Wouldn’t it be great if we would all have our very own financial advisor? Ideally, someone whom we could touch base with once a month or before we splurge on a big-ticket purchase or investment.
Unfortunately, it doesn’t always work like that — primarily because of the cost. Financial advisors don’t come cheap. It’s not that they purposefully exclude certain income groups; it’s that they need to earn a living, too.
Because of the expense, choosing to work with a financial advisor calls for a thorough cost/benefit analysis. To make things easier, Money Under 30 compared three scenarios where you may want to hire a financial advisor.
Scenario #1: Planning Your Financial Future
Everyone could use a little extra help in planning their future, mainly when we’re living on our own for the first time. We only have so much money, and there are so many things we want to do with it — like repaying student loans, building an emergency fund, saving for retirement, purchasing a home, vacations, getting married…the list goes on. And that can make it difficult for young adults to create a financial plan by themselves.
But again, it circles back to the expense of a plan. For many people, saving up to hire a financial advisor is just one more objective on a long list of goals.
If you have a sizeable emergency fund and can cover the cost of a financial advisor without taking on more debt, Money Under 30 suggests making the investment. There’s a chance that you could offset the fee within several years if they help you make smarter financial choices.
Scenario #2: You Don’t Like Managing Money
Not everyone enjoys dealing with money. In fact, some downright hate it. While that’s not necessarily bad, it’s key that you see it for yourself and find an expert to manage your money for you. Of course, this requires that you have enough assets for an advisor to work with you.
Most advisors can’t afford to help clients until they have at least $100,000 of investments. Of course, this figure can vary based on the advisor, so make sure you do your research and compare.
If you don’t have $100,000, your best bet may be to deposit your funds in a low-cost index fund account and let it earn interest over time.
Scenario #3: You Want An Unbiased Opinion On Your Finances
Many DIY investors don’t hire financial advisors because they don’t want to pay commissions and other fees. However, no amount of self-taught knowledge will ever compete with someone who trained to become a financial advisor. Hiring an expert can help you avoid costly mistakes or find new ways to grow your wealth that you may not have recognized, which can offset the cost of any fee.
How Much Do Financial Advisors Cost?
The answer depends. If you work with a financial advisor on an annual retainer, you could pay upwards of several thousand dollars, but you’ll get a thorough, fool-proof financial strategy. Or, the advisor may charge based on a percentage of your invested assets, typically 0.25% to 1% annually. Some charge by the hour — sometimes hundreds of dollars per hour.
No matter what structure a financial advisor uses, always ask them how they receive compensation. It would be best if you did this during your first meeting together. That’s because some advisors receive fees from financial institutions or investment firms.
This means that while their suggestions are technically free, these advisors typically earn commissions based on the investments you buy from them. Eventually, buying into a bad investment could cost you much more than paying an advisor who charges by the hour, retainer, or receives a portion of your returns.
Not every financial advisor who earns commission will act in bad faith, but be aware that the best advisors will go out of their way to be transparent.
Working with a financial advisor is expensive, which is why many people choose not to hire one. However, if you have the right expert on your side, the payoff will be well worth the initial cost. It’s not uncommon for us to feel overwhelmed when it comes to our money. Sometimes, having a second pair of eyes from a professional can offer peace of mind.
- Weliver, David. “When Is It Time To Hire A Financial Advisor?” moneyunder30.Com, 16 Dec. 2020, www.moneyunder30.com/when-is-it-time-to-hire-a-financial-advisor.