When to Hire a Financial Advisor.

Planning for your financial future all the way to retirement can be challenging. There is a near infinite amount of information to sift through, different savings accounts, investment vehicles and retirement options to consider, and so much more. It can feel almost impossible to navigate this by yourself.

What is a Financial Advisor?

A financial advisor is a qualified professional who will help you understand and reach your retirement, college savings or other personal financial goals. A good pro speaks in terms you understand and is committed to educating and empowering you to make decisions about your financial future.

A financial advisor will assist you in planning your financial future. Whether you’re saving for retirement, a home, creating an emergency fund or want to simplify your month-to-month finances to reduce expenses. Better management can help you reach goals earlier and create a plan for reducing spending and maximizing your portfolio’s efficiency.

Is is Worth it?

One of the most common questions financial advisors hear is, “Why should I hire you when all I have is a 401k and some savings?”

Vanguard, one of the world’s largest investment companies, has been examining this question for 15 years. Based on research, analysis, and testing, Vanguard has concluded that, yes, there is a quantifiable increase in return from working with a financial advisor. Vanguard calls this advantage the Advisor’s Alpha. When certain best practices are followed, the result can be an Alpha in the 3 percent per year range.

Not everyone wants or needs a financial advisor. About one-quarter of private investors are truly “self-directed,” according to Vanguard. These people enjoy investing. They obsessively follow the markets and enjoy creating and doing financial projections. Perhaps most importantly, these investors have an incredible level of discipline that prevents their emotions from intervening with their long-term investment strategy.

Finding the right financial advisor near you may seem overwhelming, but it’s not that difficult. You just need to remember a few things.

What Value can a Financial Advisor Offer?

There are several ways in which a financial advisor can add value to your investment efforts, including guidance on developing an overall investment strategy, asset allocation, minimizing taxes, re-balancing, and how to structure/time withdrawals from your retirement accounts.

But the single biggest way a financial advisor can add value—up to 1.5 percent per year of increased annual returns—is through something called behavioral coaching.

The best financial advisors are able to keep their clients’ fears and emotions in check by providing steady, fact-based advice and reassurance when the markets go crazy.

I can’t emphasize enough the importance of this function. A Vanguard study of more than 58,000 self-directed IRAs showed that investors who made material changes to their strategy EVEN ONCE in the five-year period from 2008 through 2012 suffered an 8 percent-plus hit to performance!

A Morningstar study shows that investors often receive far lower returns than the very funds they invest in. The reason: they run to funds after they have done well and ditch other funds right before they take off. In other words, they sell low and buy high. An advisor can prevent such counter-productive behaviors.

How to Choose a Financial Advisor

When evaluating a potential financial expert, you need to be prepared to ask some questions that will help you make an informed decision and choose the right advisor.

Here are 10 questions that can help you choose the best financial advisor for you:

1. Are you a fiduciary?

The answer to this question should be “yes.” Fiduciaries legally must put clients’ financial interests above their own. Not all financial advisors are fiduciaries.

2. What are your credentials?

When it comes to a financial advisor, credentials matter. Those fancy letters after the advisor’s name prove that they have dedicated a lot of time to mastering their profession.

Ideally, your financial advisor would be a CFA (Chartered Financial Analyst), CFP® (Certified Financial Planner), or PFS (Personal Financial Specialist).

3. How much experience do you have?

Your advisor should have adequate experience to wisely guide you through various life decisions and changing market conditions.

4. How are you compensated for your services?

There’s a variety of ways advisors can charge clients. Decide which payment methods you prefer, then find an advisor who uses that strategy. Will you pay an advisor a flat fee or an hourly rate? Are they fee-only or fee-based? There are several options.

5. Do you get paid by anyone other than your clients?

Fee-only advisors make money exclusively from their clients. Fee-based earn a fee based on the assets they manage for their clients, but could also sell products for a commission. There are pros and cons to each approach. But when interviewing an advisor, you should be positive they’re going to place your needs first.

6. What services do you provide?

A financial advisor may provide tax planning, college planning, life insurance, education, investment management, getting out of debt and more. Remember your potential future needs as well as your current ones.

7. Do you have any minimums?

Many advising firms require a minimum investment or minimum fee to establish a partnership. Find an advisor whose minimum is realistic for you. Many of the bigger firms go as low as 50,000. But getting in contact with them will usually result in a referral to a smaller firm is you desire

8. What is the average portfolio size that you handle?

Often the minimum portfolio size will give you a great idea, but the answer to this could tell you how much attention you will get compared to the bigger portfolios. This may not always be true but if it’s a big difference it can be possible red light.

9. How often will I hear from you? And How?

Will the firm email you weekly? Set up a phone conversation monthly? Request an annual face-to-face meeting? Ask how often you financial advisor will be in touch and how. If you know what to expect upfront, you’ll be on the same page.

10. Will you coordinate your advice with my tax situation?

Just as all financial advisors are not created equal, neither are all clients. Your advisor should take your specific needs into consideration when handling your money, especially your tax situation. Give the advisor an opportunity to talk about how they will tailor their advice to your circumstances.

Understand Their Investing Philosophy

You want a financial advisor who can clearly explain their investing philosophy. Make sure they have a long-term investing strategy that is right for you and is willing to take your opinion into account.

Another great question to ask when an advisor recommends a particular fund is: Do you personally invest in this fund yourself? If an advisor is confident enough in a fund to invest his or her own money, that can give you some confidence.

Well.. Should I Hire An Advisor?

While not everyone can afford or even benefit from the services of a financial advisor, many situations certainly warrant the help of one of these excellent providers. Investments, retirement plans, and money management, in general, can be challenging to navigate on one’s own. With the help of an experienced advisor, you can successfully make the right decisions regarding your money, therefore reducing the risk of error and ensuring that your payment is being managed responsibly and  professionally.

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