Should you work with a financial advisor? Learn when and why

06 should you hire an advisorA financial advisor is a professional who can help bridge the gap between where you are today and where you want to be financially. If you haven't enlisted the help of one yet, this guide provides insights on when and why a financial advisor might be a good fit for you.

Why seek help from an advisor?

The world of investing is becoming more complex as technology allows the creation of more sophisticated investment instruments while speeding up transaction times. In addition, the tax code is constantly changing along with interest rates and inflation. Plus, your personal financial goals may be evolving with life events. With all of these variables, it’s difficult to find time to manage your financial health. So, why hire a financial advisor? Engaging with a financial advisor has three significant benefits. An advisor can help you:

  • Develop a financial plan that becomes the roadmap to your specific financial needs and goals

  • Avoid making investment mistakes that could derail that plan

  • Free up time so you can stay focused on your personal and professional life

When to hire a financial advisor

The other question is when to hire a financial advisor, and there's no right or wrong answer. The time could be right because of a meaningful life event like getting married or having a baby. Or your decision might stem from the growing realization that your finances are becoming more complex and you're less comfortable making vital decisions. Or perhaps you've taken responsibility for a parent's care and need to know how to finance it. Here are some typical reasons people start working with financial advisors.

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You're struggling with organizing your finances

You might decide to hire a financial advisor if you're struggling to keep your finances under control. As you leave home and start an independent adult life, finances are straightforward. You have some income and have to pay for rent, food, and utilities. But each step forward adds another layer of complexity: other income streams, retirement accounts, investments, loans, mortgages, credit cards, insurance, and monthly services, to name a few.

Suppose that while trying to balance all of your finances, you miss a credit card payment or overdraw your checking account. These mistakes could result in a negative impact on your credit score and financial reputation. Hiring a financial advisor to take a comprehensive view and organize your finances will put you on the path to financial success with the added benefit of lower stress and peace of mind.

You're experiencing a significant life event

Major life events can dramatically change your financial picture. Whether you already have a financial plan in place when the event occurs or if the event creates the need for a plan, it could be the ideal time to seek out a financial advisor. Typical events include:

  • Marriage. Two adults will have to blend financial behaviors, responsibilities, dreams, and goals, which can become complicated.

  • Divorce. Splitting the household assets and income — and going from one home to two — can disrupt all your plans and projections.

  • Becoming a parent. As a parent, you're not just adding one more mouth to feed; you're revamping your entire expense structure — from diapers and formula to college tuition, not to mention room and board.

  • Inheriting money. An inheritance almost always comes at a stressful time because it accompanies the loss of a loved one. Plus, inherited money is subject to complex rules around estates, inherited IRAs, and taxes. And then, what do you do with the money?

  • Starting or selling a business. Both activities affect your available income, risk exposure, and asset shifts, which can influence your money management practices and investment strategies.

  • Retirement. Retiring reflects the transition from your accumulation phase — while paychecks are coming in — to your spending phase. It’s important to understand how much savings you need to support your desired retirement lifestyle. In addition, the early period of your retirement requires careful monitoring to be sure all your planning is correct.

Whatever the event, a financial advisor can help you navigate and plan for life events, spotlighting all the upsides and avoiding unnecessary pitfalls.

You need tax guidance on retirement assets

How your investments are taxed when you're withdrawing the money to spend in retirement is crucial. Trying to understand all the tax implications of different retirement plans — 401(k)s or IRAs, traditional or Roth — can lead to making no contributions at all. Early in your career, the most critical action is simply contributing as much as possible — especially capturing any employer-matching 401(k) contribution.

A financial advisor can help your contributions stay within annual maximums and make the best available investment choices. An advisor can also help restructure your retirement accounts according to a tax strategy that works best for you.

Your finances are getting too complicated

Even if you're earning a regular paycheck, your finances can get more complex with time. But if you're self-employed or own your own business, certain benefits once offered by your employer before are now your responsibility. For example, you no longer have employer-based health insurance or 401(k) access. You also may have quarterly tax and other reporting obligations.

A financial advisor can help you with all those tasks, including retirement planning, and help manage your money in an environment of inconsistent income.

You don't have time to manage your finances

Making good financial decisions increases in importance as you have more money invested and as you approach retirement age. But your life has likely become busier simultaneously with your family, career, home, aging parents, and other life interests. Finding the time to manage your money — and research and purchase your investments — can be challenging. The results can include missed opportunities or, worse, the risk of mistakes and losses.

Involving a financial advisor who handles the day-to-day administration, market research, and analysis can save you valuable time and prepare you to make vital decisions.

You have a hard time keeping emotions out of investing

Your savings or investment accounts represent much more than what they can buy. They represent a lifetime of hard work, maybe even accepting short-term hardships in return for future comfort. So it's no surprise that emotions can quickly get in the way of sound, efficient investing. Your biases can influence your choice of investments, and your fears can lead to poor timing decisions as markets rise and fall.

A 2018 Journal of Financial Planning study found that investors who applied an emotion-free approach to investing could see net increases of 17 to 23% in assets over 10 years. Hiring a financial advisor can serve the same purpose: removing emotion from investment decisions.

You want to create a financial strategy

Ask most people what diversification is, and they'll say, "Don't put all your eggs in one basket." You may be talking about asset allocation, where you diversify across major asset classes, including stocks, bonds, and cash and cash equivalents. Or you may be diversifying across various sectors within one class, such as stocks. In any case, the key is to choose investments that behave differently in unexpected economic conditions, so you have stability during a market downturn.

Working with a financial advisor can help ensure you aren't overexposed to any one class, sector, or company. While providing enough risk to meet your investment goals, a diversified portfolio can allow some investments to thrive while others stagnate or fall.

You want a professional opinion on your strategy

Technology and online brokers have made it far easier to invest on your own. Charts and other investment tools abound, making investors feel they have greater control over their portfolios. Why hire a financial advisor and pay a fee with so much data and analysis available?

Even as a full-time investor, you face two disadvantages:

  1. As an individual, you'll never know as much as professionals on Wall Street
  2. You're at risk of making an emotional or irrational decision

As part of an investor community, a financial advisor may be aware of opportunities that are not on your radar or have knowledge that prevents you from making poor decisions. Getting a professional opinion of your strategy could more than compensate for the fee charged.

You have a household conflict regarding financial strategy

Harris Poll research for the American Institute of CPAs reports that 73% of married or cohabiting Americans say financial decisions were the source of disagreement and tension in the relationship in the prior year. Conflicts within couples can begin when first combining finances and while learning to manage money as a couple.

Even more critical is being on the same page regarding long-term financial planning. As a neutral third party, a financial advisor can help remove or avoid conflicts by successfully developing a plan both parties can buy into and follow.

You're not sure if you're on track for retirement

Perhaps you’re afraid you'll never be able to retire. Or perhaps you worry that once retired, you’ll run out of money. Not setting enough money aside or not saving soon enough are common mistakes that will lead to retirement disaster, as neither have given your money enough time to benefit from compound interest.

It’s also important to run calculations to determine how much money you will need to save before you retire. These calculations should factor in fluctuating inflation rates, ideal withdrawal rates, and life expectancy. A multitude of variables to consider creates a complex scenario when planning for retirement.

Having a financial advisor review your formal or informal retirement plans can help determine if you're on track for retirement or what to change to get there.

You don't want to deal with money and investing

Financial psychologists will tell you that an uneasy relationship with money comes from childhood experiences and beliefs. Whatever the case, some people simply hate managing their money. That makes them not the best people to do so, and they'd benefit greatly from hiring a financial advisor.

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Getting one-time financial advice

Not all financial advisors require full-time relationships with ongoing guidance. Some will work with you on a one-time basis and charge an hourly or flat fee. These relationships make sense if you want a comprehensive financial plan or a review by an advisor of what you've already created. Some offer financial plan packages at a set fee with set deliverables: a review of your financial situation, a written plan, and the action steps to implement it, for example.

One-time advice may make sense if you have a significant financial decision regarding a pivotal event. Examples could be:

  • Choosing among retirement pension options

  • Managing an inheritance

  • Creating a claiming strategy for your Social Security benefits

  • Maximizing your assets at retirement

  • Formulating a withdrawal plan for money in your 401(k) or IRA

  • Creating a realistic retirement budget

  • Managing stock options

A good one-time consultation with a financial advisor can lead to full-time guidance from that advisor.

Hiring a full-time financial advisor

The decision to hire a full-time financial advisor can grow out of a one-time consultation or be triggered by an event that requires ongoing help. In either case, an advisor provides the guidance that helps you reach financial goals, almost like a personal finance mentor. Topics typically include investment management services, preparing for retirement, tax and estate planning, or saving for a college education.

So, how much does it cost to hire a financial advisor, and what do they charge? Payment forms can vary. It can be a fee schedule based on a percentage of Assets Under Management (AUM). Other advisors charge a retainer that gives the investor regularly scheduled meetings, often with access to the advisor between meetings as needed. A full-time financial advisor arrangement provides ongoing monitoring of an investor's portfolio and ongoing review of other aspects of their personal finances.

How to find a financial advisor

Managing your money will not come with a one-size-fits-all solution. Be sure to research your options carefully and make an informed decision. You should seek someone who will learn about your situation, provide expert advice, and guide you toward solid financial decisions. Let FinanceHQ help find a financial advisor near you who has the expertise to support you on your journey to financial security.

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Sharon O' Day
Written bySharon O' DayContributing writer

Sharon O' Day has been writing in the personal finance space for half a decade, with an MBA in Finance from the Wharton School.