Many investors are reluctant to pay for financial advice, but a good independent financial advisor (IFA) will use their knowledge and years of experience to help you make important decisions that fit your particular circ*mstances.
Investors are flooded with information and it can sometimes be quite a daunting experience to go at it alone. You might not always need or want an IFA, but they can often be the key factor in your financial success. Here are five scenarios where consulting an IFA would be beneficial to you:
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You want to develop a financial plan, but you don’t know where to start
An IFA will help you identify your key goals and develop a long-term, objective driven plan. Always consider your long-term needs when making an investment. Retirement savings, education, healthcare costs and which investment company to invest in, can have a huge impact on your long-term plans. An IFA can shape these commitments into realistic goals and help you stay focused during uncertain times. Remember, you only change your plan if your goals or circ*mstances change.
Also Read: 7 Questions to When Choose Between a Financial Advisor and Robo-Advisor
You’re having trouble choosing the right investment product
The number of products available to investors is truly astounding. So much so that choice itself becomes a barrier to entry. It’s of the utmost importance that you understand the fine print of the products you are considering. Not all investment products will suit your objectives. Some have certain restrictions, while others offer tax benefits. Therefore it is important to be aware of the details before committing.
The sheer number of products can make research time consuming and it can often be overwhelming. An IFA can use their knowledge and experience to help you make choices that are suitable for your unique situation.
Your circ*mstances have, or will, change
Some life events change everything: Marriage, children, divorce, death in the family and retirement can introduce new challenges into your life. Managing your money during these life stages can be confusing and balancing responsibilities can be hard. Seeking financial advice can help you navigate through the confusion and questions, which arise during these huge changes.
Also Read: How Much Should I Have in my 401k?
You don’t know what to do with your retirement ‘windfall’when changing jobs
It is important to preserve your retirement savings. People often withdraw their retirement savings when changing jobs, which can cause a setback in their retirement plans. When you withdraw your retirement savings you miss out on future compound interest and often end up spending the money. An IFA will help you stay on track with your long-term plan and curb any impulsive spending.
You have debt
You have to prioritize paying off your debt before making any investments. If you’re having a problem getting out of debt on your own, consult a debt counselor. They will help you develop a plan to tackle your debt. However, not all counselors are alike. You should only consult someone who is qualified and registered to offer counseling services.
Wrapping it up
It’s important that you take a cold hard look at your finances. This can be tough since many of us don’t want to face the reality of our financial situation. Critical self-evaluation is the vital first step to making sound long-term financial decisions. Ignorance of our financial situation can keep us from admitting we need professional help.
Investing on your own isn’t impossible, but for some, it can be tough. An IFA offers you objectivity and experience, which are invaluable assets when it comes to facing challenges and adhering to your plan.
Sean Bryant created OneSmartDollar.com in 2011 to help pass along his knowledge of finance and economics to others. After graduating from the University of Iowa with a degree in economics he worked as a construction superintendent before jumping into the world of finance. Sean has worked on the trade desk for a commodities brokerage firm, he was a project manager for an investment research company and was a CDO analyst at a big bank. That being said he brings a good understanding of the finance field to the One Smart Dollar community. When not working Sean and his wife are avid world travelers. He enjoys spending time with his two kids and dog Charlie.
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Not everyone needs a financial advisor, especially since it's an additional cost. But having the extra help and advice can be paramount in reaching financial goals, especially if you're feeling stuck or unsure of how to get there.
Consider hiring an advisor if your finances are complex or you experience a major life event. Choose an advisor you feel comfortable with and whose expertise aligns with your needs.
But, if you're already working with an advisor, the simplest way to determine whether a 1% fee is reasonable may be to look at what they've helped you accomplish. For example, if they've consistently helped you to earn a 12% return in your portfolio for five years running, then 1% may be a bargain.
A financial advisor is worth paying for if they provide help you need, whether because you don't have the time or financial acumen or you simply don't want to deal with your finances. An advisor may be especially valuable if you have complicated finances that would benefit from professional help.
Most of my research has shown people saying about 1% is normal. Answer: From a regulatory perspective, it's usually prohibited to ever charge more than 2%, so it's common to see fees range from as low as 0.25% all the way up to 2%, says certified financial planner Taylor Jessee at Impact Financial.
Generally, having between $50,000 and $500,000 of liquid assets to invest can be a good point to start looking at hiring a financial advisor. Some advisors have minimum asset thresholds. This could be a relatively low figure, like $25,000, but it could $500,000, $1 million or even more.
While it's easy to see the many advantages a financial advisor has, we want to also bring up the potential disadvantages so you can make informed decisions:
According to Cody Garrett, CFP, owner and financial planner at Measure Twice Financial, whether you should hire a financial advisor or not should not be based on your age but on which financial decisions you need help considering.
Whether you should consider working with more than one advisor can depend on your overall goals and financial situation. If you're fairly new to investing and you haven't built up a sizable net worth yet, for instance then one advisor may be sufficient to meet your needs.
Studies have shown that financial advisors have the potential to add, on average, between 1.5% and 4% to your portfolio above what the average person is able to get as a return on their own.
Depending on the net worth advisor you choose, you generally should consider hiring an advisor when you have between $50,000 - $1,000,000, but most prefer to start working with clients when they have between $100,000 - $500,000 in liquid assets.
Those who use financial advisors typically get higher returns and more integrated planning, including tax management, retirement planning and estate planning. Self-investors, on the other hand, save on advisor fees and get the self-satisfaction of learning about investing and making their own decisions.
Industry studies estimate that professional financial advice can add up to 5.1% to portfolio returns over the long term, depending on the time period and how returns are calculated. Good advisors will work with you to create a personalized investment plan and identify opportunities to help grow and protect your assets.
What Percentage of Financial Advisors are Successful? 80-90% of financial advisors fail and close their firm within the first three years of business. This means only 10-20% of financial advisors are ultimately successful.
In other words, even professionals can't beat the market with consistency. That means that the right expectation is typically to target a portfolio that tracks the market as closely as possible with a balance between risk (stocks) and stability (bonds) that matches your goals and risk tolerance.
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