By now, many of us have seen the TD Ameritrade commercials with the bearded bespectacled financial advisor questioning his client about her plans and where she’d like to be when she retires. The client usually throws in some unexpected adventure or bucket list idea that has been in the back of her mind for a few years that nobody would guess just by looking at her. What many people need to consider before getting to this point, however, is whether their situation warrants hiring an advisor. In other words, before you wind up sitting on a couch speaking about running with the bulls someday, you should know when it’s worthwhile to seek the help of a financial professional.
My Finances Aren’t That Complicated
Understandably, many people have reservations about hiring someone to manage their money. Usually, they think that their finances aren’t complicated enough to justify outside help. While this is true for many people, it is certainly not always the case. Even a seemingly simple financial situation may be missing out on numerous opportunities to grow wealth and protect one’s assets.
For example, a widow in her late sixties with a sizable estate left to her by her husband may think that she should just continue with her husband’s financial choices because they yielded a pretty good return up to this point. However, life changes usually bring up an entirely new set of questions. Is she still paying for kids’ college educations? What kind of income does she need now to continue to live comfortably in retirement? Did her husband own a number of stocks which could be sold to offset other capital gains? Did he keep a large amount of cash in savings accounts earning very little, if anything? These are just some of the questions a person in her situation may need to consider.
The Big Picture
Have you ever heard someone talk about how they couldn’t see things clearly because they were too involved in the situation? Personal finances often fall along the same lines. Many people are uncomfortable talking or even thinking concretely about their own financial situations. One of the great benefits of a financial advisor is that he can see the big picture more clearly because he is outside the situation.
Since an advisor is not emotionally connected, he can look at your entire financial situation and figure out what challenges must be met in order to achieve your goals. For instance, he might notice when the interest on a car loan is greater than the interest you are getting on your savings account. In this case, he might advise you to pay off the loan with your savings, so you can start building capital right away without losing money by servicing long-term debt at higher interest rates than your savings account accrues.
Is an Advisor Worth the Fee?
This is one of the main questions people have when considering financial assistance nowadays, and I have to say it’s a valid concern. While there are different types of compensation models, many advisors charge a percentage of the assets under management. This fee usually ranges from 1% to 1.5% per year. Clearly, your advisor needs to add value over and above his fee to make his services worthwhile. After all, Warren Buffett has made no secret of how much fees matter to your bottom line and how you should keep your investing costs as low as possible.
The Financial Upside
The good news is that a Vanguard Alpha study recently uncovered that using a financial advisor may add as much as a 3% net gain over time to a portfolio. In other words, after paying their fees, the client winds up with 3% more than they would have had without using an advisor. This percentage may not sound like much but a 10% gain vs. a 7% gain in your annual return can result in a huge difference to your portfolio. While not everyone will see those exact gains, even a 2% gain can result in a healthy additional return over time.
In the End, It’s Personal
People often need help when changing jobs and moving retirement accounts, assessing long-term care insurance, or even deciding whether it makes sense to lease or buy your next car. These are just a few of the situations for which people are often not prepared or simply cannot deal with at the time. A skilled financial advisor, however, can look at your investment options objectively in order to plan for your future. Ultimately, the decision to hire a financial professional remains a personal one. You have to be honest about what your needs and your goals are at this point in your life, and whether the assistance an advisor provides is necessary to reaching those financial goals.