How often have you asked yourself this question? How do you know if your needs warrant the service and cost associated with a financial advisor?
Determine The Need
Engaging an advisor to help you determine if you actually need an advisor is not a good strategy. Prior to the invention of robust planning software that consolidates and monitors budgets, this may have been somewhat viable for those that found themselves with too much cash. Do you invest more or build up an emergency fund? Can you spend it all if you are retired? Do you have excess available for gifting or other potentially tax-advantaged strategies? Budgeting firms like Mint.com allow you to access several tools and calculators free of charge. In my initial conversations with prospects, I always give guidance on where they can do all of their financial planning and investments for a reasonably low cost or without incurring excessive fees. If, after the conversation, they feel it is more convenient for an advisor to assist with the consolidation and budgeting, they at least have a better idea of the value of service I provide.
Choose How You Would Like to Compensate The Advisor
Many advisors will tell you they can help you address your needs. In reality, they may require you to invest or purchase a product through them or their firm first before they provide any advice. This can present a conflict: The quality of advice may be determined by the revenue generated from your account. In my opinion, the lower your investable account value that you can move, and the larger the firm and client base, the less attention you may receive from your advisor on an ongoing basis. A strategy for wealth management firms may be to tell you what you want to hear, make the sale, and move on. If you desire an analysis that requires a review without ongoing monitoring (think budget analysis or estate review), it may be better to hire an advisor that can provide planning on an hourly or flat-fee basis. The advisor can analyze your current situation, create goals, and recommend strategies to meet those goals. I believe paying for ongoing management or an insurance product should only be initiated after the planning is complete.
Do you need to pay for ongoing advice? The answer to this question comes down to personal preference. Once you have a plan in place, a good advisor can provide access to many solutions through their firm to help see your plan through to the end. They can help with investment allocation and management, provide access to various insurance vehicles, and introduce you to trusted professional contacts to provide services not available through their firm (like tax filing and drafting of wills and trusts). Ask yourself this question: Do you trust yourself to avoid the common pitfalls that many can experience when it comes to managing your own personal wealth and finances? Or you might feel you need a trusted professional to work directly with you as your financial situation becomes more complex (increasing tax bracket, increasing income, and potential capital gains, to name a few). In my opinion, having a plan in place reduces the chance that your advisor will come up with revenue generating options (commission or high-priced asset management strategies). Why do I feel this is important? Because a comprehensive plan should have all the information needed to shop for an ongoing solution that’s right for you. You should be able to price various asset management strategies and insurance products at various firms to find the best deal, because much of the planning legwork has been done by an hourly or flat-fee advisor.
A professional who labels themselves as a financial advisor can provide many services with varying degrees of products, specializations and fees. Deciding if you even need one, and if so, who it should be is critical to realizing your best outcomes.
Securities and advisory services offered through LPL Financial, a registered investment advisor, Member FINRA/SIPC.
The opinions expressed in this article do not necessarily reflect the views of LPL Financial.
This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.