Originally posted via moneyunder30.com – https://www.moneyunder30.com/when-is-it-time-to-hire-a-financial-advisor
While nearly everyone could benefit from working with a professional financial planner, the cost is often prohibitive. There comes a time, however, when paying for financial advice becomes a solid investment in your future. How do you know when it’s time to hire a financial advisor?
From time to time I get emails from readers who have realized that they need financial help that goes beyond reading blogs and books.
Some readers’ finances have suddenly grown more complicated, either as the result of a new job or an inheritance, while others simply want personalized advice that helps them increase their savings or pay down debt.
After over 15 years of writing on the subject, I consider myself well versed in personal finance, but I don’t have experience with individual counseling. That’s something to consider if you seek a financial advisor; it’s no different than seeing a doctor who may have 10 years of research and publishing experience but has never performed clinical exams.
What I do in these situations is recommend to our readers that they begin to search for a fee-only financial planner in their area (assuming the reader really does need a personal financial advisor and can afford one).
You can find a financial advisor through Paladin Registry— a free directory of financial planners and registered investment advisors.
When is it time to hire a financial advisor?
In a perfect world, everyone would have financial advisors with whom we could check in once a month or call before making a big purchase or investment decision.
Realistically, however, financial advisors are expensive. And that’s not necessarily because they don’t want to work with people who can’t afford them, but because advisors have to charge a certain amount to make a living doing what they do.
As a result, the decision to hire a financial advisor requires a careful cost/benefit analysis, which I’ll cover next.
So, how much do financial advisors cost?
It varies, is the answer in short.
But I’m going to try to break it down somewhat here:
- Annual Retainer – Financial planners typically charge a few thousand dollars for a comprehensive financial plan.
- Percentage of Invested Assets– You’ll be charged a flat percentage of your total account balance – usually between 0.25% to 1% per year. An unofficial industry benchmark is 1%, although advisors may charge slightly more or less.
So let’s look at some real numbers so you’ll get a sense of how much you may be paying.
If you have $200,000 to invest, you would pay $2,000 a year. If you have $1 million, the fee would jump to $10,000 a year, although some advisors have a fee structure in which the percentage slides down as your assets grow.
- Hourly Rate – Rates by hour typically run a few hundred dollars an hour.
Rule of thumb: always ask how your advisor is compensated
Whenever you meet with financial advisors, ask how they are compensated. Some financial advisors earn their fees from banks and investment companies. So although they offer “free” advice – which may very well be tempting – these advisors usually earn commissions from the investments they sell you. Over time, being in the wrong investments may actually cost you more than paying a fee-only advisor.
I’m not saying all advisors who work on commission are going to give bad advice, but a good advisor should be transparent.
What benefits can you expect from hiring a personal financial advisor?
In my opinion, there are three reasons to hire a personal financial advisor:
- You feel “lost” in planning for your financial future and you need a roadmap.
- You just don’t want to deal. When it comes to money, you’re not the DIY type, and you just want a professional to take care of it.
- You like managing your money, but realize that your financial plan would benefit from an impartial and unemotional third-party opinion.
I think all of us will fall into one of these three categories…at least eventually. But let’s look at each situation and consider when it’s time to hire a financial advisor.
1. You need help with planning your financial future
This may be true for most of us when we’re starting out. There are so many goals competing for our limited financial resources: Paying off student loans, funding a retirement account, saving an emergency fund, buying a house, taking a vacation, getting married, having fun NOW. It’s no wonder we find money so overwhelming as 20- and 30-somethings!
But it comes back to the cost of a financial plan. Another thousand dollars or two is a lot of money and yet another goal to throw in the pot with all the others.
Here’s my take: If you have a comfortable emergency fund and can afford a financial advisor’s fee without going into debt, a financial planner might be a good investment. In fact, the planner’s fee may pay for itself in a few years if he or she helps you make better financial decisions in the meantime.
2. You just don’t want to deal with money
Some people hate managing their money. And that’s cool; what’s important is that you recognize it and get someone to do it for you. In this case, hiring a financial advisor is a no-brainer.
What you’ll need, however, is enough investable assets for an advisor to take you on.
When it comes to investment advisors, most can’t afford to work with you as a client until you have $100,000 or so of investments. Some drop that to $50,000 while others won’t take clients until they have $500,000 or even a $1 million to invest. So you’ll have to shop around.
I think the $100,000 level makes sense. If you have less than that invested, you’re better off sticking your money in low-cost index funds and leaving it be.
3. You want an impartial third-party opinion on your money
There are a lot of do-it-yourself investors who never hire a financial advisor. Their thinking is—I like doing this myself and I’m fairly savvy, why would I pay someone 1% of my money every year and reduce my returns?
But here’s the thing: No matter how much you learn about investing, you’ll never be on an even playing field with Wall Street. And no matter how much you learn about investing, you’ll always be human and, therefore, susceptible to making irrational decisions.
If paying a financial advisor saves you from one bad decision a year—or spots an opportunity that you overlooked—he or she may very well increase your investment returns, despite the fee.
Hiring a financial advisor may require you to spend some money. But if you’ve got the right person on your team, it can definitely be a worthwhile investment.
Isn’t that always how it is?
So many of us feel lost in our finances, that getting a second opinion from a financial advisor can be reassuring. It stirs up the pot – and that’s almost always a good thing!