Common Misconceptions of When You Should Get a Financial Advisor

Common Misconceptions of When You Should Get a Financial Advisor, image of a plane in the sky with a hand plucking it.

Managing personal finances can be a complex and daunting task, and many people often seek the help of a financial advisor to ensure they make the right decisions. However, questions often arise such as do you need to be rich to get a financial advisor or is it worth paying for a financial advisor. Additionally, what’s the difference between fee-based and fee-only advisors, and should that be a factor in your decision. It’s also important to consider when is the right time to get a financial advisor, or how much money you should have before hiring a financial advisor. How much a financial advisor costs is also a factor you should consider, and if cost is a big concern, there are free financial planning and low income financial advisor options available. In this article, we will explore these topics to help you make an informed decision when it comes to seeking financial guidance.

Do you need to be rich to get a financial advisor?

No, you do not need to be rich to get a financial advisor, and as a fiduciary, I do not believe one should wait until they are rich before getting financial help. While the saying “it takes money to make money”, is true to an extent, I find the saying “a penny saved is worth more than a penny earned” to be more applicable for most early to mid-career professionals. Let me explain, if you had a $1,000 and you gave that $1,000 to the luckiest financial advisor in the world, and that advisor miraculously doubled or tripled your money in a year (which would be far beyond what anyone should reasonably expect). Going from $1,000 to $2,000 or even $3,000 is not life changing. If instead it was $1,000,000 and it doubled to $2 million or 3 million then maybe, but the amount of risk required could also result in that $1,000,000 being reduced significantly, potentially to $0. Most investors should not be willing to take on that level of risk. What I find far more sustainable, realistic, and ultimately life changing, is for an advisor to diligently look at the client’s entire financial picture to find places where they could save money on taxes, fees, or excessive expenses, and ultimately put those savings to work through prudent investments with a long proven history. Unlike high risk investments, careful planning is sustainable and can be put to work for you year after year.

But how does one get money in the first place? Shouldn’t you need to be rich to get a financial advisor, first? Financial advisors provide advice and guidance across a wide range of financial topics, including budgeting, saving, investing, retirement planning, debt management, student loans, stock options, tax planning, risk management, employer benefits and more. They can help people at all income levels achieve their financial and life goals. Currently the United States as a whole gets a failing grade in terms of its financial literacy. According to the Financial Industry Regulatory Authority (FINRA) “Today, only about one-third of Americans have a working understanding of interest rates, mortgage rates and financial risk”. From a financial planner perspective, those items are the most basic of principles for what we advise on. So we are already starting miles apart in terms of the information available from financial professionals and information known by the general public. A financial planner can help you become wealthy by providing you with, among other things, access to and advice from their many years of experience managing money. The gold standard for financial planners is the Certified Financial Planner® certification or CFP® for short. A Certified Financial Planner® has gone through highly specialized training, has been rigorously tested, and has obtained at least two years of experience working directly under another CFP® in order to be able to use the CFP® marks. Can even a rather exceptional lay person compete with that? No.

Going it alone without the guidance of a financial expert naturally leads to the question, what might you be missing by not hiring an expert? Vanguard, which is a non profit consumer investor advocacy group, has taken on the difficult task of putting a value on this.

”We believe implementing the Vanguard Advisor’s Alpha framework (which is a list of areas Vanguard believes advisors can leverage to add value back to their clients), can add about 3% in net returns for your clients and also allow you to differentiate your skills and practice.” – Vanguard.

I spent years studying financial markets, investor behavior, taxes, investing, risk management, estate planning, insurance and much more. With only ⅓ of Americans having even the most basic understanding, what percent could even come close to the level of financial knowledge of a seasoned CFP®. As laymen, average investors just don’t know what they don’t know, and when it comes to your money and your future, that can be costly in a number of ways. However, with a financial benefit of ~3% per year (and that’s after expenses), a professional is going to create value far beyond their costs and will save you tons of time and hassle, too. So, what do you think, do you need to be rich to get a financial advisor?

When should you get a financial advisor?

It is a good idea to start considering a financial advisor if you find you lack the time, knowledge, confidence or interest in managing your finances on your own. The following are some situations where you might benefit from working with a financial advisor:

  • You have a high net worth: If you have a substantial amount of money in investments, real estate, or other assets, a financial advisor can help you manage and grow your wealth.
  • You have a complicated financial situation: If you have multiple sources of income, debts, tax obligations, or estate planning needs, a financial advisor can help you develop a comprehensive financial plan that takes all of these factors into account.
  • You want to grow your assets or decrease your debts: You may not have a high net worth yet, but if your household income is high you should consider ways to grow your assets, someday you will need to replace that income. If you have debt, you definitely want to put together a plan to pay that down. There is no investment in the world that will reliably keep pace with high interest debt.
  • You lack financial expertise: If you are not confident in your ability to manage your finances, or if you simply do not have the time to devote to it, a financial advisor can help you make informed decisions and avoid costly mistakes. I believe most people will fall into this category as their main, although not necessarily only, reason to seek out financial help.
  • You are approaching retirement: If you are getting close to retirement age, a financial advisor can help you develop a retirement plan that ensures you have enough income to meet your needs throughout your retirement years. You only get one chance to retire, you had better be certain you are prepared.
  • You are facing a major financial decision: If you are considering a significant financial decision, such as buying a home, starting a business, or investing in a new venture, a financial advisor can help you weigh the risks and rewards and make an informed choice. Warren Buffett is the world’s most astute investor. His #1 rule is “don’t lose money”. His #2 rule is “don’t forget rule #1.

When should you get a financial advisor? I truly believe you should get started with a financial advisor when you are fairly early in your career. Compound Interest is not a difficult concept to understand, but the benefits of it can take time to develop. Compound interest is exponential growth, it starts out slow but will eventually grow rapidly. Compound interest is the money that your money makes, well it also makes money. While that sentence might be hard to wrap your brain around, simply stated, it’s your money hard at work, earning you more money. So, the sooner you get your money compounding, the more efficient your investment portfolio, and the greater your overall savings rate – the more money you will end up with. Ultimately, in answering when should you get a financial advisor, it really depends on your unique situation and goals. But in my honest opinion, sooner is better than later.

How much money should you have before hiring a financial planner?

This is a common question asked by many people who are considering seeking the help of a financial planner. The answer, however, is not a straightforward one. It depends on several factors including your financial goals, complexity of your finances, and unfortunately the financial planner’s minimum asset requirements.

Financial planners typically have a minimum asset requirement for their clients, which can vary widely, ranging from hundreds of thousands of dollars to several million dollars. Fortunately, not all financial planners have minimums. At FlightPath Financial Planning, there are no account minimums, EVER. We believe access to good financial advice should be a right, and not a privilege of the wealthy. So, the answer to the question “How much money should you have before hiring a financial planner?” will come down to the specific financial planner’s requirements.

How much money should you have before hiring a financial planner is an important question to consider, but it’s not the only factor to consider. If your financial needs are complex, and you find it difficult to juggle or prioritize all your options, a financial planner will provide valuable guidance with a benefit far greater than the cost, even if you don’t have a significant amount of money. And if you are financially simple, the time savings and peace of mind that your finances are professionally managed can be reason enough.

Is It Worth Paying for a Financial Advisor?

People often ask, it is worth paying for a financial advisor? That depends on your unique circumstances. First and foremost, you need to assess your financial situation and determine whether you can adequately do this on your own. Most people do not have the time nor interest to obtain the level of proficiency required to manage their money well. A professional will be able to review your financial picture and make wide ranging recommendations regardless of your financial complexity, or whether you have a little bit of money or a lot of money.

For individuals with complex financial needs, such as high net worth individuals, business owners, or those with multiple investments involving complex financial decisions, hiring a financial advisor who is a CFP® and a fiduciary is hands down going to be worth the cost. A financial advisor can provide valuable guidance and help you navigate complex financial decisions, which can ultimately lead to better financial outcomes and save you time and money.

In comparison, if you do not have a high net worth or do not believe you have complicated finances, it can still be financially advantageous to get help. For example, younger individuals regardless of their financial status have the added advantage of time. This time advantage gives money saved, or money earned, more time to compound and grow. Think of it this way. On average, a well managed investment should double about every 7-10 years. Most people will get the benefit of their money doubling 4.5 times in their lifetime. How did I come up with that number, take 67(retirement age) – 35 (current age) = 32 years. Now divide that answer by 7(or the amount of years required to double) and you get 4.57. Your money will double, about, 4.57 times before you retire. However, if we can get that to 5 times or 5.5 times by getting you started earlier, you will have significantly more assets when you retire. It’s that final doubling, from what was maybe 1-2 million to be 2-4 million that really changes peoples lives. To add to that, each decision that is made better with the advice of your financial planner than would have been made on your own, puts both money and time back in your pocket. That extra money will also have more time to compound and grow. With compound interest being exponential, the sooner you get started the better.

In conclusion, whether it is worth paying for a financial advisor depends on your individual financial situation, needs, and knowledge. For individuals with complex financial needs, or those who do not have the time or knowledge to dedicate to research and maintenance, hiring a financial advisor is going to be a cost, but that cost will be minimal compared to the benefit received over doing it yourself. Therefore, when asking is it worth paying for a financial advisor, one should carefully evaluate their financial situation, their level of knowledge, and their capacity to determine what services are going to be needed before making a decision.

What is the difference between a fee based and fee-only advisor?

A fee-only financial advisor is compensated only by fees paid by their clients. This compensation structure means that their advice is typically viewed as objective and unbiased because they do not receive any commissions or incentives for recommending specific financial products. In contrast, a fee-based financial advisor may charge fees for their services but can also receive commissions or other compensation from third-party financial products they recommend.

The potential conflict of interest for fee-based financial advisors arises from the fact that they may be incentivized to recommend financial products that pay higher commissions, even if they are not the best option for their clients. For example, a fee-based financial advisor may recommend a high-cost investment product or insurance policy because it pays a higher commission, even if there are lower-cost alternatives that would be better for the client.

Here’s an example: Let’s say a fee-based financial advisor recommends an annuity to their client, and the annuity pays the financial advisor a commission of 5% of the client’s investment. The financial advisor may be incentivized to recommend this annuity over other investment options, even if the annuity is not the best option for the client, because they stand to earn a higher commission. In this scenario, the financial advisor’s recommendation is influenced by their compensation structure, which could create a conflict of interest.

In summary, while both fee-only and fee-based financial advisors can provide valuable services, it is important to understand the differences in compensation structure and any potential conflicts of interest. Clients should evaluate whether their financial advisor’s recommendations align with their financial goals and values, and consider working with a fee-only financial advisor if they prefer a compensation structure that eliminates the potential for conflicts of interest. FlightPath Financial Planning believes it is crucial to understand the difference between a fee based and fee-only advisor. The public has the right to know who is acting in their best interest, and who may have potential conflicts of interest. FlightPath Financial Planning is proud to be a fee-only firm and has taken a fiduciary oath to always act in the best interest of the client.

How much a financial advisor costs

The cost of a financial advisor can vary widely depending on the advisor’s fee structure, the services provided, and the client’s individual needs. Financial advisors typically charge either a fee-based or fee-only structure, based on some of the differences I detailed above.

Fee-based advisors charge a fee for their services and may also receive commissions from financial products they recommend or sell. The fee may be based on a percentage of the assets under management or a flat fee. These fees can be front loaded as a percent of the initial investment, or back loaded as a percentage of the investment plus any growth when sold.

Fee-only advisors, on the other hand, only charge a fee for their services and do not receive commissions from financial products. This fee may also be based on a percentage of assets under management or a flat fee. The range of these fees can be quite wide depending on the services requested. Take a look at FlightPaths’ fee schedule. We offer a “Lite” financial planning $100(single) – $150 (couple) per month for targeted advice, as well as, a full service offering averaging ~$200 (single) to ~$300 (couple) per month. We base your fees on financial complexity. So your fees could end up being a little more or a little less than this. Schedule a free consultation today to discuss your financial complexity.

The cost of a financial advisor can range from a few hundred dollars per month to tens of thousands of dollars annually for comprehensive planning and investment management services. Some advisors may also charge hourly rates or project-based fees for specific financial planning services.

When considering the cost of a financial advisor, it’s important to carefully evaluate the potential benefits of the services provided against the fees charged. It’s also important to ask about any potential additional fees, such as transaction fees or administrative fees.

Overall, how much a financial advisor costs at least compared to other services you are familiar with, can be significant, but for most individuals, the value of the services provided can lead to improved financial outcomes, and peace of mind, with benefits surpassing many times the cost. When considering hiring a financial advisor, be sure to carefully evaluate the costs and potential benefits to determine if it’s the right choice for you.

Are there options for a low income financial advisor or free financial planning?

Yes, there are options for low income financial advisors and also for free financial planning services. Although, these options are likely going to be limited in their offerings to basic financial issues and may have limitations. Here are some resources to help you get started

Nonprofit Organizations: There are several nonprofit organizations that offer free financial planning services to people with low income. Some of these organizations include the Financial Planning Association, National Foundation for Credit Counseling, and the Association for Financial Counseling and Planning Education.

Government Programs: The U.S. government offers several programs that provide free financial advice and counseling to people with low income. Some of these programs include the Department of Housing and Urban Development (HUD) and the Consumer Financial Protection Bureau (CFPB).

Online Resources: There are several online resources available that offer free financial planning tools and advice. Some of these resources include Mint, Personal Capital, and NerdWallet.

Local Community Resources: Your local community may offer free financial planning services through community centers, libraries, or non-profit organizations. Check with your local government or community center to see what resources are available.

Regardless of whether you qualify for low income financial advisor help, or free financial planning, it’s important to do your research and choose a reputable organization or resource before getting started. FlightPath does offer targeted advice with a “Lite” financial planning option with reduced costs, which may be suitable for those with simple situations, or those who are not ready to commit to something more comprehensive just yet.

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