If you’re serious about finding financial stability and building long-term wealth, a financial advisor may be in your future. These experts can help you outline your goals, organize your finances and meet your long-term obligations.
That said, not everyone absolutely has to have one – especially if you’re confident in your financial abilities. So, if you ever find yourself asking – Do I need a financial advisor? Here’s what to consider.
What a financial advisor does
The purpose of a financial advisor is to:
- Assess your current financial situation
- Ask about your short- and long-term goals
- Devise actional steps to put your resources toward meeting your goals
However, not every financial professional is suited to every need. Think of them like doctors. Some, like investment advisors, specialize in specific areas. But others, like financial planners, are generalists that can address a host of needs.
Potential services an advisor may offer include:
- General financial and budget planning
- Investment management
- Retirement planning
- Estate planning
- Tax planning
- Insurance product selection
- Mortgage planning
When you hire a financial advisor, pay attention to their credentials. Not only do their credentials reveal their specialty but also whether an advisor is a fiduciary or not.
Fiduciary financial advisors are legally required to act in your best interest and select products and strategies that work for you. Generally, non-fiduciary advisors (like stockbrokers) only have to ensure that products are suitable for you – even if cheaper products exist.
An advisor’s fiduciary status may also reveal their fee structure. Advisors may charge hourly, flat-rate, or commission-based fees. Some also charge a percentage of your assets under management (AUM). For the most part, fiduciaries stick with hourly or flat-rate fees while non-fiduciaries may charge commissions.
Benefits of a financial advisor
Planning and investing with a financial advisor offers several benefits, like:
- Saving time researching and planning alone
- Built-in financial and investment expertise
- Steering you away from emotion-based decisions
- Trading securities or building tax strategies on your behalf
- Having someone act in your best interest (if your advisor is a fiduciary)
Drawbacks of a financial advisor
But like all things finance, advisors can present drawbacks, like:
- Potentially high or confusing fees
- High investment minimums (requiring a certain net worth to take on clients)
- Not being a fiduciary
- Pointing you to expensive investments to pad their own pockets
Financial advisor vs. financial planner
Many people use “financial advisor” and “financial planner” to mean the same thing – but technically, they’re not. Broadly speaking, financial advisors can take on more roles, like stockbrokers, estate planners, bankers and accountants. But financial planners mostly focus on that: planning client finances.
When to get a financial advisor
Usually, the more complex your finances, the more likely you’ll need to hire a financial advisor – but not always. Generally, you should consider a financial advisor in the following circumstances.
Your finances are complex
One common reason to need a financial advisor is when your finances get complicated. This may happen when you:
- Earn more money
- Start retirement planning
- Buy life insurance
- Start a small business
- Bring in multiple sources of income
- Inherit large sums of money
- Get married or divorced
The more you pile onto your plate, the more likely you’ll benefit from professional advice.
You want a personalized investment strategy
Personal investments, like personal finance, are unique to you. In other words, your mother or neighbor’s investment plans are not likely suitable for your situation.
Investing with a financial advisor can help you make the best long-term decisions for your finances. Plus, financial advisor investment strategies may consider assets you’ve never heard of, let alone considered.
You need tax guidance
Taxes are complex and doubly so when you consider multiple incomes, retirement planning and other convoluted situations. If you need tax guidance regarding your investments, inheritance or other financial situations, an advisor can point the way.
You’re interested in estate planning
Estate planning can be extremely complex, entangling property rights, inheritance, life insurance and taxes. Bringing on a professional can help you make sense of your needs – and those of your future beneficiaries.
You’re preparing for retirement
In your 20s, planning for retirement probably looks like plopping a few bucks into a retirement account occasionally.
But as you enter your 30s, you’ll want to start strategizing for retirement with different accounts, investments and timelines. A financial advisor can put you on track for long-term success and help you reallocate your portfolio as you age.
Alternatives to financial advisors
If you’re comfortable handling your own finances or just need a light touch, you may not need a financial advisor full-time. Here are some alternatives.
For confident investors, opening a brokerage account lets you buy and sell various securities like stocks and bonds. Many investors also rely on exchange-traded funds (ETFs), which are baskets of securities that offer cheap, instant diversification.
A robo-advisor is a computer algorithm that uses your answers to a short financial survey to generate investment advice. Essentially, these automated programs can recommend simple, slightly personalized portfolios to meet basic needs.
Because they require less human interaction, they tend to be cheaper and require lower investment minimums than a full-service financial advisor. Depending on the service, they may offer regular brokerage or retirement accounts of various descriptions.
Some even provide pay-per-visit financial advisors on staff to answer any specific questions you have.
Financial planning services
Nowadays, many financial planners offer one-off appointments to:
- Help you build or correct your budget
- Design a personalized, long-term financial plan
- Answer any questions you have about complicated financial situations
For those who are otherwise financially confident, one-time or infrequent visits may be more cost-effective than hiring a financial advisor to manage your investments. The average cost of a fee-only advisor is around $200 per hour or a flat fee of $2,400 to build a comprehensive financial plan.
Do I need a financial advisor? Maybe – or maybe not
Financial advisors offer many benefits: expert advice, personalized financial plans and answers to complex questions at your convenience. However, their costs can be prohibitive and if your finances are relatively simple, you may not need one. But if you’re ready to pursue your financial goals in earnest, an advisor is a worthwhile consideration, at least.
At what net worth do you need a financial advisor?
There’s no set net worth to hire a financial advisor (though some advisors do set net worth minimums). If you have money to invest and aren’t sure where to start, an initial consultation is a worthwhile consideration.
Should I hire a financial advisor or go it alone?
Financial advisors make more sense if you have limited financial knowledge, complicated money situations or lots of investable assets. But if you have a lower net worth or are financially confident, you may not need one.
Is it worth paying a financial advisor 1%?
Generally, 1% per year is a reasonable fee to pay for financial guidance. However, that includes financial advisor fees and fees on the investments you use. If your advisor charges more, you may want to shop around for a better rate.