If you are like most Americans, you have at least thought about hiring a financial advisor. Maybe you have talked with a couple different ones in your area or maybe you don’t even know where to start. This article will look into how to know if it’s time for you to hire a professional and if it is, how do you pick the right one for you.
Not too long ago the focus was only on picking the right investments. i.e How you pick one investment over another. But today people are realizing the investments are just one piece of the puzzle. So now the focus is on picking the right financial advisor. You have to plan for retirement, save for college, plan for taxes, analyze insurance needs, complete your estate planning, and save for any number of things like a wedding, vacation, or other goals. There is a broad array of financial issues that need to be considered in order to have a sound financial future.
Everybody needs a financial plan. But not every needs a financial planner.
There was an industry survey that mentioned that of the people who need financial advice there are basically two groups on consumers. 70% of the people have a financial advisor and 30% handle it themselves. If you are going be a do-it-yourselfer you need these three things:
Knowledge – You need to know how to do it. You need to know how stocks, bonds, and mutual funds work. And then you need to know how to choose the right investments for your situation. You also need some knowledge of insurance, estate planning, the various account types, tax law, and a number of other financial matters. As with anything you need to have this basic knowledge before you begin to do it yourself. For example if you were going to change the oil on your car you need to know a little about cars, car oil, and how the process of changing a car’s oil works.
Time – Everything takes time. From a financial planning perspective, you need to have the time to research the right investments, monitor your investments, keep your financial documents organized, and pay attention to changes in your life that would require a change in your plan. You need to take the time to organize your assets and liabilities, and then project out everything into retirement. You need to stay up to date with your account rules, tax law, interest rates, and many other things to ensure your plan reflects the current market environment. And depending on your level of knowledge it might take you more or less time to do this correctly.
Desire – Ever if you have the time and the knowledge you still need to want to do it all on your own. Some people really enjoy handling their own investments and planning but others would rather be doing other things. As well, it might be more beneficial to you to spend more of your time focused on your own career goals rather than your investments. Others will want to spend their free time with family, friends, and hobbies. Just because you can do something and you have the time doesn’t mean you want to do it.
If you lack one or two, or all of these things you need to hire a financial advisor. I have said this many times before but there is no secret to what I do. As a financial advisor, the investments I suggest to my clients are not better than ones they could get on their own. Just like the oil for your car isn’t anything special coming from an auto mechanic. It’s the same oil you can get at AutoZone. In today’s investment environment you don’t need a broker to get you into the best investments, you can go out and buy them yourself. Almost all of the investments that my clients invest in are publicly traded exchange traded funds. I’ll repeat for emphasis, the investments don’t matter. It’s doing the work necessary to determine your optimal asset allocation based on your financial situation. It’s building globally diversified, low-cost, tax efficient portfolios. And it’s all going to be aligned with your goals and overall financial plan. We determine which accounts are best suited with the accounts you have available to you. We handle all the administration of your accounts and we make updates to your plan and portfolio when necessary. It’s not the investments it’s the plan.
Ok, I need help with my financial plan, who do I choose?
So now you should know whether or not you need someone to handle this particular task in your life. If you delegate this job to an advisor the next question is whom you pick to help.
First, determine what kind of financial advisor you are talking to. Did you know approximately two thirds of all financial advisors are solely investment advisors. This means those advisors won’t help you with retirement projections, college planning, tax planning, and a plethora of other things. They will only allocate your portfolio. If this is what you want then so be it but at my company, Phillip James Financial, our motto is “Investing with Purpose.” This means we believe that before investing a dollar you should know why you are investing. Is it for retirement? Is it for your heirs? Without knowing your reason for investing you really don’t know how to invest your portfolio. This is also why you should look for a financial advisor that provides the critical financial planning rather than just investments.
What are your fees?
This seems like an obvious question to ask but I guarantee if you ask it you will only get half of the information you are looking for. For example, when asked this question an advisor might say that his fees are 1% of the assets he is managing. But he might fail to mention that the underlying funds are charge 1.5%. Or if the advisor is commissioned based he may only mention an small annual fee but fail mention the very expensive commissions that will be included in the products that he sells you. So instead of asking what are your fees, you should instead ask, “What are the total costs involved in working with you?” By asking this you should be able to get a better idea of your total costs. As well, you should try to find a “Fee-Only Financial Advisor” because this removes the conflict of interest of selling commission based products. These advisors are held to a fiduciary standard meaning by law they have to do what is in your best interest as the client not their own or the company they work for.
There are certainly other things you can ask to determine the best financial advisor for you but once you know what services the financial advisor provides and the fees for those services you should be able to make a competent decision. You can take a look at our Financial Advisor Checklist if you are interested in a more comprehensive list of questions to ask your current or future financial advisor.
Phillip Christenson, CFA is a financial advisor for the Fee-Only Wealth Management Company, Phillip James Financial. He is located in Plymouth Minnesota and help individuals and families with their investments, financial planning, and retirement needs. To contact Phillip, please visit his MoneyTips profile.