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Like millions of Americans, at one time or another, you probably have asked yourself, “Do I need a financial advisor?” The motivations for hiring a financial advisor vary, but major reasons typically involve planning for retirement, funding a child’s education, helping with an inheritance, coping with the financial aspects of widowhood or divorce or unexpectedly coming into a major sum of money.
Depending on the challenge, some people decide they would like help on a short-term basis. Others may prefer a long-term relationship or seek out solutions themselves. Each of those choices may be appropriate after a careful review of your unique circumstances. Here’s an eight-step guide to help you decide whether you should get a financial advisor.
Set your financial goals
Sometimes financial goals are long-term and general, such as having a comfortable retirement. Another could be putting aside money to pay for a child’s college education. Other times, your goals might be short-term in nature, like needing a down payment to buy a home in the near future.
In many cases, a financial goal may not be time-related but more about the quality of your life right now. For example, greater peace of mind about everyday finances may be your goal. For that, you might need help to create a realistic monthly budget or figure out a way to pay off credit card debt.
As a first step in understanding your financial goals, think about the money-related matters that are most important to you and your objectives regarding those issues. Write it all down. The list will be helpful whether you decide to use a financial advisor or not.
Evaluate your financial knowledge and skills
How much do you know about credit, interest rates and investing? How comfortable are you with your knowledge level? If you are not confident or comfortable with your knowledge of personal finance issues, you are not alone. Survey after survey of American financial literacy, whether assessing teens, seniors or those in between, have revealed high levels of uncertainty and low levels of knowledge. Many professional and non-profit groups, such as The National Foundation for Credit Counseling and Operation HOPE, devote themselves to raising Americans’ understanding of financial basics so people can live more fulfilling lives and be less susceptible to financial fraud by scammers looking to exploit the unsophisticated.
Even if you feel comfortable in your knowledge of financial basics, you may feel that your knowledge in specific areas of personal finance is lacking, especially in areas that affect your ability to reach your financial goals. For that reason, you may seek out a financial advisor with particular expertise in specialized areas, such as budgeting, investing, retirement planning, widow and divorce counseling or protections for special-needs children.
Assess your time and resources
Even if you feel you have the knowledge and expertise to take the steps necessary to achieve your financial goals — or are willing to learn what you don’t know — the bigger and perhaps more relevant question is whether you have the time and resources to devote to handling your financial needs.
While keeping up with financial news and information need not be a full-time activity (in fact, creating and following a basic savings and investing plan has proven to be more successful in the long run than active short-term trading for most people), tending to one’s personal finances can be time-consuming. If you’re busy with work and family, or just don’t feel the desire to spend time on personal finance issues, delegating that responsibility to a financial advisor could make sense.
Weigh the benefits and costs of hiring a financial advisor
There are several benefits of hiring a financial advisor. The right financial advisor for your needs and objectives will bring extensive knowledge, save you the time it would take to gather information yourself, have access to the financial products and tools you might need to get the job done and help you overcome the inertia and hasty decision-making that often prevents individuals from reaching their goals.
While there are clear benefits in hiring a financial advisor, costs can be murky. Some advisors are technically known as registered representatives and are employees of or are associated with firms known as broker-dealers. These firms disclose on their websites and in their statements that they are members of the Financial Industry Regulatory Authority, or FINRA, and of the Securities Investor Protection Corp., or SIPC. Those advisors typically earn their income from commissions on the sale of investment products or in the form of fees for the investments they manage on a client’s behalf. Sometimes it’s not clear what those costs are.
Registered representatives (RRs), whether called advisors, consultants or something else, are held to a suitability standard, which means the investments they recommend must be suitable for a client’s specific goals and circumstances. RRs also must comply with the Securities and Exchange Commission’s Regulation Best Interest, which requires written disclosure of any conflict they have when making a recommendation. For example, they would be required to disclose why they are selecting a particular investment product when another virtually identical product would have lower fees.
In contrast, registered investment advisers (RIAs) are fiduciaries, which means they are required to put their clients’ interests above their own. In the case of the two investments above, RIAs would be required to recommend the less expensive choice. RIAs do not receive commissions from product providers but instead charge clients fees for their services. These fees typically are calculated as a percentage of the value of the investments RIAs manage for you. They also can charge for the time they spend with you, either by the hour, by the project or through a subscription. Financial planners who may be registered representatives, RIAs or simply planners who don’t advise on investments may charge by the hour or by the project. Usually, RIA and planner fees are transparent.
All reputable financial advisors should be open about their form of remuneration and able to give you a good estimate of how much you would be paying them for their services. Don’t have any hesitation in asking about costs, fees or commissions. If a prospective advisor is reluctant to discuss costs, is evasive or gives you answers you don’t understand or that aren’t clear, thank them for their time and find someone else.
Explore DIY financial management options
Can you get financial advice without a human advisor? Yes. That option is now available through many firms familiarly known as “robo-advisors.”
Using algorithm-based models for investing and financial planning, standalone robo-advisor firms — as well as robo-advisor offerings from large, well-known firms with human advisors — can help you define your objectives and goals, assess your risk tolerance and then come up with planning and investment solutions.
For those who wish to handle investments by themselves, many online brokerages provide a variety of planning tools in addition to transaction services. Since many financial advice services are available online for do-it-yourselfers, many advice-seekers often ask themselves if hiring a financial advisor is worth it.
Consider the complexity of your financial situation
If the solution you are seeking is relatively easy to implement and you have the time and resources to devote to your financial affairs, hiring a financial advisor may be unnecessary. For many, however, having a financial advisor is well worth the expense.
“With this complex world, I think most people need some kind of help,” investment legend John Bogle said in an interview. Bogle, who founded Vanguard — the investment firm that grew into an industry giant by serving investors directly and bypassing advisors — said that most people need help figuring out how to invest, how to stay the course and not get emotional when markets drop, and how to assess their risk tolerance, to name just a few areas where a professional’s input can be invaluable.
Identify your risk tolerance
As Bogle noted, risk tolerance is a key area where a financial advisor can be helpful. Risk tolerance is a fancy way of saying how much of a loss you can afford to withstand financially and emotionally before you throw in the towel, cash in your investments and put the money under your mattress (or, more realistically, a savings account).
Given a theoretical $1,000 investment, some people might get anxious if its value dipped to even $975. Others might not be concerned if they lost $100 or $150 but would become nervous if they lost $200. Some might not worry about a gradual loss in their portfolio if it were within what they considered to be reasonable limits but would become terrified if that loss happened over one or two days.
Financial advisors typically use diagnostic tests to assess a new client’s risk tolerance, but an honest self-appraisal of your ability to tolerate investment losses is a useful step in deciding whether you turn to an advisor or handle financial matters yourself.
Choose the right professional for long-term financial planning
Financial advisors who concentrate on investments often include financial planning in their services, using financial planning software designed for advisors and their clients. Many financial advisors hold the certified financial planner (CFP) designation, which indicates they have completed a lengthy academic program covering investments, insurance, risk analysis, budgeting and many other areas. Holders of the CFP designation, overseen by the Certified Financial Planner Board of Standards, must fulfill continuing education requirements each year to maintain their status.
A similar financial planning designation, chartered financial consultant (ChFC), is overseen by the American College of Financial Services. Many certified public accountants (CPAs) who offer financial planning also hold the personal financial specialist (PFS) designation overseen by the American Institute of CPAs, or AICPA.
If professional financial planners don’t handle the investment aspects of the plans they create, they often provide clients with advice about whom and which firms to use.
Resources that help in making a decision
When deciding whether to hire a financial advisor and assessing possible candidates, many organizations stand ready to help with objective information. Consider the following:
- Financial Industry Regulatory Authority: The website of the securities industry’s self-regulatory body provides a wealth of information, including Working With an Investment Professional and Ask and Check, which has links to resources where an advisor’s background can be reviewed, including FINRA’s BrokerCheck, which has information about every licensed registered representative in the country — including any disciplinary actions taken against them by regulators or individuals.
- The Securities and Exchange Commission: The nation’s securities regulator devotes considerable resources to investor education, with useful information about investment professionals and tools to check on the background of those professionals and their firms.
- The American Association of Individual Investors: AAII is an independent, non-profit corporation that assists individuals in becoming effective managers of their assets through education programs, information and research.
How to interview a financial advisor
Here are some discussion points and key questions to ask when speaking with a financial advisor for the first time:
- Tell me about your experience in working with people whose problems or issues are like mine.
- Are you a registered representative? A registered investment advisor? If both, how do I know when you are acting as an RR and when you are acting as an investment advisor?
- Are you a certified financial planner? Do you hold any other professional credentials?
- Do you have any disciplinary actions, arbitration awards or customer complaints? If so, please explain them.
- What is your firm’s investment philosophy?
- What type of investment products and services do you offer? Are there any products or services you don’t offer? Why?
- Do you or your firm impose any minimum account balances on customers? If so, what happens if my portfolio falls below the minimum?
- How do you get paid? Do you receive commissions on products I buy or sell? Do you charge a fee based on a percentage of the value of my assets you manage? A flat or an hourly fee? Any other method? How much do you estimate I will pay you in the first year?
- How often can I expect to meet with you in person, online or on the phone?
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