Why should I engage a financial advisor?

By Katie Martens

My dad has never used the services of a financial advisor, and I always thought I’d be the same way. That is, until I met our current financial advisor, and found it a lot easier for him to manage some aspects of our financial life than for me to do it myself.

This article will outline the most common topics associated with financial advisors:

1. Do I need a financial advisor?

2. What are the benefits of a financial advisor and what are the downsides?

3. What it’s like to work with a financial advisor.

Do I need a financial advisor?

A financial advisor once told me that good referrals for him were people who were intimidated or overwhelmed by the idea of doing their investments on their own. He said, in other words, if someone has an E*Trade account, that would not be a good referral for him.

While my dad doesn’t have an E*Trade account, he does have many other investment accounts held with brokers like Fidelity and Vanguard that allow him to do all of the work himself. He does the research on stocks and bonds, he makes the decision when to sell and when to buy, and he does this work about once a week. He views it as a control issue - no one but him can make decisions on he should invest, and in what stocks, which is how he feels less anxious about his financial health. He’s also a cheapo - why pay someone to do it, when I can do it myself for free?

For many, what my dad does is anxiety-inducing. And “free” doesn’t really feel free if you’re spending important time away from other things to do your investment research. Especially for those just starting out in the financial investments world, it can feel easy to get lost and make the wrong decision. This was my husband and I at the beginning of our marriage, and we elected to transfer a few small investments to a national financial services company for management of our IRAs. While there’s an annual fee assessed against our investments, it felt worth the trade off of our time and the learning curve it would take for us to feel comfortable making decisions regarding how the money should be managed.

Benefits and Downsides of Financial Advisors

First, any financial advisor you consult with should have the proper licenses - these aren’t specific to each state, but specific to financial institutions like FINRA. These security licenses authorize the financial advisor to sell investment products.

Second, if you have the names of a few financial advisors who have been recommended to you, Google search them and see what comes up. It’s important to vet them to make sure there haven’t been any fraud charges they’ve had to fight, or customer reviews indicating someone who’s less than agreeable to work with. My sister once asked my dad for a financial advisor recommendation, and he referred her to his former client, not realizing that person was really a bad fit for my sister and had faced some fraud charges for his work as a financial advisor. Don’t assume people recommend services or advisors who will be the right fit for your situation.

Generally, the benefits of having a financial advisor on your side are:

1. You’ve got someone who can explain any financial concept to you as many times as it takes for you to understand it - I do this all the time to our financial advisor because he’s working for us, and I want to make sure we understand all of the options he’s able to exercise on our behalf.

2. Most states require financial advisors to work as a fiduciary on behalf of clients - which means they’re required to work in the best interest of the client.

3. The financial advisor likely has a lot more education or experience than you have in the area of financial and investment products.

The downsides to having a financial advisor often go hand-in-hand with the benefits:

1. They charge fees - make sure the fees are not commission based, but there will be transactional fees on everything.

2. There’s a wide gamut of people who hold themselves as financial advisors - again, be sure your financial advisor has the proper licenses, and has not faced criminal or administrative charges for actions that don’t serve their clients (like only selling investment products to clients that gives the financial advisor the biggest commission rate).

3. You give over control of a portion of your financial health to a financial advisor - if you are the type of person like my dad who likes DIY and to have control in order to have peace of mind, having a financial advisor may not be the right fit for you.

What it’s like working with a financial advisor

Generally, if you’re working with a traditional, live person as your financial advisor, you’ll meet first to go over financial goals and the financial advisor will explain to you his approach to working with you. That can look like: “I believe in a balanced portfolio to avoid as much risk as possible for the entirety of your life” or “I believe in an aggressive investment plan in your younger years, and then move towards more conservative investment options as you get closer to retirement age” and everything in between. If their approach makes sense to you, you’ll move on to the next step.

The second step is filling out lots of paperwork. If you have investment products outside the financial advisor and want to bring them under the financial advisor’s wing, you’ll have to complete a lot of transfer paperwork. If you’re starting from scratch, you’ll have to determine how much you can afford to transfer to the financial advisor so he or she can begin executing on the plan you agreed to. Then there will be the decision on whether you’ll have recurring payments made into your investment vehicles monthly, or quarterly, or at all. You may elect to make a small transfer each month, that you can manage with your budget. Or you may elect to assess your investment products at the same time each year, say, around tax time. All of it will depend on your salary, and how much you can afford to set aside, and how much the tax code allows you to set aside into certain investment vehicles.

The third step, which is probably the most appealing to people using financial advisors, is to forget about your investments until your financial advisor calls you. It is now your financial advisor’s job to manage your money that you have invested, and they will need to account for dips or slides in the amount of money you have invested.