Financial advisors: What are they and do you need one?

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What should we do, coach?

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At different stages of your investing life, you may wonder if you could benefit from professional help. Although many investors feel confident going it alone, others seek the help of a financial advisor.

Why hire a financial advisor? Maybe you don’t want to devote so much time and attention to your portfolio. Or perhaps you have a particularly challenging financial picture, with competing goals and complicated assets.

But before deciding, you need to understand what role a financial advisor plays, whether you should seek one who’s a fiduciary, and how much financial advisors charge.

A financial advisor is anyone you pay to recommend investments, assist you with financial planning, or buy and sell securities on your behalf.

But there are several specific types of financial professionals, and each one is different. Some handle your stock portfolio and advise you on the suitability of trades. Others work with you on the larger financial picture to create a financial plan that involves your retirement accounts, real estate, and children’s education accounts. Still others go a step further and create an estate plan for your children and future generations.

Each financial advisor has their own fee schedule. There are three main structures for paying:

Some financial professionals—including those who register with the U.S. Securities and Exchange Commission (SEC) or a state securities authority to be Registered Investment Advisers—operate under a strict “fiduciary” standard. A fiduciary has a legal duty to put the best interests of their clients above their own.

That differs from a “suitability standard,” which is the standard that, historically, many financial advisors have operated under. The suitability standard requires that an advisor make recommendations that are suitable to a client’s personal situation, but doesn’t legally require that they adhere to a fiduciary standard.

But a new regulation that came into force in 2020—Regulation Best Interest (“Reg BI”)—aims to narrow the distinction between suitability and fiduciary standards by requiring broker-dealers to act in their clients’ best interest when recommending products. Reg BI also requires your broker to disclose any potential conflicts of interest, as well as information about fees, codes of conduct, and any important information about its disciplinary history.

The ramifications and legal interpretations of Reg BI are still unfolding. Until there’s full clarity, it’s important to ensure your broker is complying with Reg BI.

If you have substantial investments, an advisor can help oversee those assets to manage risks, maximize returns, and minimize taxes. Those services may be worth the cost, especially if you don’t have the time or expertise to do it yourself.

If your assets are less substantial, there are still options available. For starters, you may want to consider a robo-advisor, which creates a customized investing plan based on your responses to a series of questions about your financial goals.

Is it OK to go it on your own without an advisor? Absolutely. There are plenty of information sources, trading platforms, and investment products available to you. Investing on your own is also a great way to limit the dent that fees take out of your returns over time.

But there are other factors involved. Do you understand investing basics enough to diversify your portfolio, rebalance regularly in a tax-efficient way, and watch out for risks? If not, you may want to consider enlisting some help.

Emotions are another big factor. Can you stick with your plan when there’s a dramatic market swing and you feel like you’re missing out? How about if you suddenly lose a lot of hard-earned money? A good financial advisor can talk you down from the ledge when, for instance, you might feel like selling most of your portfolio during a market downturn. They can also keep you from being too aggressive when the market is soaring.

You might consider hiring a financial advisor depending on how much you have to invest, how complicated your finances are, and your own expertise and discipline when it comes to investing.

If you do choose to hire an advisor, be sure you understand exactly what services they offer, how they charge for those services, what standards they operate under, and what value they’ll provide in terms of your time, energy, and long-term financial health. Just as you wouldn’t go to a brain surgeon to treat a cold, you won’t need an expensive advisor for a basic portfolio. Know what services you’re paying for and make sure you’re getting what you need and no more.