With all the things you have to keep track of as a parent – feeding schedules, school schedules, and even pooping schedules, you might be wondering if you should hire a financial advisor. Working with a financial advisor can help you make better decisions about preserving and growing your family’s wealth. And handing financial decisions over to a trusted professional can give you more time to enjoy your kids, or to get out for that rare date night.
Yet, a good financial advisor can be expensive, and with an ever-expanding array of options available to individual investors, is it worth it? Is it better to just do it yourself? It depends on your financial situation, your knowledge of personal finance, and the amount of time you have to dedicate to it. Before deciding whether to hire a financial advisor or to do it yourself, it’s important to understand the services that a financial advisor can provide.
Investment Management Versus Financial Planning
While the term “financial advisor” is generally used to refer to anyone who advises individuals in connection with their personal finances, a financial advisor is increasingly viewed as having two distinct, sometimes overlapping roles: an investment advisor and a financial planner.
An investment advisor generally advises clients on which stocks or bonds to buy (or sell). A financial planner advises clients on their overall financial wellness, ensuring that appropriate risk management tools are in place (e.g., insurance, legal protections) and that money is being managed in accordance with the client’s priorities. One person can serve in both capacities; however, he or she often has a focus on one role or the other.
Over the past decade, the value of individual stock-picking has been seriously questioned. With market-based index funds outperforming the majority of actively-managed funds over time, investors have increasingly turned to passive investment strategies, with low-cost index funds, like those operated by Vanguard, receiving record inflows of money. While the jury is still out on whether passive funds are superior to active trading, as it looks now, the advisor who focuses solely on stock picking may be going the way of the cassette tape.
Even with solely passive investments, however, an advisor can provide added value by helping you choose appropriate funds and providing traditional “planning” services, such as advising you on setting your asset allocation; creating a budget that reflects your goals, values, and priorities; making sure you have the appropriate insurance policies and estate planning documents in place; and implementing strategies to minimize your taxes. A financial planner should also serve to coordinate other financial professionals, such as attorneys and accountants.
Questions to Ask Before You Go It Alone
Few non-financial professionals have the expertise of a professional financial advisor, but that doesn’t mean that you can’t – or shouldn’t – manage your own money. However, you should be ready to engage in some extensive research on your own and be able to dedicate significant time to learning about personal finance.
Some of the questions you should ask yourself before taking on the role of your family’s financial manager are:
– Do you understand the difference between investing and financial planning?
– Do you understand basic tax concepts (e.g., ordinary income taxation, marginal tax rates, and capital gains tax rates)?
– Do you understand what a balanced portfolio looks like, and how it should change over time?
– Do you know how to research the performance, fees, and asset allocations of index funds and mutual funds?
– Do you understand inflation and the time value of money?
– Do you know what elements are included in a basic financial plan?
– Do you have the discipline to stick to investing decisions over a long period of time?
– Do you understand the stock market and how rare it is for an individual investor – or even a professional investor – to “beat the market” over a long period of time?
If you are well-versed in investing, have a basic understanding of financial planning, and don’t have a complicated financial situation, you can save a significant amount of money in fees by investing in a balanced portfolio of low-cost funds. Even if this is the case, you may benefit from getting some help from a financial planner who charges by the hour or who is willing to prepare a comprehensive financial plan for a flat fee. You can use this guidance to supplement your own investing activities without paying an annual fee to the advisor.
Helpful Resources for Do-It-Yourself Investing
If you decide to go it alone, there are a plethora of resources to help you. Morningstar.com is the go-to website for information on stocks, bonds, mutual funds, and index funds. It can help you research various funds and choose a portfolio of low-cost passive or actively-managed funds. Other websites or publications with useful information are Kiplingers.com, Barrons.com, and the Wall Street Journal.
In the past few years, a number of alternative vehicles have emerged that allow individuals to manage and track passive investments online, while providing basic financial planning guidance. Websites like betterment.com and futureadvisor.com can provide you with tools to invest and manage your finances at fraction of the cost of traditional, in-person advisors.
LearnVest is another relatively new company that provides online tools to create a financial plan with virtual help from real financial advisors and is available through a monthly subscription plan. This can be a good option for those who want to manage their investments themselves, but want basic help from a professional.
When to Get an Advisor
If all of this seems overwhelming to you, or you simply don’t have the time to tackle such a vast subject, you may be better off working with a financial advisor in person. Working with a traditional financial advisor is also recommended if you have your own business; own alternative investments (not stocks and bonds), such as real estate investments or interests in a partnership; if you have assets abroad or are not a U.S. citizen; or if your financial situation is not atypical in other ways.
If you decide to work with a financial advisor, it’s critically important to understand the advisor’s credentials and fee structure. Be sure read our article How to Choose a Financial Advisor to know what to look for and what questions to ask before hiring someone.