I often have people ask me if they should work with a financial advisor, and my response is, “It depends.” There can be many benefits to working with a financial advisor, but that doesn’t mean everyone should or that you’re necessarily ready to work with one.
That said, some people will reach a point where they need help beyond what a financial book can offer them. So let’s look at what a financial advisor does and how to know when to hire one.
What is a Financial Advisor?
A financial advisor works with clients and helps them manage their money. They provide financial guidance and receive payment for their services.
However, the term financial advisor can be an umbrella term that describes a wide variety of people and services. For instance, people refer to financial planners, counselors, and investment managers as financial advisors. It really just boils down to their target audience and who they serve.
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What Does a Financial Advisor Do?
A financial advisor meets with clients and helps them evaluate their current financial situation and develop a plan for the future. They’ll consider your income, debts, and investments and make recommendations for improvement.
And a good financial advisor will always start by understanding where you’re currently at financially and seeking to understand your goals. That way, they have the information they need to help you meet those financial goals.
A financial advisor’s job is really to understand where you’re at and educate you about your options. In the beginning, this may look like helping you pay off debt and save an emergency fund. As your knowledge grows, your financial advisor can help you with more complex economic issues, like taxes and investing.
Pros and Cons of Hiring a Financial Advisor
- Access to their expertise: Financial advisors have extensive experience and knowledge about investing and planning for retirement. And in all likelihood, they’ve spent years working with clients in situations similar to yours.
- Saves time: By working with a financial advisor, you won’t have to worry about figuring out your financial options on your own. Your financial advisor will help you come up with a financial plan and can even help you implement and manage it.
- Personalized advice: Robo-advisors have become popular in recent years as a low-cost alternative to traditional financial planning. But the benefit of working with a financial advisor is that you get personalized advice for your situation. This personalized advice can be beneficial if you’re going through a significant life transition or your finances are fairly complex.
- The cost: For most people, the biggest downside to hiring a financial advisor is the cost that comes with it. Some financial advisors charge an annual flat fee to use their services, while others take a percentage of your portfolio. Either way, you’ll need to find out what these charges are and decide what you can afford to pay.
- It’s hard to find the right person: Finding the right financial advisor can take time, and not everyone will be the right fit for you. And if you choose someone who offers poor financial advice, it could end up hurting you financially more than it helps.
Why You May Want to Hire a Financial Advisor
Now that you understand what a financial advisor does and the pros and cons of working with one, when does it make sense to hire one? Here are a few situations where you could benefit from outside financial help.
Your financial situation changes
If your assets suddenly increase substantially, like receiving an inheritance or a significant raise, you may want to consider working with a financial advisor. That person can help you develop a plan for how to use the extra money to increase your financial wealth. They can also help you avoid the lifestyle inflation trap that so many people fall into.
But in addition, a financial advisor can also help you if something negatively impacts your finances, like a divorce or job loss. That person can help you reallocate your asset and figure out where you need to downsize. And they can help ensure that you stay on track with your financial goals.
You’re nearing retirement age
If you’re getting closer to retiring but aren’t sure if you’re ready, a financial advisor who focuses on retirement can help. These individuals help you navigate the changes that come with retirement and identify your options going forward.
A retirement financial advisor will ensure you’re on track with your retirement goals and help you develop a plan for your retirement years. Their guidance can help protect you from any market volatility and will likely give you greater peace of mind as you near retirement.
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You need sound, unbiased advice
It’s easy to make emotional decisions about your money, but this leads many people to make decisions they later regret. A financial advisor can be a good source of unbiased advice and help you avoid overreacting to a market downturn or temporary financial setback.
Plus, the right advisor can help you identify investment opportunities you might have overlooked otherwise. The bottom line is, it’s always good to get the opinion of a neutral third party when it comes to your finances.
The Bottom Line
If you’re ready to change your financial situation but don’t know where to start, hiring a financial advisor could be the right solution. It will cost you some money to get started, but many people find that the rewards make the expense worth it.
To get started, identify what kind of services you’re looking for and how much you can afford to pay an advisor. From there, you can begin asking for recommendations from friends and family.