Not everyone has the time or inclination to master the subject of personal finance. Luckily, it is not always necessary to master it. In the same way you can hire an electrician without understanding the inner workings of home wiring, you can hire a financial advisor to get your money in order. There are all sorts of reasons why you might choose to do this: lack of interest in personal finance, lack of time to study it or circumstances requiring urgent action, to name a few. No matter the reason, a financial advisor is a must if you cannot or will not manage your own money.
Following are several situations in which it pays to use a financial advisor.
1. Big-Picture Analysis
The most helpful task an advisor can assist you with is developing a comprehensive, big-picture analysis of your finances. As any advisor will explain, personal finance is not just one thing, but an entire constellation of concerns: savings, investing, retirement planning, estate planning, tax preparation, and more. To succeed financially requires devising some kind of overall plan that addresses each of these issues in an intelligent and responsible manner. From there, the advisor will seek input from you as he or she plans each specific area in more detail.
2. Defining Savings Goals
Any advisor worth using will tell you that savings is the bedrock of a solid financial foundation. With savings, your options expand. Vacations, starting a business, or helping a child attend college are all feasible. Without savings, your financial options will be vastly and perhaps painfully reduced. Yet advisors also know that saving for a reason is far more motivating than just “saving.” Therefore, most financial advisors will assist you in developing goals for your savings, both short and long term. These goals will include specific dates and targets (such as “$50,000 for our second home by August 2014) to keep you focused on progress.
3. Creating an Investment Portfolio
Most experts agree that 90% of your investment returns are a function of your asset allocation. That is, how much of your money is invested in stocks, bonds, mutual funds, etc. Unfortunately, some people are too intimidated by all the conflicting investment information out there to decide upon an asset allocation for themselves. This is another area in which financial advisors can help. As someone who has helped countless other people set up investment portfolios, the advisor is fully qualified to get you started. Best of all, advisors can set up automatic transfers so money is added to your investments at scheduled intervals.
4. Retirement Planning
The most important long-term savings goal most people have is retirement. No matter your age, it is important to have a strategy in place that lets you retire at a set age with a known sum of money. But where do you start — a 401(K) or an IRA? Roth IRA or Traditional? (Each has different tax implications.) And what do you invest the account’s funds in once you open it? All of these questions and more can be confidently answered in consultation with your financial advisor. Taking your stated goals (and income) into account, the advisor will suggest a step-by-step retirement strategy involving which account(s) to use, how much to contribute, and when to begin taking withdrawals.
5. Tax Preparation
One of the most dreaded personal finance errands of all is tax preparation. Given the complexity of our tax code and the overall stress associated with tax time, it might seem that only a few sadistic minds would enjoy tax preparation. However, this is yet another area in which a personal finance advisor is completely capable of helping. Simply put, your tax return will look different depending on whether you are an employee, an independent contractor or a business owner. It will also look different if you buy and sell investment property. But regardless of these details, a competent financial advisor can help ensure that your return is done correctly and filed on time.
6. Estate Planning
Despite general assumptions, estate planning does not refer only to your home. Rather, an “estate” refers to the totality of your assets: legal rights, interests in property of any kind, including real estate, businesses, investments, insurance benefits and the like. Without a clear plan specifying who gets what when you die, your heirs will be left to fight over it in probate court (an unpleasant experience to put it lightly.) Instead, financial advisors will work with you on putting together a will and other documents to ensure that your estate as divided in accordance with your own wishes. In fact, estate planning is one area in which even those who generally handle their own money tend to seek professional help. The legal complexities (and consequences) are simply too complex for most people to adequately navigate on their own.
Reviewed and updated September 11, 2011.
Pinyo Bhulipongsanon is the owner of Moolanomy Personal Finance and a Realtor® licensed in Virginia and Maryland. Over the past 20 years, Pinyo has enjoyed a diverse career as an investor, entrepreneur, business executive, educator, financial literacy author, and Realtor®.