When Should You Hire a Financial Advisor?

What Are Financial Advisors?

Let’s be honest: Not everyone has the time or desire to become a financial expert. Still, these days, it is increasingly important to be able to manage one’s personal and household finances.

Don’t fret, though. If you would rather have an easy plan that you can execute without having to constantly worry about changes in legislation or the economy or financial products, then you might consider hiring a financial advisor.

Please note that Investopedia refers to investment professionals with a strict fiduciary responsibility who advise clients and/or manage their financial assets as “advisers.” We refer to investment professionals who follow the suitability standard as “advisors.”

Understanding Financial Advisors

Financial advisors are professionals who advise their clients on decisions related to wealth management and personal finance. Depending on their area of expertise, financial advisors can help you with everything from putting together an entire retirement savings plan with a timeline attached to it or simply answering a question about whole life insurance.

Here’s a snapshot of some of the things that a financial advisor can do:

• Meet with you to assess your current financial situation and future goals
• Develop a comprehensive plan that addresses your major areas of financial concern: retirement, college planning, insurance, avoiding estate tax, etc.
• Provide advice as unexpected financial issues arise in your life
• Set up investment accounts and invest funds for you
• Locate appropriate financial vehicles for you, such as insurance policies or mortgages

Within the financial advisor field, there are many different designations and industry credentials, including, but not limited to, Certified Financial Planner (CFP), Chartered Financial Analyst (CFA), and Chartered Financial Consultant (ChFC).

Of these designations, one of the best-known is the CFP. This designation is issued by a private trade association: the Certified Financial Planner Board of Standards (CFP Board) in the United States. The CFP Board mandates qualifying exams and continuing education for those with the certification.

Life Events That Can Prompt Financial Advice

Particular events often prompt a person to seek out financial advice. These events usually involve windfalls or major losses—or a major life event. You may be more likely to seek financial advice if you find yourself in one of these scenarios:

• I’m nearing retirement, and I want to ensure that I’m on the right track.
• I just inherited some money from a parent, and I want to get some advice on how to invest the money.
• I was recently married, and we need help managing our finances as a couple.
• I was recently divorced or lost a spouse, and I need help moving forward financially as a single person.
• My parents are getting older, and they/we need help managing their overall finances.
• I just had a child and I want to make sure they are provided for
• I hate investing and financial planning, and I want professional help to ensure that I don’t mess up my future.
• I enjoy financial planning and investing, but I want a second opinion to see if I could do it better.

At some point, everyone needs to develop a long-term financial plan that includes considerations for retirement, paying off your house, funding college education for your children (if you have them), estate planning, and a timeline for when you can actually retire. These are also good reasons to seek out a financial advisor or adviser.

When to Seek Financial Advice

With all of the information available to you in books, print media, and the multitude of websites dedicated to personal finance, do you really need a financial advisor?

Before making a decision, ask yourself these questions:

• Do you have a fair knowledge of investments?
• Do you enjoy reading about wealth management and financial topics and researching specific assets?
• Do you have expertise in financial instruments?
• Do you have the time to monitor, evaluate, and make periodic changes to your portfolio?

Doing your own research is a possibility, but to do it right, you’ll need to spend a lot of time keeping current on all of the changes in a variety of areas. For instance, investing and insurance regulations change often. There are also changes in tax laws or other legislation that could affect your financial affairs.

Changes in mutual fund options at your brokerage firm also can have a huge impact on your financial situation. For example, if one of your funds closes, you will need to decide where to put the money.

If you want to handle your finances alone, you will also need to stay abreast of popular financial products and the introduction of new products. A financial advisor or adviser can handle all of that research for you, reducing the cognitive overhead and greatly simplifying the process of investing.

How to Choose a Financial Advisor

When you start working with a financial advisor, it doesn’t necessarily mean you’re locked in with that person or that you need to seek out their help regularly. It might begin as a one-time consultation.

Getting One-Time Financial Advice

Some financial planners and advisors will work with savers on a one-time basis, to either develop a financial plan or help with a specific issue or question. Generally, these sessions will be based on an hourly rate or for a flat fee.

For example, if your company has offered you a buyout package to take an early retirement, you might engage the services of a financial advisor to help you sort through your options. They can help you to evaluate any incentives that your company may be offering, such as enhanced pension benefits, and to visualize the long-term costs or benefits of such a decision.

As another example, you might ask a financial planner to put together a comprehensive financial plan or review your current situation. In addition to helping you better understand your finances, you would likely walk away with actionable steps or a road map to follow.

Keep in mind that it is not uncommon for a one-time engagement to evolve into either a full-time advisory relationship or more regular financial checkups.

Hiring a Full-Time Financial Advisor

Just as there are many good reasons to seek out the services of a financial advisor for a one-time or short-term need, it can also make sense to engage the services of an advisor on a long-term basis.

Different advisors and firms all work in different ways, but it is common for an advisor in one of these arrangements to provide ongoing investment management services, as well as ongoing advice on financial planning issues that an investor might encounter. These topics can include estate and tax planning, preparations for retirement, saving for your children’s college, and a host of other considerations.

Payment for these services is sometimes a percentage of the investment assets under management (AUM). Other times, the fee structure is a flat retainer. Under this type of arrangement, the investor and advisor typically would formally meet (in person or virtually) twice per year or quarterly, with the client having access to the advisor as often as needed for any questions or issues that might arise in the interim.

The benefit to this sort of arrangement is that the investor not only has a professional watching their assets but also receives advice on their overall situation throughout the various stages.

Pros and Cons of Hiring a Financial Advisor

Benefits of Hiring a Financial Advisor

Financial advisors can be great when you are confused, emotional, or simply uninformed about various wealth management topics. Add in the fact that a majority of people can’t see far enough into the future to imagine their retirement, much less plan for it, and professional advice can be very handy. A qualified advisor will ask you a lot of questions—some of them uncomfortable—to get the full picture of where you want to take your life.

Once all of the details are in hand, the financial advisor can put together a plan and offer you advice on investments, retirement planning, estate planning, tax liability, and your kids’ college education. The breadth of the advisor’s knowledge can make a lot of your difficult decisions easier.

Some financial planners go further, actively helping you to buy insurance products and to invest in financial products, such as mutual funds or certificates of deposit (CDs). While not all financial advisors can actually trade securities, many can act as your liaison with a broker or money manager who does. They can also work with a trust- and estate-planning lawyer or an accountant on your behalf.

Downsides of Hiring a Financial Advisor

As great as a good financial advisor can be, there are also bad actors in the field. An incompetent (or, worse, dishonest) advisor can cost you a lot of money. Here are some red flags to look out for when you are working with an advisor:

• Churning your investments: Some advisors may prompt clients to buy and sell securities more than necessary, generating higher commissions for themselves.
• Expensive investments: They may point you to mutual funds with high expense ratios when a similar, low-cost index fund or an exchange-traded fund (ETF) would be a better choice.
• Bad planning: A well-intentioned advisor who puts together a financial plan that is sketchy or ridden with holes is not helping you at all. Of course, plans do need to be flexible, given changes in the economy, interest rates, and the curveballs that life can throw at you personally (loss of a job, long-term illness, etc.). But you need to start out with a detailed blueprint and a clear course of action.
• Not responding: Even an unbiased advisor is useless if they never return your calls or emails when an urgent need arises. Timing can be of the essence in many financial and investment scenarios, and you must feel confident that your advisor will respond to you promptly.

Fiduciary Financial Advisers

To avoid problems, make sure that your adviser has a fiduciary duty to you. Fiduciary duty means that your adviser is legally obligated to put your needs above their own and always act in your best interests, offering you an unbiased view and opinion.

In a financial planning context, this means that the adviser can’t steer you toward investments that are expensive for you (through expense ratios and sales charges) just because they’re more profitable for the adviser (as a result of the commissions that they earn). The adviser must also fully explain any recommendations to you and disclose any potential conflicts of interest—for example, they might say, “XYZ mutual fund company pays me a 30% commission, and ABC company only pays me 25%.”

Being a fiduciary also means that the adviser must respect your financial goals and risk tolerance, advise you accordingly, and recommend appropriate action. No one can guarantee investment performance, e.g., that the mutual fund in which they put you will rise by a certain amount or even rise at all.

However, if you make it clear that you want to invest conservatively, preserving your capital at all costs, then it would be against the adviser’s fiduciary duty to put you in an aggressive growth stock fund that is extremely volatile. Or, if you are dependent on investment income to live, then it would be against the adviser’s fiduciary duty to push high-interest junk bonds without revealing that they have a high risk of default.

It’s important to understand the compensation structure for your adviser because it can impact the kind of advice that you receive. Whether or not a financial professional is a fiduciary depends on how they are licensed and regulated.

Paying Your Financial Advisor

Getting quality advice isn’t free, and a professional financial planner will cost you money. Some planners charge by the hour or have a set rate for certain services. This is called fee-based or fee-only planning. Some are compensated by a commission every time they make a transaction or sell you a product. Some get paid in both ways.

Fee-based advisors often claim that their advice is superior because it carries no conflict of interest, as commission-based recommendations might. In response, commission-based advisors argue that their services are less expensive than paying fees that can run as high as $100 per hour or more—and that you’re paying for demonstrated services and activities, not just amorphous advice or untraceable work hours.

Key Questions to Ask a Financial Advisor

Investors looking for the right advisor should ask a number of questions, including:

• Do they have experience working with clients like you? This could include retired people, same-sex couples, divorced people, surviving spouses, a woman, a Black or Indigenous Person of Color (BIPOC), an LGBTQ+ individual, or any applicable niche.
• How much do they charge, and how do they charge? Will they make any money from the client’s investments?
• What services do they offer—just planning or active management?
• How often will they meet clients to review the portfolio/plan/situation?
• How often will they contact you, and by what method? Are there any limitations on how frequently they can be contacted?

The nature of the advisory field is also changing. Investors now usually have access to their accounts digitally and thus, beyond traditional in-person meetings, may meet with their advisors virtually for some or all of their portfolio review sessions.

Automated Financial Advice: Robo-Advisors

Today, financial advice has benefited from automation and information technology. Robo-advisors offer a hybrid advice model that combines the typical asset allocation and advice services of a traditional advisor with a digital, automated platform.

These platforms use computer-based algorithms that don’t fall prey to human bias or emotion. They follow sound investment models such as modern portfolio theory (MPT) and other index investing strategies. Because they are automated, robo-advisors cost much less than a human advisor, and you can often begin with an opening balance as small as $5.

However, since they are based on algorithms, don’t expect customized advice, unique strategies, and hand-holding when markets turn volatile. Still, several robo-advisor platforms today have increased their human staff to answer your questions and keep you informed.

The Bottom Line

When deciding on the type and scope of advice that you might need from a financial advisor, it’s important to ask the right questions about your money needs and assess your own level of comfort in managing your own finances.

Some consumers may balk at the idea of paying hundreds of dollars just to plan, budget, and invest their money, but think of it as an investment. The money can buy you a quality plan that can be put together in a few hours and last you 20 years, with only a minimal need for a financial checkup with the planner from time to time.