Many people may wonder, “Do I need a financial advisor?” It’s an important question. Because management fees can take a huge bite out of your investments. Potentially half your returns over the course of decades. In some cases, it may be worth it. In other cases, certainly not.
Find out if you’re a good fit for DIY investing. Or if you should hire a financial manager. When you look at these 12 key questions, it’ll help you answer the all- important question, “Do I need a financial advisor?” Your answer could be worth tens or hundreds of thousands, if not more.
Disclosure: Our editorial content contains affiliates from which we receive a small payment to support the site at no additional cost to you. These marketing partners do not influence our opinion of their products. They do not review, approve or endorse our editorial content. All opinions remain our own.
Answering the question, “Do I need a financial advisor?” can make a big difference for your financial future. Partly because parting with fees for advice can sting. Big time. When does it pay for itself and when is it a complete waste of money? How do you know if it’s right for you in this stage of your life?
If you’ve read several of our articles you probably realize that we’re not into blanket recommendations. Likewise, the “correct” answer here is… It depends.
In a nutshell, the decision really boils down to this: Do you hire yourself or hire someone else? Because someone should be “minding the store.” Not everyone is cut out for the job.
Then again, it can be hard to find a financial advisor who’s the right fit with the right expertise at the right price point. And you’ll always be your own best advocate. As the saying goes, “The only person you can trust is you.” In the financial sphere that may be particularly true.
Deciding whether to DIY or hire it out is a big decision. Not everyone needs an ongoing relationship with a financial advisor. Maybe an intermittent checkup is all you need.
But some who would benefit from working with a financial advisor (sometimes called a wealth advisor, although they may erode your wealth with fees) mistakenly think they don’t need one.
Here are the 12 questions to ask when deciding whether to tackle it yourself or hire a financial advisor.
Answering these questions will also help you find the best type of person to work with.
12 Questions to Ask before Deciding, “Do I need a Financial Advisor?”
1. Do you have an inquisitive mind and an interest in learning about financial matters?
Some people have zero interest in learning about stocks and investing, insurance and debt repayment. That’s okay… sort of.
Someone should be watching out for your financial wellbeing. And there’s great wisdom in believing that no one will look after your money like you will.
Having said that, there’s a difference between reading enough to choose a mutual fund and reviewing that decision annually… versus reading five financial newsletters every month and watching 30 individual stocks. Or some middle ground.
You can do better with well-chosen stocks than mutual funds. It’s like you’re choosing your own mutual fund, without the extra fees. But only if you actually care enough to educate yourself and take time to make the transactions.
If you don’t care or won’t do it, you should probably divide your investing into a couple good mutual funds and keep one eye on them. Not be the one to decide what new stocks you’ll buy every month.
Or else, turn things over to a qualified financial advisor who will keep track of things for you.
2. Are you humble enough to admit you don’t have all the knowledge in the world and you’ll make some mistakes along the way?
Mistakes are part of the human experience. So there’s great value in the ability to humbly admit that you don’t know everything. No one can. Obviously financial advisors make mistakes too. Just because you hire one doesn’t exempt you from this ubiquitous experience.
Even the most famous gurus like Warren Buffet can’t predict the future. No one has that ultimate crystal ball. And believe it or not, even Buffet admits to investment mistakes. If you can live with that, your answer to the question, “Do I need an investment answer?” might very well be no.
3. Do I need a financial advisor? Ask yourself if you have time (not just the interest) to invest in your financial education?
Put another way, if you don’t work with a financial advisor, will you really do it yourself? Financial literacy is not rocket science. But managing investments and making wise financial decisions takes some degree of time, effort, and skill.
Time is your most precious commodity… especially for busy executives, entrepreneurs, working parents, and caretakers. Finding time to research the options, weigh the choices, and execute decisions just takes time. Even if you can take the time, will you?
If your to-do list is 10 miles long and your do-it-yourself venture has become a “no-one-does-it” venture, it might be time to hire a financial advisor.
4. Is your strategy a haphazard blend of winging it and CNBC/Google/ignorant friends? If so, your answer to “Do I need a financial advisor?” is yes.
Personal finance can be complex, nuanced, and inter-related. It’s not an insurmountable problem. Nor is it rocket science. But it’s definitely too much to just wing it.
Certainly, reading the dozens of articles on this website will help. But know this… creating a written investment plan is simple compared to a smart overall financial plan that takes into account protection, taxes, retirement and Social Security strategies, insurance, and estate planning. Your finances must consider the grand scheme of life.
If you’re business-minded, you may excel at creating your own plan. But if you don’t or won’t do it, who will?
5. What’s the monetary value of your time compared to the cost of an advisor?
Is your work time worth $200 or $500 or $1,000 dollars per hour? Some people have the ability to quickly find more high-paying clients and turn them into cash. If that’s your case, should you be spending your time managing your own money, especially if your skills are better invested elsewhere? What’s your return on investment (ROI) for the time you invest in financial planning?
If you’re roughly as successful as the average professional money manager, you’d earn returns more-or-less equivalent to an S&P 500 index fund, usually 5-6%.
If you don’t love investment research enough that you’d “do it for free,” you should either pick an S&P 500 index fund that mimics the market, or hire a financial advisor (realizing that many of them will get about the same returns for you as an index fund).
6. Can you keep your emotions in check? Also, can you discuss your money and investments with your significant other without fighting?
You may think money is objective. It’s not. We wrap up our hopes, fears, and dreams inside those dollar bills and monetary accounts.
In a 2018 survey conducted by Dave Ramsey’s organization, money fights were the second leading cause of divorce after infidelity. And who knows how much infidelity is silently driven by money problems? What’s more, the more debt a couple has, the more likely money is the key trigger of their fights.
Emotion is why you get elated when your stocks double. And why you panic when stocks crash by 50%.
When you devise a written investment or financial plan, you have to be able to check your emotions at the door, and carry on with your plan even when you’re scared.
Money is one of the most emotional topics on earth. To win, you have to confront the enemy within – which is your own emotions. If you can’t, you should consider hiring someone who can.
7. What’s the state of your finances today? If it’s a total mess, your answer to the question, “Do I need a financial advisor?” may be a resounding yes.
Let’s say everything’s a mess, and your accounts are scattered hither and yon. This may be a sign that you don’t have enough time and bandwidth to keep things on track, and would benefit from a financial advisor.
How long has it been since you’ve put together a recap of your personal finances? Do you know your numbers today, or at least as of the first of this month?
If you haven’t bothered checking your personal positions, or are scared to find out where you stand, either tackle it today or find a financial advisor (or someone else) who will force you to get on track.
8. How complex is your situation?
If your needs are simple, invest for yourself (with some caution). Most people can manage without the help of an expert if they have the requisites we already discussed – time, interest, curiosity, self-education, etc.
Beware: Some financial planners and investment advisors needlessly complicate things to drum up business for themselves. Think of this: if they can convince you that you need elaborate plans, strategies, and schemes for financial success, you’re more dependent on them.
Generally, if you have a net worth of under $1 or $2 million, can follow the basic rules of investing, use index funds, control your debt, stick to term insurance, and automate finances wherever possible, you can certainly keep your own finances on track. You’ll just need to allocate some time to it.
Above a couple million net worth, and you might benefit from a financial advisor if you’re not into managing a larger estate.
9. Are you about to make any life-changing decisions?
You can anticipate many issues and the implications of many financial decisions. But certain decisions warrant a second opinion, even if you’ve been managing them yourself up till now. Here are some such decisions:
- When to retire
- Whether to accept an early retirement buyout package
- Whether to take a lump sum in lieu of a pension
- When to start Social Security
- Whether and when to sell a business
- Implications of a cross-country move
- Whether you can afford to buy a second home or an RV
There’s no reason to shoot from the hip when this much is at stake. You can, after all, do a one-time/short-term consultation when facing a key decision. A financial advisor can help you navigate the decision, assess your options, and help you see its implications across other areas of your life.
10. Do you suffer from analysis paralysis?
If you see the options and freeze because you can’t decide what to do, you may benefit from a financial advisor who can act with greater decisiveness. You have to take action for your money to grow. You must be able to choose the stock or fund, make a decision, and then hit the buy button.
11. Are you looking to squeeze every dollar out of your investments or are you willing to pay a financial advisor?
Management fees can put severe pressure on the value of your retirement and other investment accounts. This is the money that financial advisors take from your account every time they sell stocks or mutual funds for you. Or extract from assets under management.
Some advisors charge a 1% to 2% fee per year for the assets they manage. Doesn’t sound like much, right? Over time that 1% or 2% really adds up.
Let’s say you put $10,000 into an index fund at age 25 with all gains reinvested for 40 years. At an 8% annual return your $10,000 grows to over $217,000. Not too shabby, right?
But watch out! A 2% management fee turns that 8% annual return to 6%. That means that during the same 40-year period, your $10,000 investment is worth just $103,000. Less than half. That’s practically criminal in our opinion. At least make sure you know the implications and act intentionally.
Is it worth eroding your investment values that much? Only you can decide. Much depends on your available time and interests. But it certainly appears that a DIYer would be far ahead of the person who pays a financial planner or wealth manager over all those years. All other things being equal.
Note that this is just one model of how wealth managers and financial planners get paid. See also Financial advisor types – find one you can trust. Your personal situation may or may not be this stark.
12. Will having a financial advisor add to, or take away from, your peace of mind? It’s highly relevant to “Do I need a financial advisor?”
Some people like the peace of mind they get when someone else is taking care of things. For other, it means they won’t sleep at night.
Not only are there incompetent advisors, there are also some highly dishonest ones. Think Bernie Madoff. And he’s by no means alone. The list of people who were conned by Bernie Madoff included many wealthy folks who were savvy investors and should’ve known better. They still got bilked. To the tune of millions and billions. Rich and famous people you’d know. (Google it.)
Caution… There are a lot of scammers out there ready to take advantage of anyone with money. Especially highly trusting folks with assets. As they say, there’s nothing new under the sun. Last year’s Ponzi scheme will become next year’s latest con.
So if you hire a financial advisor, you should absolutely do the background checks we wrote about in Financial advisor types – find one you can trust. Also study up on any recommended investment or course of action. At least enough to understand its basic pros and cons. Don’t use hiring it out as an excuse for ignorance.
Also, to me, it seems unwise to let any one person or group manage all your assets for fear of losing everything if something does go wrong. Because you never know…
So Do You Need a Financial Advisor or Not?
When you ask yourself, “Do I need a financial advisor?” get your answer from the 12 questions above.
The bottom line is that today you have greater ability to do it yourself now than any time in history. You have access to free trades, robo-advisors, fractional shares, and endless information on investing and financial planning.
Theoretically that could make everyone a DIY investor. The tricky part is to know yourself and your situation well enough to hire someone else if that’s the best way to handle your money.
If you’re too busy, too sloppy, too disinterested, or too emotional, the fees you pay will be worth it. Otherwise you might never get your plan made. Which means you’ll broke when you’re too old and tired to work any longer.
Should you choose a financial planner, make sure you ask questions before deciding on one.
Do I Need a Financial Advisor? Here’s How They Can Help
1. Answer the big questions. Reveal major implications.
Am I ready to retire? Should I pay off my mortgage early? How much do I need to retire and still maintain my lifestyle?
2. Allow you to consider other options…
Should you convert a traditional IRA to a Roth? If so, how much of it? What will your retirement budget be if you work two more years? What are the financial implications of buying an RV, a boat, or a sports car? If you lose your spouse, what will your financial situation look like? These are all valuable risk assessments that an outsider can help you with.
3. Risk simulation/stress plan.
Okay, decided you need a financial advisor? Read how to choose a financial advisor before you plunk down your hard-earned money. Also, take your time choosing a a financial advisor.
4. Control your emotions and keep you on track.
As alluded throughout this article, some people are good candidates for DIY financial planning and others are not. Your job is to know yourself, see where you fit, and act accordingly.
Realize that a financial advisor might not be justified when you’re in your 20’s. But may later be prudent when major life changes stare you in the face or you’re too busy to mind the store yourself.
Be sure to read how to choose a financial advisor before you walk down that road.