Key points
- Only 45% of Americans describe themselves as disciplined in financial planning.
- Working with a financial advisor can help you answer critical financial questions.
- The term “financial advisor” includes several types of financial professionals.
Managing your financial plan can be daunting, especially if you need more experience or knowledge.
According to Northwestern Mutual’s 2024 Planning and Progress Study, only 45% of Americans describe themselves as disciplined at financial planning. The study also shows that 69% of those surveyed who have a financial advisor have inflation factored into their financial plan.
It’s fair to say people who work with a financial advisor feel more confident about their short- and long-term financial prospects. If you’re still unsure, here’s what to consider to determine whether an advisor is right for you.
When do you need a financial advisor?
You don’t need to be wealthy or have a complex financial plan to work with an advisor. Whether you’re looking for long-term guidance or a one-time consultation, a financial advisor can be worth your while.
Even if you like to manage your money on your own, there are situations where an advisor can make a positive difference in your financial plan. Here are some situations where working with a financial advisor can make sense.
You’re strapped for time or motivation
Mapping out your financial plan, setting goals, researching financial products and tracking your progress can be time-consuming. A financial advisor can relieve some of the burden if you don’t have the time or desire to manage your finances independently.
You’ve experienced a major life event
If you recently got married or divorced, had a baby, switched to a higher-paying job or received a significant windfall, a financial advisor can help you understand the financial implications of the milestone and adjust your financial plan accordingly.
“A one-time consultation can provide valuable insights and strategies without the commitment to ongoing management fees,” said Taylor Kovar, a certified financial planner and founder of Kovar Wealth Management.
You want expert guidance
While managing various aspects of your financial plan, you ultimately don’t know what you don’t know.
“You need to be skilled enough to understand and ensure you are doing the right things from a tax perspective, properly title your assets, manage your estate plan, and have a plan in place for protections against death, disability and long-term care, and perhaps charitable inclinations, just to name a few,” said Lawrence Sprung, founder and CEO of 11 Financial.
With extensive knowledge of the financial planning process and an incentive to stay on top of the latest financial news, advisors can be a valuable resource. Their objective approach can help you see your blind spots and make better decisions.
What type of financial advisor do you need?
Financial advisor is a broad term that includes several types of financial professionals.
Some advisors provide more services than others. It’s important to find one who’s equipped to handle your financial situation and goals.
Here are some different types of financial advisors:
- Financial planners: Financial planners can help you develop a comprehensive financial plan that encompasses everything from budgeting, paying off debt and managing insurance needs to retirement and education planning. Planners with a certified financial planner designation meet rigorous education, exam, experience and ethical requirements to provide you with top-notch advice.
- Investment advisors: An investment advisor is a professional or firm registered with the U.S. Securities and Exchange Commission that can provide you with specific investment advice or manage your investment portfolio on your behalf.
- Specialized advisors: If you need help with your taxes, for instance, consult a tax professional, preferably a certified public accountant or an enrolled agent. Working with an estate attorney or advisor may be best if you want to set up a will or do other estate planning. Insurance agents can also be considered financial advisors, as they can help you manage potential risks to your financial plan.
- Financial coach: If you’re looking for guidance regarding basic elements of your financial plan, such as budgeting and debt repayment, consider a financial coach. In addition to improving your financial literacy, a financial coach can help you create a plan to increase your income and savings, cut your spending, and set yourself up for more financial opportunities in the future.
- Wealth manager: If you have a high net worth, a wealth manager can help you with your investment portfolio, retirement planning, estate planning, tax planning, charitable giving and more. The U.S. Securities and Exchange Commission defines high-net-worth individuals as those with a net worth of at least $2.2 million, or $1.1 million in assets under management.
Once you decide which type of advisor is right for you, make sure you understand how they make money.
Some advisors, for instance, are fee-only, meaning you pay them only for advice, plan implementation and asset management.
Others are fee-based, meaning they may earn commissions on financial or investment products they recommend in addition to fees they charge you. “Fee-based advisors can offer a broader range of services, sometimes at a lower cost than fee-only advisors,” Kovar said.
To ensure that a commissioned product is suitable, Sprung recommended that people “understand why it is being recommended to them, how it is going to help them, what need is being satisfied or helped by owning it, and what compensation is being received by the advisor.”
Finally, if you hire an advisor to manage your investment portfolio, they may charge a small percentage of your assets each year.
Pros and cons of hiring a financial advisor
Whether you’ve already decided to hire a financial advisor or you’re still on the fence, understanding the benefits and drawbacks and how they apply to your situation is important.
Pros
- Peace of mind. Working with a financial advisor can help you answer important questions and gain the confidence you need to manage your finances more effectively. If you decide to hand off your investment management, you’ll know your portfolio is in expert hands.
- More time. As mentioned, managing your financial plan on your own is possible. But the process requires a lot of time and research, and some aspects of your plan may have a steeper learning curve than others. Working with a financial advisor can give you more flexibility in your free time.
- Potentially better strategy. A good financial advisor has the experience to help you determine the best strategy for your situation and goals. Their ongoing involvement in the financial services industry can also make it easier to adjust your plan as new economic developments arise.
Cons
- Costs. While you can shop around for an advisor with more affordable fees, the costs can still add up over time. If you hire an advisor to manage your finances, management fees can affect your investment returns.
- Potential conflicts of interest. Depending on the type of advisor you employ, the standards they must meet can vary. For example, CFPs and registered investment advisors have a fiduciary duty to their clients, meaning they must act in their clients’ best interests. However, financial coaches, regular financial planners and other types of financial advisors may not be required to avoid conflicts of interest.
- Not all advisors are created equal. As with any other industry, there’s a broad range of experience among financial advisors. If you don’t do your due diligence while searching for one, you may not get the level of expertise and success you seek.
Who should not get a financial advisor?
Although working with a financial advisor can have important benefits, some situations may need to be clarified.
You aren’t concerned about your financial future
An advisor may not be worth the cost if you have your money management under control and don’t have any pressing questions or concerns about your current or future financial needs and goals.
But remember that your circumstances may change. While an advisor may not seem necessary now, that might not always be the case.
If you have the time and interest to go the DIY route
If you are a numbers nerd with the time to educate yourself, develop a strategy and track your progress, you may feel like doing it yourself is part of the fun.
Consulting a financial advisor to boost your confidence in certain aspects of your financial plan could help.
You’re on a tight budget
While financial advisors aren’t just for the rich, they don’t offer their services for free. If you’re on a tight budget, your best option may be to use reputable online resources to learn more about improving your financial situation and working toward your goals.
