When it comes to personal finance and investments, you need not only the time but also the expertise to do it well. When you align yourself with an advisor who is tailoring the plan based on your goals, they can guide you across a range of financial issues, helping improve means and quality of life. For many individual investors, the question is not whether a financial advisor is needed, but how to find the right one.
A qualified financial advisor can understand the intricacies of the financial and investment industries and has the experience to help you navigate a unique path that is customized to your financial goals, be they wealth accumulation, preservation or transfer. The right advisor can build a relationship with you that goes beyond traditional financial planning or attaining short-term gains. Instead, a good advisor can work with you to build a long-term partnership that focuses squarely on putting your lifetime financial goals within reach.
Every day, we rely on professionals with the experience and knowledge to accomplish tasks we’re less qualified for or too busy to do. Think of the barista who foams your milk, the tailor who alters your suits, or the accountant who files your taxes. We may not stop to consider the rationale behind our daily decisions to hire outside experts, but these relationships enable us to achieve more and focus on matters we deem most important. However, there are some services we keep “in house.” For instance, you may be more likely to mow your own lawn, paint your living room or cater your own party. This gives rise to a conundrum we all face from time to time: How do I know when it’s time to partner with a professional or go it alone?
And from this one question, others quickly arise: Do I have the time? Do I have the expertise?
If you’re considering a partnership with an advisor, you’ve already taken the first step in acknowledging the importance of managing your finances and investments properly. Your next step should be to assess your current financial state and ask yourself these questions:
The answers to these questions will give you insight into how engaging with the right advisor may be an asset to your financial life.
There are several ways in which a financial advisor can add value to your investment efforts. Among these benefits are guidance on developing an overall investment strategy, asset allocation, minimizing taxes, rebalancing, and how to structure and time withdrawals from your retirement accounts. Another valued benefit in working with an advisor is behavioral coaching — helping you manage counterproductive biases and behaviors with fact-based advice and reassurance when markets are stressed.
When you align yourself with an advisor who is tailoring the plan based on your goals, they can guide you across a range of financial issues, helping improve means and quality of life. That can mean avoiding costly mistakes that are difficult to recoup down the road. Savvy investors understand that the power of compounding returns is just as important when it comes to avoiding losses as it is with making gains.
A growing body of research has established quantifiable metrics on the value of more intelligent financial planning decisions for households who use professional advice. How much? The numbers differ based on the studies, methodologies and focus of the research, but Morningstar, in its focus on retirement income, concludes that “intelligent financial planning decisions” can add the equivalent of 1.59% in annual arithmetic returns.1,2
Furthermore, State Street’s research with individual investors3 suggests that in addition to the financial rewards that may accrue to those working with an advisor, it also provides increases in confidence and security that are no less valuable. Case in point: Individual investors not working with a financial advisor reported that they have less well-developed financial plans, have done less advanced wealth management planning, are less confident in reaching their financial goals, and feel less prepared should there be a downturn in financial markets.
Figure 1a: I Have a Well-Developed Financial Plan
Figure 1b: I Have Confidence in Reaching My Financial Goals
A relationship with a financial advisor can be about more than just making a return on your investments. It is also about protecting assets.
Selecting the right advisor for your financial life is key. If you want a solid working relationship that helps you manage your portfolio and make smart financial decisions, it pays to understand how their offering aligns with your objectives. Furthermore, there is a financial advisor for every budget and financial situation so be confident in your exploratory outreach; this relationship is ultimately an investment in your future.
To help you make an informed choice, in addition to the previously posed personal financial status questions, consider asking the following questions when speaking with prospective financial advisors.
Figure 2: The Majority of Investors Working with an Advisor See Financial Goals As Equally Important to Personal Goals
Figure 3: Investors View the Advisor Relationship as a Partnership
Reliance on an Advisor: Nearly Two-Thirds of Investors Work with Their Advisor and Make Investment Decisions Together
1Blanchett, David M., and Paul Kaplan. 2013. Alpha, Beta, and Now… Gamma. The Journal of Retirement, vol. 1, no. 2: 29–45.
2Arithmetic returns are the everyday calculations of the average. You take the series of returns (in this case, annual figures), add them up and then divide the total by the number of returns in the series. To view the calculations in the Morningstar research, please see Alpha, Beta, and Now… Gamma.
3State Street Global Advisors Individual Investors 2019 Study, a global survey on consumer sentiment, purpose and behavior in wealth management.
4The Financial Industry Regulatory Authority, or FINRA, is a not-for-profit organization dedicated to investor protection and market integrity. It regulates one critical part of the securities industry — brokerage firms doing business with the public in the United States. FINRA is overseen by the SEC (U.S. Securities and Exchange Commission), writes rules examines for and enforces compliance with FINRA rules and federal securities laws, registers broker-dealer personnel and offers them education and training, and informs the investing public.
5Investor.gov is brought to you by the U.S. Securities and Exchange Commission’s (SEC) Office of Investor Education and Advocacy (OIEA) and is an online resource to help individual investors make sound investment decisions and avoid fraud. The IAPD database provides information about investment adviser firms registered with the SEC and most state-registered investment adviser firms. The OIEA is dedicated to serving the needs of individual investors.
6The SEC is an independent federal government regulatory agency responsible for protecting investors, maintaining fair and orderly functioning of the securities markets, and facilitating capital formation. It was created by Congress in 1934 as the first federal regulator of the securities markets. The SEC promotes full public disclosure, protects investors against fraudulent and manipulative practices in the market, and monitors corporate takeover actions in the United States.
7FINRA Rule 2111 requires that a firm or associated person have a reasonable basis to believe a recommended transaction or investment strategy involving a security or securities is suitable for the customer. This is based on the information obtained through reasonable diligence of the firm or associated person to ascertain the customer’s investment profile.
8The Investment Advisers Act of 1940 is a US federal law that regulates and defines the role and responsibilities of an investment advisor/adviser. An adviser’s fiduciary duty means the adviser must, always, serve the best interest of its client and not subordinate its client’s interest to its own.
9In addition to compensating an advisor for their time and services, there are various other investment charges you may encounter. The SEC’s Office of Investor Education and Advocacy offers an Investor Bulletin, “How Fees and Expenses Affect Your Investment Portfolio” to educate investors about how fees can impact the value of an investment portfolio. That material is available here: Investor Bulletin: How Fees and Expenses Affect Your Investment Portfolio (sec.gov).
A fee structure that incurs charges when an investor opens an account or sells a financial product.
A fee structure that is based on assets under management.
A fee that is not impacted by the amount of work performed or market fluctuations.
A fee structure that combines the aforementioned structures.
Investing involves risk including the risk of loss of principal.
The information provided does not constitute investment advice and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell a security. It does not take into account any investor’s particular investment objectives, strategies, tax status or investment horizon. You should consult your tax and financial advisor.
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