If you're reading this article, you may be on the fence about whether hiring a financial advisor makes sense for you. Today, more than ever, tools to help individuals manage their finances are readily accessible; there are plenty of free retirement calculators, portfolio analyzers and personal finance apps. There are also so-called "robo-advisors" -- programs that use artificial intelligence to help you plan your financial future -- or you might just ask Alexa. We've come a long way.
That's all great: The more consumers are educated about personal financial topics, the better off they may be (and the less chance they'll be duped by unscrupulous sales pitches). But given all this information at your fingertips, is hiring a financial advisor worth the cost? Shouldn't you just try to read as much as you can, do it yourself, and save some money in the process? It depends.
In the spirit of full disclosure, I'm a financial advisor who has been practicing for 19 years. However, I'm not here to extol the benefits of financial advisors, but rather to provide some insight into what financial advisors actually offer, so you can make an educated decision on whether hiring one is a smart choice.
So why exactly would someone hire a financial advisor rather than manage your money yourself? Here are five problems many consumers face that can be alleviated by hiring a pro.
1. Information overload
Information can empower us to make educated decisions, but it can also overwhelm us, causing "analysis paralysis." A quick internet search on whether to fund a Roth IRA, yielded conflicting advice such as "you need a Roth IRA" and "reasons to skip the Roth." What's a saver to do?
While it's wonderful that so much information is readily available; the bad news is that having information doesn't always equal understanding. Information is a good thing if it gets us to thoroughly think through a decision, but if it causes us to procrastinate indefinitely for fear of making the wrong decision, then what is accomplished?
Part of a financial advisor's job is to help you sort through a variety of information sources, tune out the noise and make the best decision based on your finances and your personal goals.
2. Too many choices
In the U.S., there are more than 10,000 mutual funds and exchange-traded funds (ETFs) for investors to pick from. Choosing a fund from this vast universe of choices is like going to the food store and seeing ten different brands of milk, or trying to select one loaf of bread from an overflowing bakery: It takes time, and ultimately you may just settle on one with packaging that catches your eye. Is that the best way to invest?
If you have the time and enjoy picking out funds, that's one thing, but if you don't -- that's a sign it's time to call a professional. Financial advisors usually have lists of go-to investments that they've already done research and due diligence on; these investments may meet certain criteria, such as having low expenses or being consistent top performers. Helping you sort through the financial supermarket of choices is one reason to hire an advisor.
3. Too little time
If necessary, we could all learn to cut our hair, mow the lawn, or change the oil in the car -- but who really has the time? Not to mention: Where is your time best spent? Retirees may have more time to read the newspaper, research stocks, or discuss changes in tax law with their accountant than a busy corporate lawyer. That busy lawyer might appreciate a financial advisor's help in keeping up with changes in the markets and the law, and when that expertise is needed, place one call or send an email to their advisor.
Each of us has to weigh how best to spend our time. If a financial advisor frees up your time so you can concentrate on making more money at work, or spending more time with your family, then that may be advice worth paying for.
4. Lack of expertise
There's a reason a general practice physician may refer you to a gastroenterologist if you have an acute pain in your abdomen: The specialist has a particular expertise that you need. The same goes for financial advisors who work in a special niche. Some financial advisors specialize in times of transition, like selling a business or planning for a divorce, while others focus on an industry, such as working with dentists or schoolteachers.
Each of these advisors has developed unique expertise in their field, usually from years of experience working with clients who have similar needs. For example, a financial advisor may know the ins and outs of your state's pension plan, and its effects on claiming strategies for Social Security, which might help you in retirement planning. If you have a unique situation, a specialized advisor may prove extremely helpful.
5. Personal biases
Managing your own money has its advantages and disadvantages. You're keeping costs down, which is a good thing; you may also enjoy picking stocks on your own.
But each of us has our own personal biases, and you need to be aware that yours exis. Reflect on how much they impact your decisions. For example, if you got burnt in the technology-stock bubble of 2000, you might have vowed never to touch tech stocks again. If so, you'd have missed out on the years of growth that tech stocks experienced after the crash. An advisor can you help you recognize biases you may be overlooking.
You might make rash emotional decisions, too. It's a known phenomenon that we humans feel the sting of losing money more sharply than we enjoy the euphoria of making money. Some investors can't stomach the ups and downs of the stock market. Part of what a financial advisor does is to hold your hand through those tough times in the market and help you make logical and rational decisions, rather than hitting the panic button and reacting in a knee-jerk fashion that could come back to haunt you.
What's right for you?
Hiring a financial advisor is not for everyone. If you are the type that enjoys personal financial planning, has the time to do it, and the emotional intelligence to recognize your own biases, then perhaps you're OK on your own. But if you'd rather spend your time elsewhere, or you require the specific expertise of a professional, then it may be worth considering.
It's not an all-or-nothing decision, either; you can still manage your own money, and have an advisor help with the overall picture, or hire an advisor to manage a separate portion of your money.
A caveat: If you're in debt and looking for help, a financial advisor is probably not right for you. Consider instead finding a non-profit debt or credit counselor.
To find the right advisor, start by asking family, friends, and professionals (like your accountant, or the attorney who did your wills) for a few names of potential experts to interview.
Ideally you'd want someone who is experienced and seems trustworthy. You can check candidates' background on BrokerCheck, which maintains an industrywide database of financial advisors who are also brokers. You can also request a copy of the advisor's Form ADV, which is a brochure registered with the Securities and Exchange Commission (SEC); it outlines the advisor's experience, fee schedule, credentials, and disciplinary history (if any).
Often times, hiring a financial advisor will save you more money than it costs, in the long-run. Figure out how you can best utilize the services a planner has to offer.