You have a 401(k) through work. You use the online tools to determine your risk tolerance and what mutual funds you should invest in. You talk to your buddies to see what funds they like. You call an ‘800’ number when you have questions. Your account seems to be chugging along. Why would you need a financial advisor when you’ve got it covered? It seems as though a financial advisor is just an extra cost.
Because many people don’t fully understand what a financial advisor does, they assume all responsibility for their financial decisions. Sometimes they are successful, sometimes they are not. Investing seems fairly straightforward, but we don’t know what we don’t know. And what you don’t know in the world of personal finance can have serious implications for your financial future. Knowing what a financial advisor does (and doesn’t do) can help you decide if you might need one after all.
So, what does a financial advisor do? A financial advisor is a professional who provides financial guidance to their clients. They can help you identify your short-term and long-term financial goals and help you create action plans for reaching these goals. They educate you about financial markets, investor behavior, and investment strategies. They teach you about the financial tools you can use to help maximize your retirement savings. They can help you understand the tax consequences of your financial decisions. They provide direction on when you might need estate planning. They help you navigate the complexities of withdrawing money from retirement plans. They offer investment solutions that minimize taxes. They help you protect your income. The list goes on and on. In short, a good financial advisor helps guide you in those areas of your life that intersect with your finances … in short, in most areas of your life.
Consider the following questions. If you don’t understand them, don’t know the answers or have zero interest in them, you may benefit from working with a financial advisor:
1.) How much are you allowed to contribute to your company sponsored retirement plan?
2.) How much are you currently contributing?
3.) Does your company match your contributions? If so, how much?
4.) What investments should you purchase in a company sponsored retirement plan?
5.) What can you do with your retirement account when you change companies?
6.) What is an IRA?
7) How much debt do you have?
8.) What’s the difference between good debt and bad debt?
9.) How do taxes affect your investment return?
10.) How much money should you have in an Emergency fund?
11.) How much money do you need to have for retirement?
12.) What are the penalties for taking money out of a retirement account too soon?
13.) Are there penalties for not taking money out of a retirement account?
These are basic financial questions that can affect your long-term financial picture. Getting them right today can make all the difference 20 years from now.
Do you think you might need a financial advisor now? If so, here are 3 things you should consider looking for in an advisor:
1.) Look for a financial advisor who acts as a fiduciary (they put your interests first). Your financial advisor should not be a salesman and should not be pitching products. They should provide solutions.
2.) Look for a financial advisor who is fee-based. They are not paid on commission. The interests of a fee-based advisor are more aligned with a client’s interest.
3.) Look for a financial advisor who offers a complimentary consultation. You will be sharing a lot of personal information with an advisor. You want to feel comfortable with them and that you can trust them.
If you are a do-it-yourself type and love to learn about personal finance and love to manage your portfolio on your own, go for it! A financial advisor may not be for you. For the rest of you, consider where you are now and where you want to be 5 years, 10 years, 20 years from now. If you don’t know where to start or are unsure about the decisions you are making and the long-term impact they will have, consult with a professional financial advisor. They can help you make the right financial choices now to ensure that you are just where you want to be tomorrow.