Some financial situations can be handled on your own, while others are best navigated in consultation with an advisor. Ultimately, the decision to work with a financial advisor or go it alone depends on a litany of factors, including your needs, goals and where in life you find yourself. A financial advisor can help you invest your money, plan for major life events and preserve your wealth for future generations of your family. However, some people have the time and know-how to manage their money and create a financial plan suited to their needs. Here are examples of situations where you might pick either option.
What Do Financial Advisors Do?
A financial advisor is a broad term that can describe a variety of different professionals in the financial services industry. An investment advisor who exclusively picks and manages investments for clients is one type of advisor. A financial planner, on the other hand, is another kind of advisor who develops holistic financial plans that might include retirement planning, insurance needs, estate planning and charitable giving. Meanwhile, an advisor who is a certified public accountant (CPA) may specialize in tax planning.
Because the term is relatively broad, encompassing different types of financial professionals, it’s important to remember that not all financial advisors have your best interests at heart. While investment advisors who are registered with the Securities and Exchange Commission are bound by fiduciary duty to always act in your best interests, a stock broker and insurance salesperson may market themselves as a financial advisor but doesn’t follow the same stringent standard.
It’s also important to note that some financial advisors are both registered investment advisors, as well as representatives of broker-dealers or insurance companies. These advisors often follow the fee-based model, meaning they earn commissions from third-party firms when recommending certain products and services to their advisory clients.
This creates a potential conflict of interest. On one hand, these advisors are legally obligated to act in your best interests. On the other hand, they have a financial incentive to recommend certain products and services over others. However, these kinds of financial advisors must disclose any relationship that could present a conflict of interest. When working with an advisor who can earn commissions, it’s important to ask whether they stand to gain financially from specific recommendations they make to you.
Then again, you can choose to work with a fee-only advisor, whose compensation comes solely from the advisory fees that are charged to clients, not third-party commissions.
When You Should Work With a Financial Advisor
Since financial advisors can help you with a variety of needs, most people will benefit from a potential relationship with an advisor. If the following applies to you, you may want to consider hiring one:
You lack the time or knowledge to manage your investments: If you don’t have time to devote to researching investments and managing your portfolio, hiring a financial advisor can be a good option. Perhaps time isn’t an issue, but knowledge is. If you can’t tell the stock market from the supermarket, consider working with a financial advisor, especially one who’s open to teaching you the fundamentals of investing. Then at some point in the future. you may feel confident enough to manage your own portfolio.
You’re approaching retirement: There’s a lot more to retirement than simply not working. For most people, a successful retirement requires substantial financial planning. You’ll have to determine how much money you’ll need to support the lifestyle you desire, devise a plan for withdrawing your savings in a tax-efficient manner, picking the right time to claim Social Security benefits and adhering to the rules that surround required minimum distributions (RMDs). Not everyone is equipped to make these decisions on their own. A financial advisor, especially one that offers financial planning, can help you create a holistic plan for retirement that addresses each of these topics.
You’re making a major financial decision: Whether you’re planning to buy a home, sell a business or send your kids off to college, having a financial professional in your corner can be a major help. An advisor can help you consider the various implications of a given decision and plan for contingencies.
You received a large inheritance: After receiving a large inheritance or windfall, having a plan for that money can ensure it isn’t squandered. A financial advisor, especially one who offers financial planning, can help you invest your money and make a plan for it. Newfound wealth also may come with new tax liabilities. A financial advisor may be able to help you optimize your tax strategy to protect your assets for the long haul.
You can’t separate your emotions from your portfolio: Everyone lets their emotions get the best of them from time to time. But it’s important to invest with a cool and level head, especially in times of increased market volatility. Getting spooked and pulling your money from an investment during a down market can have significant negative effects on your financial future, since you likely won’t benefit from the potential rebound. Having a financial advisor manage your investments for you can add a layer of protection against making rash decisions when things appear to be going poorly.
When You May Go It Alone
Working with a financial advisor can prove extremely beneficial, but not everyone needs one in their corner. Some people in certain circumstances can get by managing their own investments and making their own financial plans.
Here’s when you may want to forgo a financial advisor and do it yourself:
You’re confident in managing your own investments: If you are comfortable selecting and managing your own investments, you may not need a financial advisor. Perhaps you follow the markets closely and do your own research on potential investments. While you may stand to learn more from a financial advisor, you might enjoy doing this legwork and crafting your own investment strategy.
You have no financial planning needs: As mentioned above, one of the primary benefits of working with a financial advisor is getting a comprehensive financial plan made for you. This plan may address your retirement outlook, insurance needs, investment portfolio and other corners of your financial life. However, if you’re not planning for any significant purchases or face any consequential financial decisions, you simply may not need a financial advisor. Then again, this might only apply to young adults who have not yet started families, purchased homes or have significant obligations. Most adults have some sort of pressing financial need or concern to consider
You don’t invest outside your work-sponsored retirement account: If you don’t invest outside of your employer-sponsored retirement plan, you may be fine going it alone without the help of a financial advisor. Employer-sponsored plans like 401(k)s often have fewer investment options than individual retirement accounts or taxable investment accounts, so there’s often less legwork for the individual investor to do. This may be especially true for retirement savers who own target date funds, which continue to rise in popularity. By the end of 2018, 56% of 401(k) account owners held TDFs and 80% of plans had them available, according to the Employee Benefit Research Institute. These set-it-and-forget-it funds automatically rebalance as the target retirement date approaches.
You’re still decades away from retiring: If you’re still decades off from retirement, you may not feel the need to work with a financial advisor. You may be comfortable simply continuing to save for your eventual retirement, but haven’t yet begun to think about when to claim Social Security, how much money you can withdraw each year and how much you medical care costs might be.
There are a number of scenarios in which it may make more sense to simply manage your finances without the help of a financial advisor, but most people can benefit from working with one. If you are approaching retirement, planning for a major purchase or facing a monumental financial decision, or you simply don’t have the time or know-how to manage your investments, hiring a financial advisor can be a good decision. Then again, people who are still decades from retirement or manage their portfolios with confidence may opt to go it alone.
Tips for Hiring a Financial Advisor
Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
It’s important to do your due diligence and interview at least three financial advisors before signing up with one. Ask about their account minimums, fees, investing philosophies and any special certifications they hold, like the certified financial planner (CFP) designation. Factor the answers to these questions into your ultimate decision.
You should also research the advisor and their firm to see if they have any regulatory or legal disclosures on their record. To do this, search for them on the Securities and Exchange Commission’s Investment Adviser Public Disclosure database. This online portal allows members of the public to access an advisor’s Form ADV, which contains important information about their business and any red flags on their record.
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