Suppose you suffer from a major injury, such as a broken leg. Or, suppose you’ve reached the culmination of an exciting past nine months and are about to have a baby. You know when you need a doctor -- whenever you have medical needs. For financial needs, however, when should you hire a financial advisor?
When you’re in dire financial straits? Or, when you’ve attained a high level of wealth? How about when you’re about to retire? Ask 10 people and you’ll likely get 10 different answers.
A major reason is that there are several misconceptions about hiring financial planning help: it’s only for those who are age 50 or older and ready to retire; you must be rich to work with an advisor; you don’t need an advisor unless you have many complex investments; and so on.
In fact, financial advisors help people young and old, rich and poor, those starting their first day on the job and those nearing their last breath, those with a single W-2 tax form and those with 1099s that have more pages than War and Peace.
Therefore, the short answer to when should you hire a financial advisor is when you are serious about your finances and ready to start planning your future.
To better understand why, it helps to know what a financial advisor does and the value of having one at your side.
What does a financial advisor do
It’s understandable that many people don’t have a strong grasp of what financial advisors exactly do. Not all financial advisors are the same; mainly because anyone can call themselves a financial advisor. There are no rules or regulations for using the title. Some professionals who call themselves financial advisors specialize in only one area. For example, brokers who buy and sell investments on your behalf.
Meanwhile, there are qualified, holistic financial advisors who help you make decisions in all aspects of your financial life – from planning for retirement to managing your retirement accounts. They are fiduciaries, who are legally obligated to put your best interests first.
From that perspective, a financial advisor can help you:
- Build a budget and prioritize your financial goals.
- Create a financial plan for achieving your specific goals and needs.
- Construct a portfolio with investments that can provide a rate of return to achieve your goals at the level of risk you’re most comfortable with.
- Manage and monitor your retirement accounts, including IRAs and 401(k)s.
- Choose an investment strategy and stick with it when markets dramatically rise or fall.
- Avoid unnecessary investment fees.
- Determine the smartest way to claim Social Security and fund future healthcare needs.
- Find life insurance policy that is right for you and your family.
- Prepare an estate plan.
- Set up a 529 plan and review other financial options for your child’s college education.
- Review your tax returns in order to minimize your tax burden in the future.
- Turn your retirement savings into a sustainable retirement income.
- Regularly adjust your financial plan and investment strategy as your life changes.
- Overcome your biases and make smarter financial decisions.
The value of a financial advisor
Of course, financial advisors have to eat – and provide the facilities, technology, personnel, etc., to do all the things they do. So, their services don’t come free of charge. Therefore, some people may believe hiring an advisor is unaffordable or that they can save a lot of money by trying to manage their finances on their own.
However, consider that a financial advisor who helps you implement comprehensive wealth management strategies can boost your net portfolio returns by 3%, according to one study by Vanguard. Another study published in Morningstar indicates that getting financial planning help can generate 29% more wealth for retirement. Further, John Hancock’s 2015 Financial Stress Survey reports that 70% of employees who work with an advisor are on track in saving for retirement, compared with 33% of those who are not working with an advisor.
Another way of looking at it is that you could cost yourself a lot of money over time – money for retirement expenses, travel, passing on to children, etc. – by not working with a financial advisor.
When you factor in the power of compounding, if you don’t have a financial advisor, then the answer to when you should hire a financial advisor is right now.
Finding the right financial advisor for you
Of course, you can search online and find thousands of advisors. The question is, who can you trust?
Ask people you already trust, such as friends or family, for recommendations. If you do blindly search for an advisor, be sure to check their history through the Securities and Exchange Commission’s Investment Adviser Public Disclosure database or BrokerCheck, a free background service provided by the Financial Industry Regulatory Authority.
Your homework begins when you meet with a potential advisor. Ask lots of questions, including the services provided, their costs, the type of clients they work with, their areas of expertise and how they keep in touch with clients.
Take note of how much they want to know about you. If an advisor spends more time talking about himself or herself, then you might not end up with the tailored advice and good communication you need.
Finally, an advisor should also be eagerly transparent. Not only in how they are compensated, for example, but with information on what they recommend and why.
For more information, download this handy checklist that provides key questions to ask and important things to look for when hiring a financial advisor. Just click the image.