When It’s a Good Idea to Use a Financial Advisor

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Pierre Herme Macarons

I know I’ve poo-pooed on financial advisors quite a bit in my last post about financial advisors, but don’t get me wrong,  I do think there are times when it is a good idea to use one.  I also believe in personal preference.  Some people like to pay to have their house cleaned and some people prefer to clean it themselves.  There’s no right or wrong here, just a personal preference.  Just be aware of what you’re paying for.

First off, I still believe that most of us in our 20’s and 30’s, especially if you have relatively simple finances, which most of us in our 20’s and 30’s do, a financial advisor is not necessary.  Not if you’re willing to put in a little elbow grease by reading some good financial books and blogs and playing around with some online tools almost all of which are available to you for free.  Learning enough to manage your household money and create a low cost, simple, diversified investment portfolio is not nearly as difficult as it might seem.  It’s probably more difficult to build an Ikea entertainment center.  True story.  Still there are definitely times it might be a good idea to use a financial professional.

First and foremost is to put in the effort to find a GOOD financial advisor.  Read it good.  Not random guy you find online or firm with the fanciest website or even through Yelp.  Preferably a strong referral from someone you know, who is financially fit themselves.  Not a friend or family member who knows nothing about their own finances let alone what the heck their advisor is doing except that they are very nice and they got free mocha fraps at the office each time they meet with him or her.  If you don’t have a good referral, then you should take the time to interview several advisors, I’d say at least three.  This gives you a chance to compare and contrast them, ask questions and find out their fee structure and investment styles.  Just as you’d get several estimates on major work that would be done on your house, or get several expert opinions on a major medical diagnosis, so should you put in some effort into finding a good financial advisor.

Now without much further ado, read on about a few situations where it is probably a good time to use a financial advisor.

  1. You’re in your 50’s.  This is probably one of the best times to use a financial advisor.  50’s is a complicated decade in my opinion.  You’re approaching retirement and while you still have a good decade or so left, you don’t have as much time to make up for investing errors or for market upheavals, especially if you haven’t had a solid financial plan in place.  You don’t have time and compound interest on your side, actually they are kind of against you.  It’s a very good time to reevaluate your retirement investment portfolio, dialing back the stock portion and dialing up the bond portion and making sure you’re on track to retire comfortably and if you’re not playing some major catch-up.  When you turn 50 years old, the government let’s you contribute extra money to your 401k (an additional $6000 for 2016) and to your Roth IRA (an additional $1000 for 2016).  If you have a 403b you can even put in more.  In addition to the extra catch-up money you can invest in your 50’s, you have more at stake in general since you probably have a lot more invested in your portfolio in your 50’s than you did in your 30’s.  Also, sometime in your mid 50’s you might begin to experience a decline in your financial decision making capabilities, what’s called financial cognitive impairment.  Lastly, 50’s might be a good time to think about purchasing long-term care insurance (LTC) if that’s something you want to incorporate as part of your retirement strategy.  A financial professional can help you decide if it’s a good idea for your retirement and/or sell you some.  Be wary though as advisors that are also insurance brokers do make commissions off the sale of insurance products like LTC and/or they might be captive agents, brokers who work for only one company, e.g. works for Prudential only.  In general, it’s better if they are non-captive agents, brokers who work with multiple insurance companies. I highly recommend checking them out on FINRA broker check.
  2. You’re planning on retiring in a few years or are about to start retirement and you need guidance on how to turn your nest egg into streams of income that will last your whole life.  There are a lot of complex rules and tax implications for withdrawing from your accounts in retirement.  Not to mention questions like should I claim social security now or delay it? What’s a required minimum distribution (RMD)?  You probably have to do some estate planning as well and you might be thinking about whether to leave any money for your heirs.  Also as mentioned above you may be experiencing financial cognitive impairment which might lead you to make poor financial decisions and you do not want to do that in retirement.  A good financial advisor can help you navigate through all these potential pitfalls.
  3. You have a significant amount of assets such as $500,000+ to invest or you got a sudden large windfall of money like an inheritance.  Could go either way, manage yourself or use a pro, but if I had a large sum of money, I’d strongly prefer to ask a pro to help me manage it.  Advisors may also have access to certain high-performing funds and investments that you may not have access to as an individual e.g. dimensional funds (DFA).  But again, be wary, they might try to push you into a risky investment or high fee mutual fund that might not be in your best interest.
  4. You want to use an advisor to learn from.  The best advisors not only manage your investments and provide comprehensive financial planning, but they are also someone you can learn from.  Especially if you’re a novice, it could help you learn more faster than if you went at it alone.  The goal being you want to manage your money and investments on your own eventually.
  5. You know nothing about investing and have no desire or will to learn about investing and financial planning and therefore are likely to leave your money in a savings account and/or CD.  Better to use an advisor to invest than to do nothing at all or worse save nothing at all.

There’s probably many more reasons when it might be a good idea for you to use a financial professional depending on your specific situation, especially if you know of a good one, but these were the top reasons I would recommend to use one.  Don’t forget there are other options such as the hybrid advisors like Vanguard Personal Advisor Services or Personal Capital which combines computerized asset allocation with access to a real life advisor or a “Robo-Advisor” like Betterment or Wealthfront, which provides portfolio construction and management using an automated algorithm with little to no human advisor.  These options tend to be significantly cheaper than using a real human advisor and some might say better, though that’s definitely up for debate.  In the end, it also comes down again to personal preference; some people like shopping online for clothes some like going to the mall.

However you decide to manage your finances, it doesn’t excuse you from learning and understanding the basics of finances yourself.  After all it’s your money.  Having a financial advisor manage your money without knowing the basics yourself is like taking a bunch of medications without knowing what you’re taking it for.  Incidentally a lot of patients do this and they are the ones more likely to take their medications incorrectly and experience more adverse side effects.  Also, I’ve noticed financial advisors and insurance agents are a lot more careful and a lot more honest with me when they realize I know a lot about finance.  Just throw out a few finance terms and they’ll immediately show you some respect.  Kidding.  But they know not to try to sell me some subpar new and shiny insurance product or loaded mutual fund and they are more likely to tell me how it really is.  One advisor flat out told me, “yeah there’s probably not much I can do for you because you’re already doing most of it yourself.”  Remember, sometimes the best defense is a good offense in football and with financial advisors.  Gosh I hate football and I’m probably using the phrase a little out of context.

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