Hiring a financial advisor requires knowing what you want out of an advisor before you actually start looking for one. Depending on what you want help with, there’s quite a bit of value they can offer beyond the typical DIY approach to financial planning, retirement planning, investing and other financial ventures most people embark on. There are also less obvious ways advisors can be helpful, including with the emotional side of investing or the time savings of not having to build and manage your own financial plan.
Do you want some help finding a financial advisor who serves your area? Try using SmartAsset’s free advisor matching tool today.
What Does a Financial Advisor Do?
In short, a financial advisor helps you with your money. This can mean a lot of things depending on your specific situation and needs, but in general there are three categories of advisors:
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Financial planners
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Investment managers
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Wealth managers
A financial planner helps you understand your money and how to utilize it. They can analyze your budget, provide overall education and help you build long-term financial plans around specific goals. This is the person most likely to answer the question, “what should I do to build a retirement plan?”
An investment manager helps you select specific investments and manage your portfolio. They recommend what to buy and sell, advise you on specific asset classes based on risk tolerance and often handle the active trading involved with your portfolio. This is the person most likely to answer the question, “what should I invest in to build a retirement plan?”
A wealth manager helps you to preserve and grow wealth once you have it. They handle concerns like tax management, large-scale investments, legal concerns and estate planning. This often involves elements of both financial planning and investment management. This is the person most likely to answer the question, “how should I holistically manage my money before and in retirement?”
The Raw Numbers of a Financial Advisor
When you consider the value of a financial advisor, one way to look at this is through a pure numbers perspective. Basically, do you have more money now than you would have without hiring your advisor? There are many ways to think about this, but this is basically what you’re looking at: are your returns after advisor fees and investment costs higher than the standard market return you could get without an advisor?
Market return is the return you would have by investing in an S&P 500 index fund, which averages about 10% per year. As an equity-based investment, this can be a volatile asset class, so risk-averse investors like retirees might want to use a different control investment, like bonds. But for long-term investors looking to grow their money, the S&P 500 is often a good baseline.
Your return after costs and fees is the money you have made with your financial advisor. This could be through their advice or their direct investment management, less the costs they charged.
The value of your client-advisor relationship, then, is the difference between what you have made from your financial advisor versus with what you would have made from a simple S&P 500 index fund. Generally speaking, your financial advisor is providing mathematical value if your portfolio’s returns exceed the control group by more than the advisor’s costs. But there’s often more to an advisor’s services than just pure investing math.
The Educational Value of a Financial Advisor
You can also look at a financial advisor’s value through your own education and growth. Finance is an incredibly complicated subject. In recent decades, that has become an acute issue for households as the 401(k) and IRA system has replaced pensions and Social Security as the main sources of retirement income. Today, everyone needs at least a little financial sophistication to build their future, and an advisor can help with that.
They are professionals who can help you understand things like your tax liabilities and opportunities, different retirement savings vehicles, ways of saving and the various types of asset classes. They can help you learn how to balance risk against reward, how to make an income plan, how to plan for the future and much more.
The simple truth is that finance is like law, health, home maintenance and many other fields. Too many people think that this is something an adult should simply know how to do, but the only way to know is by learning. A financial advisor can help fill this void for many people, but just be sure to work with an advisor that has an expertise in the areas you’re concerned with.
The Strategic Value of a Financial Advisor
Finally, you can consider the value of a financial advisor strategically. How does this person help you build a long-term plan? And how do they help you manage and execute that plan over time? More specifically, as Edward Jones writes, a major issue advisors can help with is to “replace reaction with reason.”
It’s common for people to react to market events emotionally. While reacting to the market in real time can feel reasonable, it can lead to some unfortunate happenings in your portfolio. A financial advisor can help you understand these market fluctuations, and can help you avoid selling assets and turning those on-paper losses into real ones.
Many financial advisors can also help you build a plan to retire, send a child to college, buy a house and more. This can involve education, budgeting, creating a monthly savings plan, selecting assets for your portfolio and more. Then, they can help you monitor that plan to make adjustments over time.
The value of this relationship is expressed in your overall financial security and well-being. This is someone who can help make finance make sense, so that you aren’t best-guessing your investments. For many, this is often the real and hidden value a financial advisor can provide.
Bottom Line
Understanding the value of your financial advisor depends a lot on what you want out of this relationship. Whether you want to build wealth, learn about finance or build a strategy, pay attention to this relationship to make sure it’s worthwhile.
How to Choose a Financial Advisor
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Although you may find it difficult to know where to start, finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
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On average, a financial advisor will charge you about 1% annually to manage your investments and portfolio. Even if you have a good understanding of finance, learn why that may or may not be worth it here.
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