Many people reach a point in life where they wonder if getting a financial advisor makes sense for them. As with most things financial, there is no straight answer—it depends on your budget, investments, and long-term financial plan.
Financial Advisors Can Help Everyone
People tend to conceptualize financial advisors as people who only help mega-wealthy individuals and families, but this isn't accurate. Financial advisors, believe it or not, commonly assist middle-class families who need help with planning for retirement, saving for their children's college, buying a home, and taking care of other major financial goals.
To decide if you need to hire a financial advisor or what type of advisor to hire, you need to first ask yourself some questions and assess your comfort level with making financial decisions, then do your research.
Help With Emotional Decision Making
One of the primary things financial advisors do is eliminate a lot of emotional decision making for clients. When involved in a fairly risky investment strategy, people tend to react to changes in the stock market emotionally. If you have a financial advisor assisting you with your investment decisions, they will be able to help you keep an emotional distance from your money so that you can make the best long-term plan for your money.
Your financial advisor will help you allocate funds into a portfolio that best matches your personal risk comfort level.
The prevalence of more and more financial planning apps and websites—often referred to as robo-advisors—are making everyday financial management decisions easier to handle without the help of a financial planner. Many of these apps and websites offer very similar services to those of a financial advisor at a fraction of the cost. If you're confident in your money management skills and investment choices, you may not need to shell out money for a financial advisor with the help of these planning tools.
Big Life Changes
While robo-advisors are definitely helpful, sometimes they just won't be as beneficial as an actual financial advisor. Some situations are too personal for an algorithm to put you in the best position. Suppose you want to know how to deal with the tax consequences of an inherited IRA, or a family member suddenly leaves you a large sum of money, for example. These are circumstances where you'd want a human who can understand your situation's totality to help you make decisions.
If you are suddenly facing a new or drastic change to your finances, like receiving a large inheritance that you aren't sure how to invest, a financial advisor will help decide what to do with your money and how to handle any tax fallout. If you are about to retire and aren't sure how or when to start withdrawing from your 401(k) and other retirement accounts, you may also benefit from hiring a financial advisor.
Being Comfortable With Your Financial Situation
If you feel confident, but would still like an advisor looking over your shoulder, you will most likely be able to get that help by paying a flat, one-time fee for a financial advisor once a year. You can manage your own accounts the rest of the time. If, however, you hate dealing with finances, don't understand the first thing about implementing an effective investment strategy, or receive a large sum of money you're not sure what to do with, a financial advisor is right for you.
When deciding whether to hire a financial advisor, look at your finances, and ask yourself if you feel like you know what you're doing. If you feel like you have a good handle on your daily financial needs, great—you probably don't need to spend the money on one.
If you're comfortable with your finances, only look into hiring a financial advisor if a big financial life change pops up. At that point, weigh the pros and cons of a fee-based planner's cost versus a commission-based planner.
If you feel stressed over your money or feel like you're not making the best decisions possible, then a financial advisor would be a financially wise move that would most likely end up worth the investment.
SEC. "Investor Bulletin: Robo-Advisers." May 24, 2020.