise. For instance, a financial advisor may be able to help put on the right track toward saving money for retirement.
What is a Good Percentage to Pay a Financial Advisor?
A good percentage to pay a financial advisor might be 1%, based on the value of your assets. However, some financial advisors might use a different percentage or might charge an hourly or flat fee instead.
What are Red Flags in a Financial Advisor?
Red flags in a financial advisor include not being upfront about how they make money, aggressively pushing investment products, being unresponsive to clients’ inquiries, and lacking professional designations.
How Do You Choose a Financial Advisor?
Finding a financial advisor or planner can seem intimidating at first, but it can pay off if your portfolio is too large to manage alone. The first step is to figure out what kind of financial advice you need–whether that be estate planning, saving for retirement, or simply seeking the best way to invest your savings. This will determine what kind of specialist is best suited to your needs. It is also important to understand any fees and commissions. Some advisors may benefit from selling unnecessary products, while a fiduciary is legally required to choose investments with the client's needs in mind.
The Bottom Line
Deciding whether you need a financial advisor involves evaluating your financial situation, determining which type of financial advisor you need and diving into the background of any financial advisor you’re thinking of hiring.
Before hiring a financial advisor, be sure to ask about what menu of services they offer and what they charge for those services. While you may need to put in some work to find the right financial advisor, the work can be worth it if the advisor gives you solid advice and helps put you in a better financial position.