Last month my brother visited me in Washington, D.C. His visit afforded him a chance to see the most incredible monuments and memorials. Also, he was very puzzled that I would move here since I often refused to live in this city.
While I consider San Antonio, Texas, to be my home, a career opportunity presented itself for me to work in our nation's capital that I couldn't refuse. With a particular turn of events that occurred a few years ago in my previous marriage, I saw this as a window to explore new ventures and growth.
During his visit, I asked him to take a look at my blog website to see if my niche of focusing on keeping topics simple to understand, made sense to him. He pointed out a few areas when it comes to investing that are complex for someone with no education, whether self-taught or willing to learn.
Having worked at an investment firm for several years, I can quickly relate this ignorance of the matter. The world of finance can be very complicated. While money itself is rather easy to learn, understanding the duration of a bond and learning the Black-Litterman Approach was initially challenging to learn from portfolio managers when I began my journey as an investment associate. After all, why does an unconstrained model allow negative asset-class weights anyway! (Yes, I really had to learn this stuff.)
I've also learned that many households believe they can manage their wealth just as well as hired financial advisors; yet, three-fourths of U.S. households barely have enough saved to cover a $1,000 emergency and "nine in 10 American households today engage in some type of formal and informal financial planning".
The finance world is seeing an increase in Americans using financial advisors. With growth from "28 percent in 2010 to 40 percent in 2017", about 70% of this group work closely with a Certified Financial Planner (CFP) professional.
This blog article will highlight 5 reasons to consider hiring and using a financial advisor and/or planner.
#1 Financial Advisors Simplify the Complexities
Contrary to how much you know about money and investing, a well-educated advisor has undergone extensive training and certifications that develop a deep understanding of a wide range of possible opportunities and complexities on taxes, retirement processes and laws, strategies, goals, regulatory guidance, and much more.
The tax code alone is overwhelming enough to keep you flipping through the IRS pages to find the right money-saving strategy for your retirement.
#2 Advisors Must Abide by Professional Standards and Enforcement
Not all advisors are created equal. In today's environment, it is easy to call oneself a "financial advisor." The key to cutting through the noise is the proven certifications he or she has earned.
Those who have earned a certification such as CFP or Chartered Financial Analyst (CFA) must abide by very high ethical standards that act in the client's best interest. The two are not the same. A CFP is a planner while a CFA researches the investment opportunities for a portfolio. I only work with financial professionals who have earned one of these. My Master's degree in Investment Analysis followed the curriculum of the CFA program, and I studied 12 weeks on just the subject Ethical and Professional Standards. These subject matter experts learn case studies on every possible scenario from conflicts of interest to ignorance of the law.
Recommended Reading: CFA vs. CFP: Which Do You Need?
#3 Clients Who Work With Advisors May See Higher Returns
In today's rapid environment, customers are demanding more. It shouldn't be a surprise to learn that clients demand more from their advisors. A recent study by Vanguard shows a positive correlation of earning more when using financial expertise such as Vanguard using its Advisor's Alpha. "We believe implementing the Vanguard Advisor's Alpha framework can add about 3% in net returns for your clients and also allow you to differentiate your skills and practice."
According to Fidelity, "Industry studies estimate that professional financial advice can add between 1.5% and 4% to portfolio returns over the long term, depending on the time period and how returns are calculated."
Another factor to consider using a paid advisor is these experts have access to technology, resources, and tools that you alone do not. Sometimes investment opportunities arise that requires a significant buy-in, and with your limited capital, you don't have the financial capital to buy in; however, with a financial advisor, he or she can pool money from other clients to take advantage of valuable opportunities.
#4 Fee-Only Financial Planners Serve Your Best Interest
Do you find it very annoying when products or services that aren't ideal are pushed on you? Working with a fee-only professional have a fiduciary duty to work towards your goals and interests. They don't have to rely on selling additional products for commissions because they usually earn their money based on the amount of assets being managed or may be a fixed rate. Matt Becker, CFP, states, "That doesn't guarantee that you'll get good advice, but it improves the odds of getting advice that's genuinely intended to be in your best interests."
Also, a fee-only planner may be able to offer a range of services without charging you an additional fee. Sometimes these professionals charge by the hour or service provided while I have also seen some charge a certain percentage based on the assets being managed.
You should expect a standard charge from a financial planner to range from $150 to $300 per hour; however, the median fee is usually around 1% per year. Although a higher asset balance can generally find a lower percentage charge, every firm is different.
#5 Financial Planners Manage and Build Your Wealth
Accountability! As every New Year rolls around, we seek to hold ourselves accountable to goals set to reach in the next 12 months. Whether it is getting fit and healthy or self-improvement, it is usually challenging to achieve such goals without an accountability partner.
Think of financial planners/advisors as your accountability partners. Their role is to manage your wealth and to keep you on your target milestones. They help you to weather the financial storms while ensuring your goals are easy to obtain.
Some households have complicated financial circumstances from trust and estate planning to business succession planning. Whether you are a high net worth individual or not, having a planner works in your best interest. Note: I do recommend that before you hire a financial specialist, you determine what his or her investment philosophy is. Ensure they match your goals and philosophy.
Managing the markets are complicated enough. With you working full-time and having a busy life, you do not have time to sift through daily news feeds, watch CNBC, and read the latest journal articles of thousands of companies. Hiring a financial planner outlines your long-term goals for retirement to short-term goals of purchasing a home. You will also need to ensure you do not outlive your money. This is usually a significant concern and within reason. Your financial advisor can help with this and recommend actions to take to ensure you aren't empty handed in your 90's or early 100's.
Your advisor is also educated and trained to understand the tax impacts of your retirement. By learning and understanding such implications, you can increase your income while decreasing the tax consequences of investing.
Consider Hiring a Financial Planner
Hiring a financial advisor and planner has its advantages, and the pros considerably outweigh the cons. Consider hiring one with a professional certification that can assist you with tax planning and building a road map that you can help you achieve your financial goals and dreams.