Do You Really Need a Financial Advisor?
This past February, we welcomed our second child, little Everett, into the world. He’s now coming up on eight months old and is as mobile as ever. Between Everett, his sister, and their many toys, our little townhouse is getting a little tight so we’re on the hunt for a single-family home. We’re fortunate to be working with a wonderful real-estate agent and it recently occurred to me that choosing and using a real estate agent has many parallels with finding and working with a financial advisor.
The first time we bought a home – the townhouse we’re in now – we used Redfin. Redfin is one of several home search sites that show you all the homes for sale in a specified area based on the MLS database. We searched for homes ourselves and when we were ready, we used a Redfin agent for closing. Since we weren’t also selling a home and we knew what we wanted, we didn’t mind using a basic service and overall the process went really smoothly. This time, our situation is a little more complicated. We’re wanting to live in the next home until our children are grown and because of that, the stakes are higher. We want specific features and a specific location. We’re also going to need to sell our current home - something we’ve never done before. Because the situation is more complex, we’re working with a real estate agent we know well who came with great reviews. Financial help is also offered at different service levels and it can be very worth your while to choose a level of service that meets your needs and matches your life stage.
When it comes to your financial journey, there are two basic phases: accumulation and preservation (you could argue that after you pass there’s an epilogue of sorts where estate planning comes into play, but that’s an article for another day). Early in your career, you are in the accumulation phase. The goal is mainly to save and grow your wealth so that you can achieve your future financial goals – things like purchasing a home, sending your kids to college, and retiring. During this phase, the need for an advisor is minimal. Unless your financial situation is complicated due to existing wealth from an inheritance or maybe a successful business venture, there’s not a big need for planning or even complicated investing. If your place of employment offers a retirement plan such as a 401(k), typically the best option for you is to stash as much cash in that plan as possible, set an investment allocation that fits your risk tolerance and then leave the money to grow. You may want some basic advice on what to invest in and have someone on hand to answer periodic questions, but there’s very little need to have someone providing a high level of service for you at this point.
As you near retirement, however, the situation changes. Planning becomes more crucial. You start to ask questions like “When can I retire?” or “Have I saved enough for this specific financial goal?” At this point, it makes a lot more sense to hire someone with planning and investing expertise who can guide you through the transition. As I mentioned in my home buying example, the stakes are notably higher and paying an expert to help you make the right decisions becomes worth it. When you reach this stage, you may even know that you’d like help and just aren’t sure where to start. The very best advice I can offer in response to that is this: find someone who is competent and who you are comfortable with.
When it comes to determining the quality of an advisor, there are a few things to consider. The first is, are they licensed and in good standing? Financial professionals are required to be licensed to offer advice. To gain the required license, different types of tests are administered by FINRA, a government regulatory agency. FINRA also tracks any disciplinary actions taken against advisors who engage in illegal behavior. Fortunately for consumers, they make all of this information available on their Brokercheck website (find it here). You can use this site to search for financial professionals you may consider hiring and see what licenses they have and if they have a clean history of providing financial advice.
Beyond making sure your advisor is in good standing, you also want to consider their education and experience. The bar for becoming an advisor is not very high. Not all advisors are the same. Some do just enough to meet the regulatory requirements while other go above and beyond. In addition to considering your potential advisor’s higher education and years of experience, I would also recommend looking for advisors with certain designations, the most common of which is the CFP®, or Certified Financial Planner® designation. This designation is administered by the CFP® board, and has an education requirement, an experience requirement, and requires candidates to pass a six-hour exam covering what the board considers key aspects of financial planning. What I like about this designation is that it has a continuing education requirement, meaning advisors who hold the designation have to continue learning in order to keep the designation. Because policy is constantly evolving, having an advisor who is up to date on the rules related to your financial situation can be a really big deal. Just like I want a real estate agent who knows the current market as opposed to someone who hasn’t sold a house in twenty years, I would also want an advisor who is required to keep their advice current.
Competency is a hard quality to judge, especially when it's regarding something you're not familiar with. One of the best ways to determine if someone knows their stuff is how well they're able to explain it to you and if what they tell you aligns with what you do know. If nothing your advisor says makes sense or if it flies in the face of conventional wisdom, it might be wise to look elsewhere.
Finally, I would highly recommend that you work with someone you trust. Discussing your wealth is a very intimate conversation. It’s a reflection of your lifestyle and your values as well as your fears and having someone who can walk with you through your financial situation and receive your concerns and hopes with empathy is a big deal. At all times, it helps to remember that you are the client. You are paying this person to help you steward a significant part of your life and if they’re not doing a good job or they just make you feel uneasy you don’t have to work with them.
Wherever you’re at in your financial journey, utilizing an advisor is ultimately a personal choice. There are phases of both saving and spending where it makes sense to get help and where it makes sense to go without but it’s a matter of preference. Some people simply feel more comfortable knowing that they have someone working for their best interests who can offer them advice when they want it. What matters most is that whoever you choose to work with is offering you their very best and that together you can make the most of your wealth as you pursue your financial goals.