Financial advisors are certified professionals that help their clients tackle some of the tough questions of personal finance. They can put together a retirement savings plan with goals and milestones or simply answer a question about life insurance. At the end of the day with all of the information available to you in books and magazines and the multitude of high quality websites dedicated to personal finance, do you really need a financial advisor?
How a Financial Advisor Can Help
Financial advisors are great when you are confused, emotional, or admittedly ignorant of various finance topics. You can’t know everything about everything. That’s why we have professionals like doctors, lawyers, and yes financial advisors. Instead of having to research everything on your own you have a professional opinion to rely on. Add in the fact that a majority of people can’t see far enough into the future to see retirement, much less plan for it, that professional advice can be very handy. A qualified advisor will ask you a lot of questions — some of them uncomfortable! — in order to get the full picture of where you want to take your life. Once he or she has all of the details, they can put together a plan and offer you advice on investments, estate planning, tax liability, and your kid’s college education. The breadth of the advisor’s knowledge can make a lot of your difficult decisions easier.
How a Financial Advisor Can Hurt
As great as a financial advisor can be, there are some dangers involved you need to be aware of. First make sure your advisor has a fiduciary duty to you, first. Fiduciary duty means your advisor has to put your needs above theirs. In a financial advisor context that means they can’t steer you toward expensive (for you from expense ratios and sales charges) and profitable (for them thanks to commissions) investments. Instead they can offer an unbiased view and put together the best plan for you, regardless of the firm backing some of the investments. A bad advisor can cost you a lot of money. Here’s a snapshot of ways a financial advisor can harm your financial situation:
- Churning your investments. Getting you to buy and sell more than necessary in order to generate higher commissions for themselves.
- Expensive investments. Pointing you to mutual funds with high expense ratios when a similar low-cost index fund or an Exchange Traded Fund (ETF) would be a better choice.
- Not responding. Even an unbiased advisor is useless if they never return your calls. If you are in a tough situation and need advice, you need to know you will be able to reach someone.
- Bad planning. A well-intentioned advisor that puts together an awful plan for your situation is not helping you at all. Take this with a grain of salt because plans do need to be flexible with changes in the economic and financial arena.
Going It Alone
If you decide to go it alone you need to have enough time to educate yourself up front on many of the critical areas of personal finance: retirement investing, saving for college education, buying life insurance, and when you can realistically retire. Once you’ve invested the significant amount of time up front to get educated you then must also keep up to date with your information because laws and regulations change. 20 years ago the Roth IRA wasn’t even in existence and is now one of the best methods for saving for retirement. The finance industry will continue to evolve, and an advisor can help answer those questions. If you go it alone, know what you are getting yourself into.