Do You Need A Financial Advisor?

April 9, 2023

Some people rave about financial advisors while others despise them. With so much financial information and education available online these days, do you need a financial advisor? Or should you tackle your major financial decisions on your own?

In this post we’ll run through the pros and cons of having a financial advisor, and help you determine what the right path is for you.

What Do Financial Advisors Do?

First, the term “financial advisor” is a catch-all title. The credentials and services that a financial advisor performs for a client vary from firm to firm and advisor to advisor. Also, the job of a financial advisor has changed in recent years. The industry is evolving. What individuals require, when it comes to money help and advice, is different than it was 20 years ago.

Advisors typically used to specialize in discussing long-term goals, managing your investments, and helping you think through life insurance necessities.

Now they often offer budgeting help, can create debt payoff plans, offer college admission advice, and even proofread resumes.

As individual investing has become easier and the costs have plummeted, advisors are offering more services to justify their value. As a result, that value is now tied up more in the advice about complex financial decisions, not just in attempting to beat the stock market average.

Typical Services a Financial Advisor Offers:

Before choosing a financial advisor to work with, make sure they cover the areas that you specifically need help with. Not all advisors are proficient in the same studies.

Here are some common services that financial advisors can provide:

  • Investment advice
  • Debt management strategies
  • Budgeting tips
  • Saving for college
  • Retirement planning
  • Estate planning
  • Long-term healthcare and insurance solutions
  • Tax planning
  • Creating trusts

Some advisors may specialize in particular areas of finance, such as debt management or beginner investment advice, while others may provide holistic help, guiding you on everything from savings goals to retirement and estate planning.

Pros of Having a Financial Advisor 

  1. Investment Knowledge and Experience – A certified financial advisor should possess extensive knowledge about investing. Many financial advisors have years, if not decades of valuable experience. As a result, they have most likely worked with many types of clients and situations and have invested through both bull and bear markets. 
  1. Saving Time Utilizing an advisor can help you save time spent researching and understanding various investing ideas. This is where you must consider the opportunity cost. Evaluate your available time. Depending on the investment approach you choose, managing a portfolio on a monthly basis necessitates your attention, especially around tax season.
  1. Developing an Investment Strategy If you are seeking to create long-term objectives, an advisor may be better suited to selecting the most effective investing approach for your goals. This is especially critical for investors aged 50+ who are contemplating various accounts for retirement or tax purposes. For more difficult investing scenarios, it may be prudent to seek professional advice.
  1. Peace of Mind – In delegating responsibility to a reliable source, you are relieving yourself of the everyday financial anxiety of major decision-making. Emotional investing (or succumbing to financial FOMO) is a big challenge that many investors face early in their careers. By distancing yourself, you remove your emotions and reduce the risk of impulsive buying and selling when the market changes. 
  1. Planning for the Unexpected – A good advisor can help you plan for the unexpected events life can throw your way. Situations such as losing your job, unexpected tax bills, urgent medical procedures, and emergency home repairs are all things that an advisor can help you prepare for. 

Cons of Having a Financial Advisor

  1. Cost and Fees – Most financial advisors get paid based on commissions on products they sell you (fee based) or by charging a flat rate fee for their services (fee only). While smaller investment accounts often have higher costs, even a tiny financial advisor fee may eat up a larger percentage of your earnings.
  1. Conflict of Interest – Some financial advisors act in their own best interests instead of yours. Before entrusting someone with your valuable resources, it’s a good idea to research how they handle their own. When seeking a financial advisor, it’s important to pose them a few difficult questions. Learn about the candidate’s net worth and personal financial history. 
  1. Lack of Trust – Allowing someone to manage your finances is a major move that requires trust. Regrettably, some advisors are unable or unwilling to maintain that confidence and sometimes abuse it. Make sure you double-check those credentials. 
  1. Peace of Mind – A peaceful state of mind can represent both a pro and a con in using a financial advisor. Despite having a trusted advisor on your side there are no 100% slam dunk investments. You are still the one who has to absorb any losses, not your advisor. Many folks may assume investing in stocks and bonds through an advisor will automatically earn them money on a consistent basis, in perpetuity, for life. Unfortunately, this is not always the case.
  1. Avoiding Responsibility – Hiring an advisor can promote financial avoidance, which can create a huge detriment to your financial security. Hiring an expert to invest on your behalf can feel like a relief because you’ve delegated a lifestyle determining task. Individuals who practice financial avoidance may not prioritize early investing because they are busy with working and family, or feel intimidated, confused, or scared of investing.

How to Choose a Financial Advisor

No matter what your budget or financial situation is, there is a financial advisor who is specialized to help. Remember, financial advisors provide a wide range of services, so it’s wise to know what you might need assistance with before you begin your search. Here’s a look at a few things to consider when in the process of choosing the right advisor.

Be Clear on Your Goals

It is important to identify *why* you’re looking for financial help. Do you require guidance on budgeting, investing, creating a financial/savings/estate plan, or tax help? Your responses to these questions will help determine what type of financial advisor you’ll need.

Fee Only vs. Fee Based Advisors

Despite developing a reputation for being costly, there are financial advising options for every budget. Before you hire an advisor, it’s vital to understand the three main cost structures you’ll likely encounter. 

  1. Fee-only advisors do not earn any commissions from investments. The fees they charge may be offered as a retainer, hourly rate, or flat fee per plan. These advisors typically come with the fewest conflicts of interest when offering advice. 
  2. Fee-based advisors will charge you a fee but may also earn commissions from investments. 
  3. Commission-only advisors earn their income from commissions on the investments bought and sold on your behalf. Most financial advisors charge based on how much money they manage for you. Fees can range from 0.25% to 1% per year. However, some advisors can earn upwards of 3% to 6% of your investment. 

Whichever form of financial planning service you choose, make sure you understand how much you’ll pay and what the services comprise. Because there are so many various payment systems and silly little fees you can avoid with a traditional advisor, this is extremely significant.

Make Sure Advisors are Fiduciary

You probably heard of money experts with many different titles such as investment advisors, brokers, certified financial planners (CFPs), financial coaches, and portfolio managers. Some of the aforementioned titles used by advisors aren’t related to any specific credentials. Therefore, don’t assume that someone who uses an official-sounding title possesses any special training, knowledge, or credentials. Fear not! There are ways to create clarity to determine if you’re working with someone you can trust.

Some financial advisors give their clients a fiduciary obligation, which means they must operate in their clients’ best interests rather than their own. Partnering with a professional, registered fiduciary, preferably a fee-only fiduciary, means that the advisor is paid directly by you rather than through commissions for selling specific investment or insurance products. As part of their accreditation, certified financial planners have a fiduciary duty to their customers.

Additionally, anyone who provides investment advice must be registered as an investment advisor with either the Securities and Exchange Commission or the state, depending on the amount of assets under management. Whatever title, classification, certification, or license an advisor claims to hold, the onus is on you to investigate the advisor’s credentials and experience. Always look at an advisor’s background.

Where to Find a Fee-Only Fiduciary Planner

Here are a couple of favorite sites to ensure you’re only working with an advisor who makes consumer-friendly commitments:

XY Planning Network: Financial advisors that are part of this network do not make commissions for selling products or investments. Instead, they are focussed on planning services no matter your age or how much money you have. You can search the directory for a list of advisors with specific knowledge to help you.

NAPFA: The National Association of Personal Financial Advisors was created in 1983 to expand the use of fee-only financial advisors. They advocate for the highest professional and ethical standards when it comes to financial advisors.

Financial Coaches vs. Financial Advisors

While financial advisors provide more comprehensive financial planning services, financial coaches focus on helping people change their financial behavior and habits. They may help you create a budget, pay off debt, save for a goal, or improve your overall financial well-being. 

Financial coaches typically have a background in psychology or social work, and they use their knowledge of human behavior to help people make lasting changes with their money.

Find an AFC is a great resource to help find Certified Financial Counselors. Also a fiduciary, these money coaches can help you with more short term, personal money goals.

The Bottle Line

A financial advisor may be a beneficial resource for getting your money in order, providing experienced guidance on a variety of financial issues. Yet, not all financial advisors are made equal, and those seeking one should be aware of the potential risks of working with one.

Choosing the right advisor means you won’t end up paying for services you don’t need or working with someone who isn’t a good fit for your financial goals.

There are a lot of aspects of our personal finances that don’t require professional help. You don’t need a financial advisor to tell you that you need to start paying down your debt and get that employer match in your 401(k). However, there are some more complicated issues that might arise when it would make sense to hire a pro.

Adam Smith, considered the father of modern economics, wrote 200 years ago that “managers of other people’s money rarely watch over it with the same anxious vigilance with which they watch over their own.” So ultimately, be careful who you entrust to watch over the cash you have worked hard to earn. The less expensive robo alternatives or one-time or occasional guidance from a paid professional is likely all you need considering the wealth of information and number of tools at the ready for novice investors.

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Beer Tasting Notes:

While talking about whether you need a financial advisor, we enjoyed a Catharsis by Treehouse Brewing. Thanks to Bryan and Caitlin for donating this one to the show! And as we ramp up the podcast with an additional Friday episode every week, we could really use your help to spread the word- let friends and family know about How to Money! Hit the share button, subscribe if you’re not already a regular, and give us a quick review in Apple Podcasts or wherever you get your podcasts. Help us to spread the word to get more people doing smart things with their money in these difficult times!

Best friends out!

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2 comments on “Do You Need A Financial Advisor?

  1. Brendan May 29, 2020

    You should also include NAPFA (National Association of Personal Financial Advisors) when listing resources for finding fee-only advisors. It’s the country’s leading professional association of Fee-Only financial advisors since 1983.

  2. Michelle Spada May 29, 2020

    Hi Matt and Joel,
    -Just listened to podcast #206. As a soon to be divorced 59 year old woman who has had to suddenly educate herself on how to live on her own, your financial information has been so useful.
    Please keep up the great work with these podcasts 👍🏻. I love them! And I also love craft beer and riding my bicycle 😉.
    Ps- you have got to put a visit to Treehouse Brewery on your bucket list as soon as we can all travel again. My 23 year old daughter and I went there last year. My advice- go on a Wednesday (we went mid-June and there was no line at 12:00), bring a cooler for beer as well as your own food (they didn’t have any vendors during the week, and there is absolutely no where to eat near the brewery- the pizza place across the street closed down). The grounds a spacious and kid friendly.
    Michelle from Florham Park, NJ