Written by Brad Cast, RFC®, Wealth Manager & Partner
In the world of personal finance, many people turn to financial advisors to help them make informed decisions and reach their financial goals. While there are pros and cons to working with a financial advisor, the benefits often outweigh the costs. Pros of hiring a financial advisor include gaining access to expertise, leveraging time, and sharing responsibility. However, there are also potential downsides to consider, such as costs and fees, quality of service, and the risk of abandonment. To make the most of a relationship with a financial advisor, it is important to do due diligence in the vetting process and stay invested in the relationship. The most important thing to know about hiring a financial advisor is that there will be a cost, and it is important to understand all fees and the structure in which the advisor operates.
What are the pros of hiring a financial advisor? The cons?
Working with a financial advisor can potentially benefit people in different ways. However, just as with any professional service, the goals of the relationship should be focused on leaning on expertise, leveraging time, and sharing responsibility.
- Pro: Leaning on Expertise
- Financial Advisors can offer a wide range of services, some even specialize in certain areas. Their studies and time in the business have often battle tested them and molded the way they approach investments and financial planning. It is this type of expertise you hope to gain knowledge and insight from. Part of the job of a Financial Advisor is education. It is really their job to help their clients make informed decisions.
- Pro: Leveraging Time
- To change the oil in a car yourself you would perhaps need to watch a video as to how to perform the task and then purchase oil, a filter, an oil collection pan, and tools to complete the task. However, you could simply take it to the local shop and pay for an expert who stands behind the work to accomplish the same. In both cases the oil gets changed, but only in one case did it save you time. This is basically the same when working with a Financial Advisor. Self-study, research, software subscriptions, etc. can help you get your financial house in order. However, working with a Financial Advisor can save you time and allow you to focus on creating a plan and monitoring progress of the plan as you spend valuable time on other endeavors.
- Pro: Sharing Responsibility
- It is more efficient to row a boat with two experienced people rowing than with just one. Simply put, Financial Advisors can take on part of the responsibility of rowing the boat that is your financial future. A Financial Advisor should work with you, not for you. In doing so, they should act as a Fiduciary by putting the best interests of their clients above their own and acting in good faith while providing all relevant facts and avoiding conflicts of interest. It is this type of relationship that forms the client/advisor team.
Not all relationships are successful ones though. Potential negatives of working with a Financial Advisor include costs/fees, quality, and potential abandonment.
- Cons: Costs/Fees
- This can easily be a positive as much as it can be a negative. The key is to make sure you get what your pay for. The saying, “price is an issue in the absence of value” is accurate. The key when working with a Financial Advisor is to receive value at or above the costs. Truly, the goal should be to feel like the advice and service received are worth more than the costs of the relationship. If this is not the case, then it is a negative and thus time to reconsider the relationship.
- Cons: Quality
- Not all Financial Advisors are equal. Just as, not one advisor is perfect for every potential client. Often times people will stick with a relationship they know is bad for the simple reason of not going through the motions to make a change. Change is often hard, but also often necessary. Should quality of service and quality of relationship not exist, it is time to reconsider!
- Cons: Abandonment
- Abandonment here is a reminder there is potential for a Financial Advisor to retire, die, and/or simply “move on” at any point, thus leaving clients in uncomfortable territory. This can leave clients feeling abandoned should the advisor not have a proper and communicated succession plan in place. A client should always be able to answer “what happens if something happens to my Financial Advisor?”.
How can an individual help accentuate the advantages of an advisor while minimizing the disadvantages?
It starts with due diligence. Always properly vet any Financial Advisor you are contemplating working with. Do not rely on advertisements, awards, credentials, and/or referrals solely when seeking a relationship. These means can be used to narrow down the pool no doubt, but then gloves need to be put on for the rest of the work. Ask probing questions, check backgrounds through websites such as https://brokercheck.finra.org/, ask to interview current clients, learn about the advisor’s succession plan, talk with staff, etc. when interviewing advisors. If a specific area of expertise is needed, such as working with executive comp plans or setting up retirement plans for small business owners, find advisors to interview who have experience in those arenas.
Once a relationship begins, stay invested in the relationship. Working with a Financial Advisor should be a partnership. “Expectations of the Engagement” should be set and agreed upon in writing by both parties. It is this type of effort, both at the start and through the relationship, which will help accentuate the advantages and hopefully minimize the disadvantages. Feel free to “swipe left” many time before you finally “swipe right” and make a solid connection.
What is the top thing an individual should know about hiring a financial advisor?
There will be a cost. The role of a Financial Advisor is to help clients establish a plan to meet the financial goals. Financial Advisors are consultants of sorts, being brought in to do a job. That job includes fees, sometimes in the forms of asset management fees, commissions, planning fees, investment product fees, etc. It is important to understand all fees and the structure in which the advisor operates. This is both the responsibility of the advisor and the client. The Financial Advisor is responsible for providing value for the fees. However, just like the case with streaming subscription services, it is up to the client to evaluate the value for fee exchange at least annually.
What would surprise individuals about what a financial advisor can do for them?
The term “Financial Advisor” does not have a universal definition, as services offered can vary from one advisor to the next. Long gone are the days where most Financial Advisors simply provide investment advice. Many, especially those who aim to provide holistic planning services, want to team with clients in many non-investment areas. This might include, but not be limited to, the following areas:
- Cash Flow Planning
- Goal (short-term, medium-term, and long-term) Planning
- Job Benefit Analysis
- Estate Planning
- Tax Planning
- Insurance (Life, Health, Disability, Long-Term Care, Property & Casualty) Planning
- Financial Modeling
- Business Planning
- Social Security Analysis
- Financial Education
The job of the Financial Advisor has morphed through the years. Often the goal of an advisor these days is to help clients manage their financial, emotional, and physical wellness.
Are you ready to get started with a financial advisor? Schedule your free consultation today.
Securities offered through LPL Financial, member FINRA/SIPC. Investment advice offered through Merit Financial Group, LLC, an SEC-registered investment adviser. Merit Financial Group, LLC and Merit Financial Advisors are separate entities from LPL Financial.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All investing involves risk including loss of principal. No strategy assures success or protects against loss. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk. Guarantees are based on the claims paying ability of the issuing insurance company.