Over the past year or so, my big financial goal has been to start investing seriously. This journey has taken me from experimenting with stock trading apps to opening a “real” brokerage account and looking to maximize my retirement account options. While I’ve been satisfied with my progress so far, there’s certainly a long way to go. Moreover, with as much as I’m learning and growing with each passing day, there are times when I feel I could use some guidance.
That realization got my thinking about financial advisors. Despite my interest in managing my own money and investments, could hiring a professional be a benefit? If you’re wondering the same, let’s take a look at what a financial advisor is and a few questions for helping you determine if one is right for you.
Understanding What a Financial Advisor Does
What is a financial advisor?
Just as the name implies, a financial adviser is a professional who can help navigate your finances, including investing for your future. While there are several types of advisors that fall under this title, one common type is a certified financial planner (CFP). Typically advisers will either work on a per-project basis or a full time. For the former, you may pay a one-time fee while the latter will charge you an annual fee amounting to a percentage of your portfolio.
How does a fee-only advisor compare to a commission-based one?
Often times when looking for a financial advisor, you’ll see the term “fee-only” thrown around. Before I knew what this meant, I personally found it a bit funny — of course it’s fee-only, what are you going to charge me besides a fee? However, in this case, the “only” means that the advisor isn’t compensated by other means, namely commission.
Aside from fee-only advisors, there are those who are fee-based or commission-based (the two mean the same thing). While these advisors may be able to offer their services at a lower cost to customers, they may receive compensation for selling you certain products. Therefore this arrangement can cause a conflict of interest — which leads us to our next common question.
What is a “fiduciary?”
When it comes to financial advisors, a fiduciary means that they have a responsibility and duty to act in your best interest. This isn’t to say that non-fiduciaries will actively work against you (how would they keep clients if that were the case?), but they aren’t bound to. But, to be clear, commission-based and fee-only advisers can both be fiduciaries.
How much do financial advisors cost?
Obviously it’s up to each individual advisor to set their own pricing. However, according to The Balance, fees typically fall between 0.5% and 1% of your invested assets annually. In other words, if your investments being managed by an advisor amount to $100,000, you’d pay between $500 and $1,000 each year.
Are financial advisers worth it?
Well, that depends. A common argument is that, with the assistance of a financial advisor, you can help your investments grow at a rate that exceeds the fee percentage you’re paying. In that aspect, some see hiring an advisor as an investment itself.
At the same time, an advisor might not be right for everyone. With that in mind, let’s take a look at a few questions to ask yourself when determining whether or not you should hire one.
Questions to Ask Yourself Before Hiring a Financial Advisor
Are you willing to learn on your own?
Aside from the costs associated with hiring a financial advisor, the biggest reason I have yet to seek one out is that I actually enjoy learning about different investments and options on my own. Of course, I can admit that I am likely in the minority on this one. For those who don’t want to concern themselves with the research and decision making required to invest on their own, paying a financial advisor a small percentage to manage their money for them could be well worth it.
Are you okay with making mistakes?
A major downside to the DIY path is that, as a beginner, you may be prone to making mistakes. Unfortunately some of these missteps could cost you significantly if you’re not careful. I imagine this is another big reason why many people feel more comfortable hiring a professional. Granted even CFPs and other advisors are fallible but at least they know what they’re doing, thus mitigating the chance for error.
Are you susceptible to making emotional financial decisions?
Being a successful investor often takes discipline. As human beings, we may inherently lack such self control, leading us to make emotional and rash decisions. For example, an inexperienced investor may panic during a market dip, leading them to lock in their losses instead of staying the course.
If that sounds like you, having a financial advisor to talk you through these moments of crisis and talk you down from the ledge as it were can be invaluable. In that way, you could say that these pros are helping save you (and your money) from yourself.
Do you need on-going support or a one-time plan?
Another thing to consider is that you may not need to retain a financial advisor if you’re just looking for initial guidance. Again, since there are many types of financial advisors, you may be able to find one that can help you put together a list of recommendations and actions for you to take. Then, instead of paying an ongoing percentage of your portfolio, you’ll pay them a one-time fee.
Do you have enough to invest?
Here’s a humbling one for you: some financial advisors may only be willing to work with you if you have a certain amount of money to invest. Again, this isn’t necessarily true across the board but may be a factor when you’re looking for full-time advisors. This may be another reason to consider a one-time hiring instead, so you can have someone at least set a path for you to then walk alone.
Overall the idea of having a financial advisor on your side sounds nice for a number of reasons. At the same time, there’s something to be said for the DIY route as well. Ultimately, in my case, I think I’ll keep trying to find my own way — but, if you’re in need of help, hiring one could be a great financial move.