Should You Pay Someone Else to Manage Your Finances?
Whenever people are unsure about something, want a second opinion, or just want clarification that they’re right, they tend to go to others for advice. This is such a common occurrence that there are jobs in the world specifically just for giving advice!
Perhaps one of the most common subjects that advice is sought for is finances.
When it comes to improving personal finances, many people either have somewhat of an idea but want guidance, or they have no idea where to start. If you feel this way, you are definitely not alone – there are enough people in the world that feel this way that a job had to be created to cater to them.
A financial advisor is a great person to go to when you’re unsure about what the next step is for your financial situation. For a long time, the idea of having a financial advisor would be to go to their office twice a year, sit down with them for about an hour, and go over your finances together. Now, the phrase has evolved to so much more – websites, phone apps, people, entire firms – these can all be considered financial advisors.
So, how do you know what type of financial advisor is right for you? Well, let’s first tackle the topic of whether a financial advisor is even something you need. Here are the pros and cons of hiring someone to manage your finances, along with alternatives.
When you hire a financial advisor, you can be confident in the fact that you are hiring a tried and true professional. This person has trained for a good portion of their adult life to be able to give advice and manage finances, and they have a broad understanding of how investing works. This definitely a good ally to have on your side.
They can essentially take on the grunt work for you – if you don’t have time to, or if you just don’t want to manage your investment portfolio, your financial advisor can do it for you. As long as they follow fiduciary guidelines, any decisions they make will be to your benefit, meaning that you can be assured you’re in good hands. If they are also a licensed broker, they can even make trades for you.
If you’re unsure what insurance policies you need at any given moment in your life, guess what? Your financial advisor can help you with that as well. You don’t want to buy home insurance if you’re renting – your advisor will help you avoid mistakes like that. If you’re the captain of the ship, your financial advisor is your map cartographer, painting the way for you.
One aspect that may deter you from an advisor is the cost. How could spending money to improve your finances be a good idea? Investing in preventing mistakes now will help you build more wealth in the future, and your financial advisor is a prime example of this.
If and when you decide to look for a financial advisor, you want to be sure they follow fiduciary guidelines. Many times, the advisor will unfortunately not be giving advice that may particularly be in your best interest. Fee-based advisors tend to be better in this case than advisors who earn a commission off investments; the fee-based advisors won’t have anything to lose or gain by giving you advice, whereas commission-based advisors will increase their commission if they get a good investment off of you.
For beginning investors, using an advisor may be a huge cut in your finances, which sounds counterintuitive. This can discourage a lot of newbies from using a financial advisor – but, if you stick with it and they bring you success, soon the fee amount will barely be a blip on your radar. You could start building your portfolio on your own until you feel comfortable enough paying an advisor, but by using this method, you could run the risk of making mistakes and losing short-term money that an advisor could have helped you avoid.
Lastly, if your financial advisor is also an investor, the idea of letting them take the reigns on your investments can be a bit much for the more control-freak side of you. You have to contact them every time you want to make a trade, or you have to trust them completely to make the right decisions in the heat of the moment. While some people prefer this hands-off approach, others may not be too comfortable not having as much of a say in regards to where their money is going.
As mentioned earlier, there is always the option of managing your own finances. If you already have a strong financial or accounting background, this may seem like a no-brainer. For newbies, however, learning as you go can be incredibly overwhelming and stressful – and if anything goes wrong, you’ll only have yourself to blame. If this is the route you intend to take, be sure you are constantly researching, monitoring your finances, and adjusting as necessary. You will have to take extra time out of your day to do this, so make sure you have the time available, along with the mindset to commit.
If you’re a bit on the more introverted side, or you want your finances to be automated, online financial service or a Robo-advisor may be the way to go. Betterment, Wealthfront, and Ellevest are three examples of top-tier Robo-advisors that can offer you advice and monitor your investments literally on the go. Personal Capital is another great tool that can help you track your investments, debts, and accounts all in one place, giving you a real-time update of your net worth.
All in all, it really depends on your personal preference and situation. Younger people are turning more and more to Robo-advisors, while older generations tend to stick with the real deal. Perhaps neither is an option and you’d rather go it alone. As long as you do the research and choose the best option that won’t hurt your finances in the short or long term, you can’t go wrong.
Do you use a financial advisor? What Robo-advisors have you tried in the past? Let me know in the comments!