The Benefits and Drawbacks of Using a Financial Advisor
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While plenty of people appreciate the financial advice they can get online, peace of mind and a clear strategy are top of mind for certain types of investors. If you fit into this category, you may be weighing the pros and cons of working with a financial advisor to meet your financial goals.
For many people, advisory services seem like a great idea. After all, the financial markets are constantly shifting, and keeping up with the times—not to mention figuring out your asset allocation—can be time-consuming, and hard work. Not to mention that retirement planning and can cause people a lot of dread as they consider what they will (or won’t) have in the future.
Of course, working with a financial planner isn’t the right choice for everyone. Some people are rightfully wary of the potential for a conflict of interest after some major investment management firms have received negative press for just that kind of behavior. Before you enlist an investment advisor for your financial planning, here are a few things to keep in mind.
In this article
What does a financial advisor do?
Financial advisors help their client base manage their money to achieve their financial goals. The stock market can be stressful for many people, and having an advisor in your corner can help take the steps necessary to set up your finances for success truly. A financial advisor can help you plan for various topics, including insurance, tax planning, estate planning, retirement, and general investing.
When you work with a financial advisor, you may discuss any or all of the following as they relate to your financial situation:
- Your assets, income, and liabilities
- Your goals and a specific plan to reach those goals
- How to best diversify your investment portfolio
- Retirement planning and calculations related to how much income you’ll need in retirement
- Tax planning strategies to minimize your liabilities
- Support and guidance throughout your financial journey
Working With Advisors Can Provide More Security than Going at It Alone.
- SmartAsset's free tool matches you with up to 3 financial advisors that serve your area in 5 minutes.
- Each advisor has been vetted by SmartAsset and is held to a fiduciary standard to act in your best interests.
Financial advisors vs. robo-advisors
With the rise of online banking and investment portfolio management, robo-advisors have cropped up as an alternative to traditional (human) financial advisors. Both robo-advisors and financial advisors generally provide advice and investment management services for a fee. Additionally, both services can help you make decisions about your investment portfolio.
The major difference between the two options is that humans use professional expertise to guide their decision-making, whereas robo-advisors use an algorithm to provide advice about how to manage your investments best.
Another big difference between robo-advisors and financial advisors is that robo-advisors typically charge lower fees. On the other hand, a traditional financial advisor will be far more flexible and offer a wide range of customizations and financial products than a robo-advisor.
When choosing between a human or a robot financial advisor, neither is strictly better or worse. One may be a much better fit, depending on your budget and needs. In some scenarios, you may start with a robo-advisor before “graduating” to a human advisor as your portfolio grows and your needs shift.
When should you consider a financial advisor?
Not everyone necessarily needs a financial advisor. However, there are some scenarios where working with an advisor to reach your goals may make more sense. Here is an overview of a few of those situations.
You lack experience
If you’re new to investing and don’t know where to start, a financial advisor can point you in the right direction. While it’s true that there are plenty of books and websites dedicated to offering you investment advice and strategies, there’s nothing wrong with working with another person who will hold your hand as you plan your financial goals.
Your financial situation is complex
If you run a small business, have multiple income streams, or want to invest in real estate, working with a financial advisor may make sense. By that same token, if you are saving for multiple children’s college funds and your and your spouse’s retirement, things may be a bit more complex to maintain on your own.
Generally speaking, the more balls you have to juggle, the more you can benefit from the expertise of another person helping monitor and manage your finances. If your financial situation is complex, it may be worth the advisory fee to have peace of mind that nothing is falling through the cracks with your finances.
You have significant wealth
The more money you have to manage, the more it makes sense to work with an advisor. Especially if you’ve just inherited a large sum of money, having a trusted professional ensure you don’t blow it all in one place can be an incredibly smart financial move. This is particularly true if you’re hoping to have that money last for a long period of time through careful investment in the stock market.
Remember that wealth management isn’t just for rich people like athletes, actors, and lottery winners. If someone passes away and you get a large sum of money as a life insurance payout or inheritance, it may be wise to talk with a financial advisor about how to best proceed.
You’re very busy
Some professionals just don’t have the time in their busy schedules to manage their investments themselves. In these scenarios, working with a financial advisor can mean one less thing on your plate and allow you to focus on other, more pressing priorities.
When can you pass on a financial advisor?
If others around you are working with a financial advisor, you may feel like you are missing out on some secret to financial success. However, if you fit most of the criteria below, it may be perfectly defensible not to use a financial advisor to manage your money.
Your finances are simple
If you’re single, have no children, or are mostly just saving for retirement, your situation likely doesn’t warrant a financial advisor. The simpler your finances are, the less likely you will benefit from working with a financial planner.
You have a lot of knowledge about personal finance
If you studied finance, accounting, or another financial field in college, you might be more than capable of handling your personal finances without the aid of an investment advisor. This ultimately comes down to a gut check about your own comfortability regarding your investment knowledge and your financial goals. If you feel confident in your skillset, there’s nothing wrong with taking matters into your own hands.
You don’t mind risk
Similarly to the previous point about your own knowledge, if you are okay with a bit more risk in your investing, there’s nothing wrong with managing your finances. While it’s true that a financial advisor may be a less risky option when it comes to handling your investments, it’s also true that the fees you pay to an advisor can cut into your overall gains year over year.
You like to be hands-on
If you like to play an active role in your finances, then using a financial advisor to help with your planning may not sit right with you. As long as you don’t mind risk and have a solid foundational knowledge of conventional investing wisdom, there’s nothing wrong with taking an active role in your finances.
Costs
Working with a financial advisor does cost money. Costs vary from brokerage to brokerage and advisor to advisor; however, a fee of 0.5% to 1% is typically average. Generally, advisory fees are handled in two ways: either as a fee-based arrangement or a fee-only arrangement.
Fee-based advisors
A fee-based advisor earns money from the fees they charge their clients and commissions on certain financial products. You may be more likely to encounter conflicts of interest with a fee-based advisor since they may be incentivized to push certain financial products like life insurance policies.
Fee-only advisors
Unlike fee-based advisors, fee-only advisors only make money from the fees they charge. This means they don’t get any kickbacks for the products or services they recommend. Generally, fee-only advisors are registered investment advisors, which means it’s their fiduciary duty to act in your best interest and not their own. If you’re planning on working with a financial advisor, it’s not a bad idea to focus on finding a fee-only advisor so that you know you’re truly getting the service you’re paying for.
Pros and cons
Pros
- Personalized to your goals. Working with a financial advisor is a surefire way to ensure your goals and needs are prioritized as you invest. While there’s nothing wrong with using target-date retirement funds as you plan for retirement, a general date-based retirement fund is far less specific and personal than the strategy you’ll devise when working with a financial planner.
- Professional expertise. If you don’t know much about personal finance, using a financial advisor is a great way to shore up your weak points and leverage a professional’s knowledge to achieve your goals.
- Guidance and support. It can be stressful to keep tabs on your finances alone. With a financial advisor in your corner, you can understand what market shifts mean in the short and long term.
- Access. Working with a financial advisor can sometimes give you access to a broader range of investment options. While your employer’s 401k can be quite limited, a financial planner may be able to help you diversify your portfolio in a much better way.
Cons
- Fees. Fees are the biggest drawback of working with a financial advisor. While 1% doesn’t sound like a lot of money, when talking about a retirement account worth $1M, growing at a rate of 4% instead of 5% (thanks to the advisor’s cut) can mean thousands and thousands of dollars.
- Less control. As was mentioned earlier, with a financial advisor, you can’t take as much of a hands-on approach to your investment. That isn’t to say that the advisor won’t consider your goals—just that they will also have a say and influence in what you invest in.
- Your mileage may vary. Not all financial advisors are as good as the next. As such, it’s a good idea to “shop around” if you’re considering working with a financial planner for wealth management. It may also make sense to avoid fee-based advisors since they are more likely to steer you towards financial products that they earn commission on.
Working With Advisors Can Provide More Security than Going at It Alone.
- SmartAsset's free tool matches you with up to 3 financial advisors that serve your area in 5 minutes.
- Each advisor has been vetted by SmartAsset and is held to a fiduciary standard to act in your best interests.
The bottom line
The financial services industry in general—and investment planning, more specifically—can be daunting. Suppose you’re interested in getting help with your investment strategy. In that case, working with a brokerage to fine-tune your investment portfolio can greatly maximize your earning potential while prioritizing your peace of mind.
Of course, there are benefits and drawbacks to working with a financial advisor. When you entrust an advisor with your tax planning or wealth management, you are superseding some level of control over your personal finances. Additionally, your mileage may vary in terms of the level of service and personability you’re offered. The fees associated with advisors can also cut into your overall earning potential since losing 1% of your stock market gains can account for tens of thousands of dollars depending on your portfolio.
Ultimately, whether or not you work with a financial advisor is up to you and may have more to do with your financial situation than anything else. For example, if you’ve recently inherited a large sum of money or are managing complex finances, an advisor could be a great move. On the other hand, an advisor may be less necessary if you like to take a hands-on approach to managing your money or have relatively simple finances.
With the above pros and cons in mind, you can make an informed decision about whether or not to use a financial advisor. Remember, too, that it’s possible to speak to a few different advisors before committing to one, so there’s nothing wrong with “shopping around” before you sign anything.
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Writer
Brent Ervin-Eickhoff is a Chicago-based writer, stage director, and filmmaker with a background in digital marketing and content creation. In addition to Joy Wallet, Brent has written for Complex, Volkswagen, HowlRound, Picture this Post, and Third Coast Review, among others. He currently serves as the Associate Director of Marketing for Content Creation at Court Theatre at the University of Chicago. Brent graduated from Ball State University with Academic Honors in Writing.
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