Pros and Cons of Hiring a Financial Advisor

Financial advisors can be an invaluable resource as you navigate the challenging feat of managing your finances. Among other tasks, they can help you reach important goals such as retirement, manage risk, and, above all, provide peace of mind.

However, while they bring quite a bit, they’re not always the most cost-effective option, especially if you have strong financial literacy or don’t have significant assets. In this article, we’ll outline the benefits and disadvantages of hiring an advisor, hopefully offering more clarity on if it’s right for you.

Pros

As mentioned, working one-on-one with a financial professional has plenty of benefits, especially if you’re not comfortable with handling a complex portfolio alone. One of the most prominent is the chance to reduce stress by knowing you’re receiving educated and personalized guidance.

Below are five advantages of hiring a financial advisor:

Expertise

The most notable benefit of working with an expert is the knowledge they can use and provide. Most financial advisors will have spent several years studying their field in college and earning on-the-job experience, especially if they hold high-quality certifications such as Certified Financial Planner (CFP), Chartered Financial Analyst (CFA), or Chartered Financial Consultant (ChFC).

As you meet with your advisor, they’ll use their expertise to recommend viable strategies and guide you where you perhaps hadn’t known you needed to be. “Speaking from my experience, hiring a financial advisor can be a game-changer. It’s like having a personal navigator in the complex world of finance,” emphasizes Eric Eng, founder and CEO of AdmissionSight and former investment professional at Goldman Sachs.

Helping You Stay Disciplined

Aside from applying their often-extensive industry knowledge, financial advisors can also help you keep a disciplined, level head as you manage your assets. This can be useful in several facets of your finances, whether you’re investing or saving. For example, while building a budget, your expert may help you form more conservative spending habits or show you effective and creative ways to save your earnings.

It’s not uncommon to make decisions out of emotion or impulse. Some examples might be selling shares in a mutual fund for a quick infusion of cash or buying an asset without sufficient knowledge of how it works just because it’s the latest trend. However, making sometimes emotional decisions such as these can cause one to experience unnecessary losses and can throw their progress off track.

“Many people might not be aware, but advisors can also offer behavioral coaching,” says Shmuel Shayowitz, President and Chief Lending Officer at Approved Funding. He adds that this “can assist clients in maintaining discipline amid market swings and avoiding rash decisions that could jeopardize their long-term objectives. They basically take a lot of the ’emotion’ out of the equation.”

Clarity and Peace of Mind

It can be hard to know whether you’re taking the right steps when managing your money, especially if you have a portfolio with many turning gears. However, according to Shayowitz, “The right financial advisor can help with a broad assessment of one’s current financial situation, assist with setting practical and attainable savings goals, and, in more advanced circumstances, recommendation of suitable investment strategies.”

Through the communication and use of their expertise, an advisor can identify tangible ways to reach your goals, giving you peace of mind that you’re on the right track. If they’re managing your portfolio, you’ll also benefit by knowing you have a trained and experienced professional at the helm. Instead of painstakingly researching market trends and which securities to buy, you have someone doing much, or even all, of this for you.

Risk Management

Risk is an ever-present part of finance, with potential losses looming over several assets and investment strategies. To the average investor, it can be difficult to pinpoint ways to dodge them and mitigate both short- and long-term dangers. When you meet with a financial advisor, you’ll be able to become more aware of risk management techniques, including asset allocation and diversification.

Potential for Higher Returns

While gains are never guaranteed, professional assistance can help you see more portfolio growth than you might on your own. According to a Vanguard study, working with a financial advisor could raise your portfolio’s value by around 3%. There could be several reasons for this, each varying by client; however, one of the most plausible is that professionals simply carry more experience and, thus, can skillfully put together a portfolio according to your needs and goals.

Another potential reason that advisors can boost your portfolio’s value is that they, as noted, help you avoid impulsive decisions. Because of this, you’re more likely to fully realize the gains from holding certain assets for longer periods or buying or selling at the proper times.

Cons

At this point, it may seem like a no-brainer to meet with an advisor. After all, they can increase your value and help guide you toward making smart financial decisions. Even so, there are some critical drawbacks, including their high prices and potential conflicts of interest.

The following are the disadvantages of hiring an advisory professional:

High Cost

One of the most glaring cons of hiring a financial advisor is their expensive and, often, varied fee structures. You can expect to pay higher prices as you require more services or work with a more experienced or sought-after advisor in many cases.

While some advisors charge on a flat-fee or retainer basis, many will base their fees around a certain percentage of assets under management (AUM). Therefore, for an advisor to be worth it, you’ll likely need to have a higher amount of assets.

Eng points out, “While hiring a financial advisor offers significant advantages, certain scenarios might not prove cost-effective.” He adds that “if you’re just starting out in your career with a minimal income and straightforward financial situation, the cost of hiring a financial advisor may outweigh the benefits.”

In that way, if your finances aren’t very complicated or you don’t have sizeable funds to work with, it may be more suitable to consider do-it-yourself (DIY) strategies or a one-time meeting with a financial planner.

High Account Minimums

Many wealth or portfolio management firms require a specific amount of assets before you can open an account or use their services. This can make getting the guidance or help you desire challenging if you don’t meet certain thresholds. Morgan Stanley, for example, requires a minimum account value of $500,000 before you can work with a dedicated in-person professional.

As an alternative to traditional in-person advisors, robo-advisors often feature lower account minimums. This can be good for people who want portfolio management services at a more accessible cost and minimum investment. However, be aware that they may not have all the tools and services you want out of an advisory relationship, including one-on-one meetings.

May be Hard to Find a Quality Advisor

It’s not always easy to find an advisor who has your best interest in mind and offers the exact types of services you’re looking for. This is especially the case if there are questions about conflicts of interest regarding the way they earn compensation. Per Shayowitz, “When there is a lack of transparency or when advisors receive commissions for recommending specific products, trust issues with financial advisors may surface.”

To minimize questions about trust, Shayowitz recommends prioritizing “fee-only advisors who have a fiduciary duty to act in their clients’ best interests.” These will often be professionals, such as CFAs and CFPs, who have received their credentials from accredited organizations or through the government.

One of the most straightforward ways to find a high-quality advisor is by using a free matching tool like this one. After answering a quick set of questions about your goals and circumstances, it’ll list up to three vetted fiduciary professionals near you.

Frequently Asked Questions

Is it worth the cost to hire a financial advisor?

The answer to this question depends on your situation and goals. If you would like to put together a substantial portfolio, have important goals you want to hit, or have plenty of funds to work with, it’s often smart to seek out professional guidance. However, if this doesn’t sound like you, it may not be worthwhile. “A full-service financial advisor may not be necessary for someone with very modest financial goals or for someone who is only interested in basic budgeting and debt management,” Shayowitz says.

Is it possible to depend too much on a financial advisor’s expertise?

It’s always possible, especially in portfolio management situations, where it seems like the easiest choice is to sit back and watch your advisor do the work and tell you what you should do. Therefore, it’s smart to make sure you keep an eye on your finances and take steps to understand the advice you’re receiving. This may include asking questions whenever you feel unsure, researching recommended investments, or asking for progress reports.

At what point should I get a financial advisor?

While the ideal net worth can vary, you’ll often consider an advisor when you’ve reached the point where your finances are exceeding your control. You might also think about hiring one if you want to take calculated steps to reach certain benchmarks.