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Should I Get a Financial Advisor?

Thanks to the internet, getting into investing is easier than ever. The ease of stock trading in the digital age has significantly lowered the financial barrier for entry and automated services like robo-advisors make it easy to put any spare cash you have into the market.

If you are thinking about getting into investing, you probably have thought of getting a financial advisor. Financial advisors leverage their knowledge and expertise to help you manage your funds to meet your investment goals. Financial advisors can be a great option for managing your funds, but the cost can often be prohibitive.

In this post, we will discuss financial advisors, what they do, and whether you should think about getting one. The answer might surprise you, as most of the time, you do not actually need a financial advisor to meet your investment goals, provided you do your research and diversify your portfolio. We will also discuss when it might be wise to consider getting a financial advisor.



What is a financial advisor?

Financial advisors offer assistance and in some cases completely manage your finances. The term “financial advisor” and financial advisors typically offer a wide range of services, including managing investments, consultations, and financial planning. Most people use a financial advisor when they don’t have the time or know-how to manage their finances.

What Do Financial Advisors Do?

The exact services a financial advisor will offer depends on the type of advisor. Generally, though, financial advisors assess your current financial situation and craft a plan for future improvement. Financial advisors take stock of your assets, debt, and expenses and help you make a monetary plan to meet your financial goals.

For instance, a good financial advisor will help you save for retirement, make sure you have an adequate emergency fund or help you manage debt and payment plans. Many financial advisors help their clients with their investments. Financials advisors help with your investments by giving advice, recommending strategies, or, sometimes, handling the entire investment process.

Financial advisors often let you choose which services you use. A traditional advisor might offer in-person advice for a continual fee, while investment managers handle investments and take a small commission off the top for payment.

There are no legal requirements for working as a financial advisor, so technically anyone can be a financial advisor. There are, however, several industry credentials and certifications, such as certified financial planner (CFP) chartered financial analyst (CFA) and chartered financial consultant (ChFC). Organizations grant these certifications to financial advisors via a series of professional evaluations and qualifying exams to make sure they have the knowledge and expertise for successful advising.



Types of Financial Advisors

Here are just a handful of the different types of financial advisors and what they do.

Robo-Advisors

Robo-advisors are a relatively new service that uses computer algorithms and AI to manage your funds. Robo-advisors are a great option as they have very low commission fees and low-cost barriers to entry. Many robo-advisors have minimum investment amounts of $25 and some don’t have minimum amounts at all.

Robo-advisors use economic models derived from cutting edge empirical science to make investments and manage your funds. You simply fill out a questionnaire to set your financial habits including your risk tolerance, and the algorithm automatically invests your funds to meet your preferences. Most robo-advisors typically build investment portfolios around exchange-traded and index funds.

In some ways, the term “robo-advisor” is a bit misleading. Robo-advisors technically don’t “advise” anyone—they just automate the investment process. If you need more in-depth financial advice or need help crafting an investment plan, a human advisor might be a better option.

Online Financial Services

Online financial services put you in contact with financial advisors and involve a combination of investment management with virtual finance planning. Online financial services are usually more expensive than robo-advisors as they involve human interaction, but are less expensive than traditional in-person advising.

Online financial services allow you to meet with your advisor online who will help you manage your investments and give you financial advice. Most online financial planning organizations let you choose which services you get and the price is usually based on the complexity of the advice you want. Many online services combine robo-advising to manage daily investments with human advice for making long-term financial plans.

In other words, online financial services are a nice middle ground between pure robo-advising and traditional in-person advising.

In-Person Advisor

In-person advising tends to offer the most comprehensive advising services. In-person advisors can focus on very specific aspects of your finances or they can offer more holistic financial advice. Some examples of in-person advisors include

  • Certified financial planner (CFP): Offer a wide range of financial services, including planning for retirement, managing debt, and calculating total expense. Financial advisors must pass a rigorous qualifying exam to receive their CFP certification.
  • Broker: Brokers are the advisors who buy and sell financial products for their clients. Brokers usually charge a commission fee which is a certain percentage of each transaction they perform.
  • Investment advisor: Investment advisors act as brokers while also offering higher-level financial advice. Investment advisors help clients identify their goals, create long-term investment plans, and offer comprehensive financial advice.
  • Wealth manager: Wealth managers usually provide holistic financial advising and tend to work with high net-worth clients. Wealth managers handle basically every aspect of clients’ finances, including investments, retirement funds, taxes, and more. Wealth managers usually have very high minimum investment requirements, to the tune of $250,000.

In-person advisors offer comprehensive financial services but they are usually more expensive than other kinds of advising.



Do I Need a Financial Advisor?

If you have the money to pay for it, a financial advisor can be a great idea. Most people do not have the money to keep a financial advisor on retainer, though. Luckily, you do not need a financial advisor to have good financial health. As long as you take some time to learn about finances, how to invest, and keep track of financial trends and reports, it is entirely possible to manage your finances on your own. Here are a few key financial concepts one needs to learn to manage their finances effectively on their own.

Diversify Your Portfolio

It is a common saying that you shouldn’t put all your eggs in one basket. In the context of investing, the phrase is taken to mean that you should not concentrate all your investment funds in a single company or industry. It is easy to see why too. If you put all your funds into a single company and it tanks, you can basically kiss your entire investment goodbye. As such, you should spread your investments over multiple companies and industries so you can be insulated from the negative effects of a downturn in one sector. In fact, many investors and financial advisors say that diversification is the single most important factor in having a solid investment portfolio.

Here are a few ways you can diversify your portfolio to protect your investments.

Asset Allocation Funds

The simplest way to diversify your portfolio is to figure out an ideal ratio of investment security types. Asset allocation funds are a predetermined mix of stock and bonds. You can specify these rations ad keep your investments within those ranges. For instance, if you shoot for a 60/40 fund you will keep 60% of your funds in stocks and 40% in bonds. You reallocate your funds any time these ratios change.

The idea of asset allocation funds is to get the right mix of high risk and low-risk securities. That way, changes in one security can be offset by the stability of others. Asset allocation funds allow you to optimize gains while also minimizing risk by keeping your funds spread over multiple kinds of securities with different risks.

Exchange-Traded Funds (ETF) or Mutual Funds

If you want a more personally tailored portfolio, consider investing in mutual funds or exchange-traded funds. Mutual funds pool resources from multiple investors and invest them in a mixture of stocks, bonds, and short-term debt. There is no 100% one size fits all investment method for mutual funds, but a good place to start is the so-called 5/25 rule. According to the 5/25 rule, you should keep your investments in 5 different asset classes and keep no more than 25% of your funds in each one.



Customize individual stock and bonds

If you want to micromanage your assets even more, then you can customize your investment portfolios with individual stocks and bonds. The ideal ratio of stocks to bonds and cash assets depends on your financial goals, risk tolerance, and time frame. For example, if you have long term financial goals with a timeframe of 20 years or more, a good idea is to keep a 90/10 ratio of stocks to bonds.

Keep in mind that diversifying your portfolio is not just about having a lot of different investments, but holding multiple investments that behave and move independently of one another. The more companies and sectors you invest the more you spread your risk. A good rule of thumb is to try and have at least 30 stocks over 5 different industries and not put more than 4% of your total income to any single stock.

You also should vary the company size of stocks and bonds you invest in. In general, big companies that have a large market capitalization are more stable to invest in but show slower growth. In contrast, smaller companies have great potential from growth but are usually riskier.



Behavior Management

One of the more difficult parts of investing on your own is learning how to take their emotions out of investment decisions and stick to a strict investment strategy. This is difficult for two major reasons; First, professional advisors usually just have more experience and a better grasp of investment strategies. Second, managing your funds on your own gives you a much larger personal stake which can cloud your judgment, unlike an advisor who manages other peoples’ funds.

For instance, many investment strategies, such as dollar-cost averaging, involve making strict regular investments that are relatively insensitive to market conditions. If you get too caught up in the thrill of investing, it can be very easy to deviate from a regimented investment strategy. Properly managing your finances requires a certain kind of stoicism.



When Should I Get a Financial Advisor?

Going alone with your finances is doable, but you will need to stay up to date on your financial knowledge and take the time to research market trends. While it is certainly possible to manage your finances without an advisor, sometimes the best option is to hire a professional.

Here are a few reasons why one should consider hiring a financial advisor.

Lack of time

Managing your finances on your own requires quite a bit of time and effort. Unfortunately for many, the demands of work and life mean they are not able to dedicate adequate time to manage their finances.

You need help planning your financial future

Planning your finances can be difficult as there are so many things you have to keep in consideration, including retirement funds, savings, taxes, etc. Even if you have a solid grasp on these kinds of things it is still helpful to get the input of an impartial third party of experts. No matter how experienced with investing you are, you can always learn more. Human beings are fundamentally irrational. A good financial advisor can fill in the cracks where your personal stake in the matter might blind you.



You are nearing retirement

Most people who are near retirement could probably benefit from at least one face-to-face meeting with a financial advisor. A financial advisor can help you figure out if you are in a good place financially to retire and, if not, how best to get there. Financial advisors can also help you figure out different nuances and strategies for investing for retirement. So if you are nearing retirement age, it is recommended to schedule at least one consultation with an advisor who specializes in retirement planning.

You are starting a family

By the same token, if you are starting a family you can benefit from a financial advisor. Getting married and having kids brings a lot of new financial challenges; things like saving for college, life insurance, and estate planning. Financial advisors can help you navigate this terrain and create a financial plan to secure your family’s financial health.

You have a very high income

If you make an income that is substantially above the average, you can save a lot of money but may not know where to allocate your funds. Many people who make the jump from mid-level income to high-range suddenly find themselves with more money than they know what to do with. At that point, hiring a financial investor can be a good idea just to get a baseline of what you should do.

Conclusion

Financial advisors are in general a good idea, but they are not necessary to properly manage your finances and have good monetary health. With the right combination of learning, work, and research, you can safely manage your funds on your own.



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