Do You Need a Financial Advisor or Robo-Advisor?

I recently taught a new class titled Do You Need a Financial Advisor or Robo-Advisor? because many of my students were asking about hiring financial professionals during classes about retirement planning, investing, and income taxes.

Below are eight take-aways:

Frequency of Use- According to one study, less than half (44%) of American adults said they worked with a financial professional in 2023 but 88% said they thought that doing so would be helpful. Obviously, this is a major disconnect.

 

Common Financial Challenges- Studies indicate the following: not knowing where to start, being overwhelmed by investment choices, lack of time or expertise to manage finances, fear of making costly mistakes, and new income tax calculations such as required minimum distributions (RMDs).

 

When Financial Advisors Are Useful- Common situations include retirement planning and decumulation (spending down savings) decisions, major life transitions (e.g., widowhood and retirement), complex tax situations, and receipt of an inheritance, settlement, or large prize.

 

Benefits of Working With a Financial Advisor- Advantages include personalized financial guidance, expertise in tax planning and investments, retirement and estate planning guidance, a holistic approach to financial management, behavioral coaching to curb emotional investing mistakes, and objective “third party” insights.

 

Common Myths- One myth is that “all financial advisors are expensive.” The truth is that many offer hourly rates or flat fees that do not involve ongoing investment management expenses. A second myth is “I don’t need an advisor if I’m good at managing money.” In reality, even financial experts seek outside guidance.

 

“Alphabet Soup”- There are dozens of certifications in the personal financial planning space. Among the most widely recognized are: accredited financial counselor (AFC®), certified financial planner (CFP®), chartered financial consultant (ChFC®), certified public accountant/personal finance specialist (CPA/PFS), and chartered retirement planning counselor (CRPC®).

 

Advisor Compensation Methods- There are three main types: 1. Fee-only (advisors that charge an hourly rate, a flat fee, or a percentage of assets under management), 2. Commission-only (advisors that earn commissions by selling financial products), and 3. Fee-based- Advisors that charge a fee for advice but may also receive commissions on product sales.

Questions to Ask a Potential Financial Advisor- Here are five key questions: What are your qualifications and certifications?, How long have you been a financial advisor? What types of clients do you typically work with? Are you a fiduciary (obligated to act in clients’ best interests)?, and Have you ever been subject to any disciplinary actions?

This post provides general personal finance or consumer decision-making information and does not address all the variables that apply to an individual’s unique situation. It does not endorse specific products or services and should not be construed as legal or financial advice. If professional assistance is required, the services of a competent professional should be sought.