There’s no shortage of places to get financial advice these days, but to level up your finances, you might consider working with a professional, like a financial advisor.
Hiring a financial advisor comes at a cost so you might wonder, “Should I use a financial advisor or do it myself?”
The answer: it depends on your situation. Financial advisors can be useful for long-term financial planning; however, not everyone needs one so it’s important to understand the pros and cons of hiring a professional versus doing it yourself.
What is a financial advisor?
A financial advisor is a professional that helps you make a plan for your money management, so you can reach your financial goals. In many cases, a financial advisor focuses on investing and helps clients:
- Assess risk tolerance.
- Evaluate asset allocation (how diversified your portfolio is among stocks/bonds/cash).
- Review cash flow.
- Suggest strategies to help build wealth.
Financial advisors support clients with their money goals in the short- and long-term and provide advice about clients’ overall financial decisions. However, the term “financial advisor” can be an umbrella term that refers to various types of people in finance including:
- Financial planner
- Wealth manager
- Life insurance agent or broker
- Retirement advisor
- Financial consultant
- Chartered Financial Analyst (CFA)
- Certified Financial Planner (CFP)
- Certified Public Accountant (CPA)
Although all of these titles might fall under the umbrella of “financial advisor,” each role can have different fee structures and levels of responsibility to their clients.
What to consider before working with a financial advisor
The term “financial advisor” is fairly broad and can encompass different types of financial professionals. Be aware that some of these professions have a low barrier of entry into the field and some professionals might not have the experience you need.
In fact, the Bureau of Labor Statistics (BLS) states that no work experience in a related occupation is required to be a financial advisor. That’s not to say that most or all financial advisors are bad, but it’s important to know that not all are created equal.
Here are questions to ask before working with a financial advisor:
- Do they have professional designations? Working with a Certified Financial Planner (CFP) is a great option given the rigorous requirements and fiduciary standard, which means they must act in your best interest. They can help you create a comprehensive financial plan.
- How do they make money? Fee-only support is a great option because you pay a flat fee in exchange for a service. This is a straightforward option as the advisor’s fee is based on a percentage of assets under management. Commission-based advisors, on the other hand, might get paid by selling you insurance or other financial products, creating a conflict of interest. In other words, they may sell you products you don’t really need if the payout for them is worthwhile.
- Do they have experience in the field you need the most help in? Work with someone who’s well-versed in the areas you need help with. For example, you might need a plan to pay off student loans, assist with estate planning, or develop a targeted investing strategy. Ask about their experience, certifications, and credentials.
- Are there public disclosures you should be aware of? A financial advisor may have complaints against them or violations and still be working. Do your research on who you might work with by reviewing the SEC Investment Advisor Public Disclosure Database and FINRA Broker Check.
At Student Loan Planner, we typically recommend that people work with a fee-only fiduciary that’s a Chartered Financial Analyst (CFA), Certified Financial Planner (CFP), or Certified Public Accountant (CPA).
When it makes sense to hire a financial advisor
Not everyone needs a financial advisor. But if you don’t love personal finance and find it a chore to the point that you neglect it, a financial advisor might be useful. If you’re contemplating should I use a financial advisor or do it myself, here are some scenarios where it may make sense to get some outside support.
You’re going through a big life change
You might be able to DIY your finances and investments if it’s just you in your household. But if there are others involved — like a partner, children, or dependent aging parents — and you’re going through a big life change, getting support from a vetted professional might be a smart idea.
These events can include:
- Getting married.
- Getting divorced.
- Becoming a widow.
- Getting re-married and having a blended family.
- Receiving a significant inheritance.
In these situations, your financial life might both be impacted by others and others might be impacted by it.
For example, splitting assets in a divorce or having to pay alimony or child support are common situations that might merit a financial advisor. They can help stay on track with retirement planning, paying off debt, and building wealth.
You have a business or practice
If you have your own business or practice, a financial advisor might help you navigate the murky aspects of managing money as a business owner.
Whether you’re managing your business day-to-day, thinking of starting a business or selling your practice, a financial advisor can support you. In this situation, it’s vital to find a financial advisor who understands the intricacies of business income, expenses, deductions, taxes, etc.
You’re buying a home or investment property
Purchasing a home will likely be your largest expense in your lifetime (next to your student loans!). Whether you’re buying a home to live in or buying real estate as an investment property, taking on so much debt can warrant working with a financial advisor.
If the home is an investment, an advisor can help you navigate the special rules and considerations to be aware of. They can also help you look at the big picture, review your debt-to-income ratio, and make sure you’re not buying too much house for your monthly budget. Plus, they can help you re-adjust your finances so your other goals stay on track.
How much does a financial advisor cost?
If you want to work with a financial advisor, be aware of the costs and different levels. If you work with someone directly, it might cost a few thousand dollars per year. If that feels high, consider working with a robo-advisor such as Betterment or with a brokerage like Vanguard, which offers advice and costs 0.25% to 0.4% of your investments as your annual fee. This is an easy and affordable way to get guidance with your investment strategy.
You may also find a low-cost advisor with a similar rate structure that you can work with online who can invest your assets for you. At the higher end, you might pay up to 1% of assets if you work with a full-service financial advising firm. This could cost a lot of money, depending on your situation.
When DIYing your finances makes sense
If your financial situation isn’t complicated and you don’t have multiple people involved in your household finances, you might not need to hire a professional advisor.
Here are some scenarios it might be worth managing your own finances.
1. You’re on top of your finances and goals
Perhaps you’re confident about your personal finance knowledge and have read books and listened to podcasts to educate yourself. If you feel like you have a handle on your finances and routinely review your finances to see if it’s still on the right path toward your goals, you might not need a financial advisor.
An indication that you might be OK managing your own finances is if you have a plan to pay off your debt, or have successfully paid off debt — especially high-interest credit card debt.
Another indication that a DIY approach might work for you is if you’ve developed a manageable plan to max out retirement accounts, like a 401(k) or IRA. Also, if you’ve maximized your tax-savings strategies and are growing your income.
2. Your financial life is fairly simple
If you’re single with a conventional job that issues you a W-2, are actively saving for retirement, paying down debt, and don’t own any property, you might not need a financial advisor.
Even if you’re married, you may not need a financial advisor. As long as you and your partner are on the same page and actively working toward your goals. If you don’t have a ton of income sources and don’t have complicated investment vehicles or businesses, you might be able to DIY your finances.
Lastly, you can always do a hybrid approach where you mostly DIY your finances but enter a one-time engagement with a financial advisor to review your plan. In this situation, they can see if you’re missing a key issue toward your goals.
Pros and cons of DIYing your finances
If you’re still on the fence about using a financial advisor or managing your finances on your own, consider these pros and cons.
Pros of DIYing your finances
- You have your own best interest at heart.
- You’ll learn new insights and experiment as you go.
- It’s low cost, and you can invest those savings toward your goals.
Cons of DIYing your finances
- You could make a costly mistake (consider mutual funds fees, and high-interest debt in particular).
- You might be approaching your plan the hard way, unknowingly.
- You might have financial blindspots you’re unaware of.
If you DIY your finances, set up goals and track your finances monthly or at a minimum every quarter. That way you have a roadmap that pinpoints your starting point and where you want to go.
Look at your spending, debt payoff progress, and your investments, and consider rebalancing your portfolio once a year.
If you decide to hire a financial advisor, research their credentials, and whether they have complaints against them or disclosures. Finally, always ask how they get paid.
Figuring out if you should use a financial advisor or do it yourself can be a tough decision. Using this guide, you can evaluate the pros and cons of each option to figure out the best option for you.
There’s no wrong answer — just be clear about what you’re hoping to get out of your larger financial plan and the milestones along the way. If a large part of your financial stress is about student loans, you can get work with a student loan expert to create a customized repayment plan.