Hire a Financial Advisor or Do It Yourself: What’s Right?
By Aimee E. Calderon, CFP®
This year has been great for the stock market. The S&P 500 is up nearly 28% year-to-date. In years like this, some investors may think they can go it alone and don’t need the help of a financial advisor. We take a look at important factors to consider when you are deciding whether to hire a financial advisor or do it yourself.
Your Portfolio: Diversification and Behavioral Coaching
Although many people judge financial advisors on returns alone, there is much more that they bring to the table when it comes to investing.
Diversification is just one benefit of working with a financial advisor. While you may be attracted to the shiny returns of the S&P 500 this year, studies prove the importance of diversification in portfolios. Diversified portfolios using asset allocation can drastically reduce risk and lower volatility.
In addition to diversifying portfolios, advisors can help with behavioral coaching in the investment area. As advisors in Fullerton, California, we sometimes get calls from clients during a stock market downturn asking to sell out to cash. Although not an easy task, it is our job to help “talk them down” and use reason and experience to make decisions instead of emotion. Similarly, we also try to help clients refrain from chasing returns on stocks that have run up and are overvalued.
Beyond Investing: Financial Planning
Many financial advisors go beyond investment management and help clients with comprehensive financial planning. Tax, retirement, estate, and insurance planning are all services that comprehensive planners can cover. We often tell clients that any question that has a dollar sign attached to it is something we are happy to advise on.
Here are some details on each of the areas:
Tax planning: A financial advisor can help you look at strategies that may help you minimize your taxes. These strategies can include contributing to Roth or traditional IRAs and using qualified charitable distributions to satisfy required minimum distributions.
Retirement planning: A common question clients have is “Can I afford to retire?” An advisor can run projections to show you what the financial side of retirement will look like for you at varying ages. This process can help you set savings goals. Advisors can also help you decide what the best age is for you to start Social Security benefits.
Estate planning: Do you know the best way to pass on an inheritance to children or charities. Financial advisors can help you determine the most tax-efficient way to do this. Do you wonder if you even need a will or trust? Again, an advisor can evaluate your situation, recommend a plan, and put you in touch with a trusted attorney to get the documents you need.
Insurance planning: Life, homeowners, auto, umbrella, long-term care, and on and on—there are so many different policies to consider, it can get overwhelming. Although many advisors are not insurance agents, we are well versed in the area and can give non-biased advice on what and how much you need.
Where to Find a Financial Advisor
While it is possible to go it alone, you may decide that you do not have the expertise, experience, objectivity, accountability, time, or inclination to handle the financial planning process.
If you decide to hire an advisor, what should you look for? Here are a few of the more desirable professional designations to look for, along with links to their certification requirements:
CERTIFIED FINANCIAL PLANNER™ (CFP®) certification requirements.
Chartered Financial Analyst® (CFA) certification requirements.
Personal Financial Specialist (CPA/PFS™) certification requirements.
Each of these certifications has strong ethical, educational, and experience requirements that the members are held to in order to use the designation. Continuing education is also an important factor to consider so that the members stay up to date on industry best practices and new planning opportunities.
What to Look for in a Financial Advisor
Choosing from whom to receive your advice is an important decision, and it is worth the extra time and effort upfront to determine who you can trust to help manage your life savings and guide your family toward its financial goals.
The first step you should take in your search is to make sure the financial advisor is a fiduciary. A fiduciary must always put your best interests first. This may seem obvious, but unfortunately, not all advisors are held to the fiduciary standard of care, which requires advisors to put their clients’ interests ahead of their own.
A simple question to ask is “Are you always required to put my best interests first?”
Most advisors operate under what is known as the suitability standard of care, which means they just need to be sure that the products they recommend to you are suitable for someone in your situation. The products do not necessarily have to be the best solutions available.
The next step you should take is to look for an independent advisor who can choose from all available investments and products in the marketplace.
Many advisors can select from only a specific list of options provided by the company they work for. If an advisor can sell only annuities, then it is very likely that they will figure out a way to solve your problem with an annuity, which may not be the optimal solution.
Once you’ve narrowed down your list, one of the best questions you can ask a financial professional is:
“How do you get paid?”
Here are a few ways advisors are generally compensated:
Commission only
Fee and commission (aka fee-based financial planner)
Fee-only financial planning
Hourly rate
Flat fee/project fe
Most fee-only advisors are regulated by the Securities and Exchange Commission (SEC) as Registered Investment Advisors (RIAs). They generally have fewer inherent conflicts of interest when compared with their commission-based counterparts.
The SEC has a website in which you can look up an advisor‘s history: https://www.adviserinfo.sec.gov/.
Commission-based advisors are usually licensed by the Financial Industry Regulatory Authority (FINRA) or their state’s insurance commission, which enables them to receive commissions for the various products they recommend and sell to you.
Like the SEC, FINRA has a website where you can look up the track record of a commission-based advisor: https://brokercheck.finra.org/.
Remember that most people do not work for free, so if you can’t figure out what you will be paying for the services, you should probably take that as a warning sign!
Here are a few good online resources to help you with your search for a personal financial advisor:
Remember to take your time with this decision. It is much better to move slowly at the outset and make a good decision on the best financial advisor to work with the first time around.
This will not only improve your peace of mind as it relates to your finances, but will help prevent you from having to jump from advisor to advisor over your lifetime, which could be detrimental to your long-term goals.
It will also improve your ability to follow the advice you are receiving, as you’ll know the source to be competent, experienced, and transparent.
Schedule a 15-minute discovery call with a fee-only financial advisor.