Key Takeaways
- A financial advisor is a professional that can help you manage complex, interdependent financial matters in exchange for a fee.
- Advisory services can be costly, but assistance can be invaluable, especially if you lack the time or expertise to manage things on your own.
- If you opt to hire a financial advisor, make sure they are highly qualified and committed to always act in your best interest. This means working with a fiduciary that holds the Certified Financial Planner (CFP®) certification.
When a Financial Advisor Is Worth It
A financial advisor can help you address a variety of multifaceted financial matters, such as budgeting, banking, managing debt, optimizing insurance coverages, minimizing tax burdens, planning for retirement, managing investments and implementing estate plans. Given the complexity of these matters, enlisting a financial advisor can be highly beneficial. However, doing so will cost you some time and money.
Before investing in a financial advisor, make sure it is worth it. Spend some time considering your current state, near-term liquidity needs, longer-term goals and your proficiency in handling financial matters. More specifically, determine whether any of the situations outlined below pertain to you. Each can warrant advisory assistance.
You Have a Complex Financial Framework
A complex financial framework means you own an array of assets (many of which are privately held and non-diversified), you have significant debts/commitments and you have multiple and varying streams of income. In general, the larger the monetary sums in question, the greater the need for advisory assistance.
You Don’t Have the Knowledge or Time To Focus on Your Finances
It is not uncommon for most people to lack the knowledge or time to focus on their finances. Financial management is difficult, and it only gets harder as your finances grow. A good advisor can help you navigate through life and increase the probability of achieving your short-term and long-term goals. Along the way, they can enlighten you on specialized strategies, such as tax loss harvesting and socially-responsible investing.
You Are Retiring in the Next 10 Years and Lack a Comprehensive Plan
For most people, connecting with a financial advisor is a critical part of planning for retirement. While smart savers start saving early in their working years, many individuals tend to delay thinking about retirement until they are further along in their careers. If you are retiring in 10 years or less and have not put together a retirement plan, connecting with an advisor is highly recommended.
You Want a Fresh Perspective
Taking a fresh look at things is a good idea, especially if you have always independently managed your money and are worried you may be exhibiting behavioral biases. In this case, vetting your investment plan with an unbiased advisor could reveal meaningful enhancement opportunities. At a minimum, it could affirm your approach.
Pros of Hiring a Financial Advisor
- Financial advisors can help you address a variety of complex financial matters, including planning for retirement and investing.
- They have innovative tools, programs and processes that few people can replicate on their own.
- Financial advisors employ a hands-on approach, which can free you up to devote more time and energy to other aspects of your life.
- They often serve as sounding boards, providing objective guidance, customized education and agile economic insights. For most clients, the result is a heightened level of clarity and peace of mind.
When a Financial Advisor May Not Be Worth It
While many people can benefit from the assistance of a financial advisor, there are circumstances when enlisting one may not be necessary. The most common situations are outlined below.
You Have a Very Simple Financial Situation
Oftentimes, having a very simple financial situation means you have a steady job, a debt-free lifestyle and highly predictable cash flows that are expected to be sufficient for the rest of your life. Additionally, you may have access to a knowledgeable family member or friend that can help you address intermittent financial issues.
You View Financial Advisory Services As Unnecessary
Given the plethora of free and low-cost budgeting, financial planning and investment management resources at your disposal, you may not view financial advisory services as necessary or you may prefer to manage your finances on your own. Helpful resources include educational materials, online tools, mobile applications and increasingly popular robo-advisory platforms.
Cons of Working With a Financial Advisor
- Finding a suitable financial advisor can be time consuming. Oftentimes, the process entails significant research and due diligence.
- Some financial advisors charge exorbitant fees that can erode their value proposition and eat into your hard-earned wealth.
- An advisory relationship is a long-term commitment that calls for ongoing dialogue and continual assessment of your objectives, priorities and tolerance for risk. It is not a “set it and forget it” arrangement.
Choosing What’s Right for You
When deciding whether a financial advisor is worth it, the first thing to consider is the complexity of your financial affairs, including the state of your budget, the extent of your incoming and outgoing cash flows and the size of your balance sheet (assets, liabilities and net worth). Oftentimes, limited-scope financial affairs do not require advisory assistance. However, as your financial balances grow and become more complex, professional oversight can be highly beneficial.
If the nature of your financial affairs indicates an advisor may be needed, the next most important things to consider are your competency and capacity. Are you knowledgeable enough to manage your own finances? Do you have the time and resources necessary to do so? A negative response to either of these questions indicates you should hire a financial advisor.
How To Find an Advisor
The best place to begin looking for a financial advisor is the CFP Board, a non-profit organization that sets and enforces standards for the highly respected CFP® certification. All CFP® professionals are held to the standard of fiduciary duty, which means they have a legal and ethical duty to always act in their client’s best interests. This is a key differentiator in the oftentimes unscrupulous financial services industry.
Locate a few CFP® professionals in your neighborhood and meet with them. Ask each advisor to elaborate on their credentials and experience in the industry. Then, inquire about their service offering and guiding principles for managing money and achieving optimal outcomes for clients. The best advisors will take the time to thoroughly explain their philosophies, practices and procedures. Many CFP® professionals will also furnish you with case studies and client references.
