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Are you among the many young adults trying to figure out if they need a financial advisor or if they should manage their finances independently? It can be an intimidating decision, especially since it concerns your hard-earned money.
But don’t feel overwhelmed. This article will explore the pros and cons of should you hire a financial advisor or do it yourself so you will have all the knowledge needed to make an informed decision.
Whether you decide to hire someone to help with your investments or take matters into your own hands, confidence is critical as you begin navigating toward a secure financial future.
What Is A Financial Advisor
A financial advisor is invaluable in achieving short and long-term financial goals.
They are experienced professionals who help to guide individuals, families, businesses, and organizations in all areas of their financial lives, from budgeting and debt management to retirement planning, investments, and estate planning.
A financial advisor’s financial planning strategies encompass all aspects of life, including growing and protecting assets and savings disciplines to ensure clients live their lives with financial peace of mind.
This can be a huge comfort for those feeling overwhelmed by their finances or those looking to maximize their opportunities while reducing the risk of making wrong decisions due to a lack of knowledge. Typically, when you hire an advisor, they will sit down with you and take a complete look at your current finances as well as get an understanding of your future goals.
This will allow them to begin to put together the puzzle pieces of your financial life so you can reach these goals.
Financial Advisor vs. Financial Planner
Deciding between a financial advisor and a financial planner can often be confusing. Many people use the terms interchangeably, but they offer different services. A financial advisor focuses more on investing your money with the primary purpose of growing it. They provide knowledgeable guidance on stocks, bonds, mutual funds, and other investments.
On the other hand, a financial planner has a more comprehensive approach to managing your finances and may work with you to build an overall financial plan that covers everything from setting up an emergency fund to preparing you for retirement, as well as making sure you have the right insurance coverage to protect your wealth.
Advisors and planners will advise about investments, but only the planner looks at your bigger financial picture when giving advice.
Reasons To Hire A Financial Advisor
Now that you know what a financial professional does, let’s look at why you might consider hiring one.
#1. You Don’t Have The Knowledge
The biggest reason to hire a financial professional is your lack of investing knowledge. When you hear stocks, mutual funds, or exchange-traded funds, your eyes glaze over, and it’s as if someone is speaking a foreign language to you. In this case, paying for a professional to hold your hand and help you outline and create a plan for success makes sense.
#2. You Don’t Have The Time
You might have the knowledge about investing, but you lack the time. If this is you, this could be a reason to hire a financial professional. You have to consider what your time is worth and if it is better to do something else. For example, you might earn $100 an hour, so you are better off spending three extra hours working and paying someone else to manage your investments.
#3. You Inherited A Large Amount Of Money
While we all dream of inheriting a large windfall falling into our laps, most of us would waste every last cent. Studies show that 70% of people who come into sudden wealth end up broke within a few years. If you have no experience handling a large amount of money, chances are you will make many costly mistakes.
#4. You Are Approaching Retirement
Retirement is a difficult time in our lives. We are preparing to stop working and live off our savings and Social Security. Then there is the issue of our health and how to pay for the rising cost of health care.
Putting all of these puzzle pieces together can be overwhelming for many people. Someone who knows the details can be a lifesaver in making it through retirement and not running out of money.
#5. You Are Emotional When It Comes To Money
One final reason to outsource your investing and financial goal planning is if you are emotional regarding money. If you frequently have buyer’s remorse, make many poor money decisions, or are too scared to invest, having someone else could greatly benefit you.
They will help you to make smarter decisions so that you don’t tread water but rather get ahead financially.
Reasons To Do It Yourself
Now that you know why you might consider hiring a professional to help with your finances, let’s consider why doing it yourself might make more sense.
#1. Not Ready
One reason that you should not hire an advisor is that you aren’t financially ready for it. This is one topic that most people don’t talk about.
Theresa Bailey, M.S., A.F.C.® of Daily Financial Success, says, “I see clients each day who want to be in the stock market but are still taking on consumer debt because they can’t figure out how to deal with their cash flow. Once a strong base is established, they can move into obtaining financial advice with confidence. Bottom line, until this is in place, I do not believe a 20 something should hire a financial advisor.”
For an advisor to be worth your money, you must reach a financial point where they can help you. Sometimes, you are better off working with a financial coach and graduating to a professional advisor.
#2. You Don’t Have The Need
Another issue for young adults deciding on a financial advisor is you may not need an advisor even when you are ready to invest and plan for the future. Your situation might be straightforward. You are single, earning a good salary, and putting money into your 401k plan and a Roth IRA.
If you don’t have pressing long-term goals, paying to speak with a financial advisor might be a waste of both your time.
#3. You Have The Knowledge
Finally, you might understand enough about personal finance or be interested in learning more about it. The reality is, managing money and even investing is not difficult.
But you need a basic understanding and stay updated on changing laws and product offerings. If you are interested in this, you could set up an investment plan and follow it yourself.
Costs Of Working With A Financial Professional
If you are leaning towards hiring a financial professional, you need to understand how they get paid. There are three standard fee plans that most advisors and planners follow.
#1. Percentage Of Assets Under Management (AUM)
This is the most common fee structure that financial advisors use and is often referred to as fee only. When you agree to work with them, they will disclose their fee, usually around 1%. Every year, they will take 1% of the value of your investments they manage as their fee.
For example, if an advisor charges you 1% and you have $1 million invested with them, they will take $10,000 as their fee. The downside for young adults with this model is unless you meet the minimum investable assets, these advisors will not work with you.
The issue with this, as Allen Mueller, CFA, MBA of 7 Saturdays Financial, puts it, “An advisor expecting clients to be wealthy before they’ll consider working with them is like a personal trainer expecting clients to be fit before their first workout.”
In many cases, the minimum is $1 million.
#2. Hourly Or Flat Fee
Some advisors skip the above fee and choose to charge by the hour or a flat fee. This is usually the case when you don’t need complex financial advice, or you need a little hand-holding when setting up a plan and selecting investments.
According to Kelly Klingaman, CFP®, RLP® at Kelly Klingaman Financial Planning, “over the past decade, there’s been a growing number of fee-only planners that have abandoned the AUM fee and instead adopted a flat-fee model. A model like this ensures that clients have proper awareness of what they’re paying at any given time, and the planner is fairly compensated for the ongoing work. This is because it is more transparent and directly links the fee to the value of overall financial guidance being delivered to clients and not just to manage assets.”
#3. Commission Based
Other advisors earn their money when they recommend investment products to you. When you choose to invest in these products, the advisor will earn a commission either from the firm they work for or the investment company that owns the product.
Should You Consider A Robo Advisor?
An alternative to hiring a financial advisor or going at it alone is to look into a robo-advisor. These are algorithms that are automated to invest for you. You answer a few basic questions, and the robo-advisor will put you into a pre-built portfolio based on your goals, time horizon, and risk tolerance.
There is no human interaction with this option, which is a turnoff for some investors. As a result, many companies offering this service are now adding in one-time or ongoing meetings with a financial professional for an added fee. While this route seems like a good middle ground, it could be a waste of money.
Ian Weiner, CFP® at Bespoke Wealth, says, “Robo advisors are designed to help with investment management, and they can seem attractive because of their ‘low’ fees, though most folks would be better off just buying a few low cost ETF’s and saving on the robo fees if they don’t want to work with a pro.”
Looking at the underlying investments that make up many of the portfolios, you can open an account at Vanguard or Schwab and recreate the investment without the additional fee.
A Common Costly Mistake
The biggest mistake I see people make is deciding against a financial advisor because of the fee. The investor sees the amount of money they will be paying and believe it is not worth it. My advice is to not look at the fee by itself but look at the entire picture. Here is what I mean by this.
I worked for a high-net-worth financial planning firm, and one day a client was in for his quarterly meeting. In the meeting, he pulled out a paper showing how much money he paid the firm to manage his wealth. Over the many years, the annual assets under management fee came to over $100,000. When he showed this to us, he did not complain.
Instead, he said it was the best money he had ever spent. By working with us, he admitted that he stayed invested when he would have sold everything during the Dot Com meltdown and again during the Great Recession.
Because he stayed invested, he grew his wealth to levels he never thought possible. The point is that paying a fee might be a lot of money, but you also have to look at what you are getting for that amount.
If a financial advisor can help you meet your dreams of retiring by 50 or owning an oceanside villa in Hawaii, the cost is most likely worth it. But if you feel that you can reach these goals yourself, then you may be better off doing it yourself.
I have over 15 years experience in the financial services industry and 20 years investing in the stock market. I have both my undergrad and graduate degrees in Finance, and am FINRA Series 65 licensed and have a Certificate in Financial Planning.
Visit my About Me page to learn more about me and why I am your trusted personal finance expert.