As strange as it might sound coming from an Investment Advisor, not every investor needs to hire an advisor. Others might not need an advisor yet, but will need one eventually. Here are some points to consider if you are trying to decide if or when you need an advisor.
1. Have you saved more than $25,000?
$25,000 is not a figure set in stone, but a reference point to use a guide. If you do not have money to invest, you do not need to spend money on an advisor. You could hire an advisor to write a financial plan for you if you haven't started saving yet, but unless you have money to invest, your financial plan should read, "Start saving". Having $25,000 saved shows that you are not living above your means and can have some cash set aside in an emergency fund. After your funding your emergency account, you can begin investing for growth.
2. Will you seek and listen to advice?
Hiring an advisor is great, but if you do not seek and listen to advice, you are throwing money away. Advice you seek can range from how to diversify your investments and what asset allocation is best for you to decisions on how much you spend on your next house or car.
Most people won't reach their retirement goals by only contributing to their 401(k) plans. Working with an advisor who looks at your full financial picture will benefit you, but only if you ask for and listen to the advice. Advice goes beyond allocating your stock and bond investments. Buying a house or car that you can make payments on, but prevents you from saving for retirement will hurt you as bad as or worse than choosing the wrong investments.
4. Do you spend more time on ESPN.com and Facebook than CNBC.com, MarketWatch.com or Briefing.com?
These three examples of financial sites aren't magical. The question is if you are staying informed on what's moving the markets. Investing isn't something you can do easily with only an hour of reading per week. Market conditions change too fast for someone who doesn't have the desire to invest their time in research. Investing without research is simply gambling. 1.0-1.5% is a small fee compared to what you can lose by not taking the time to do your due diligence. (Note: Watching Mad Money on CNBC does not count as research. It's entertainment at best.)
5. Would you rather spend your time doing other things?
The world is full of people who are quite capable of managing their own investments, but if they don't enjoy it, should they focus their attention elsewhere? Just like many people pay someone else to mow their lawns, clean their houses, paint their houses or wash their cars, outsourcing your investment management can free-up your time to spend on something that makes you happy.
6. Do you know the difference between an IRA and a 401(k) or between a Roth and Traditional IRA or how mutual funds and ETFs differ?
If you don't have basic knowledge of finance, it's probably better to hire a professional.
7. Do you need help planning for your children's college expenses?
Have you thought through how much you need to save for college? Do you know what college investment options are best for you? If either of these questions makes you pause, it's worth speaking to an advisor.
8. Could you save money by hiring a fee-only investment advisor?
Investors who manage their own investments are not necessarily paying lower fees than their friend who works with a fee-only investment advisor. Fees can come in different forms. A fee-only advisor charges a percentage of assets or pre-arranged set fee. An individual investor, who isn't careful, may not realize how much he is paying in hidden mutual fund fees (aka high expense ratios). An advisor who does not work on a fee-only basis may use mutual funds with higher fees to receive payments and gifts from mutual fund companies that incentivize them to "sell" their products. Those individual investors who use low cost funds or individual stocks may have too much emotion in their investing. People who are prone to selling late in a bear market or continuing to buy late in a bull market might find their losses can be greater than if they worked with an advisor who can invest without the same emotional considerations.
9. Do you have a clear path on how to reach your financial goals?
Many investors find it helpful to work with an advisor to create a realistic plan on how you are going to reach your financial goals. These plans should include your current and projected spending habits in addition to your current nest egg and savings rate. Much like a personal trainer helps her clients stay in shape, a good advisor will work with you to stay on your path to reach your financial goals.
10. Do you understand the tax consequences of your investing approach?
If you are in a higher tax bracket, the tax consequences of your investment choices can derail what you thought was a good plan. If you do not understand how investing with mutual funds in a non-tax-deferred account (aka taxable brokerage account) can increase your tax burden, you could benefit by working with a fee-only investment advisor who invests with individual stocks and/or ETFs.
In the end, knowing when to hire an investment advisor depends on your specific situation, goals and investment knowledge. Any advisor who is worth working with will not charge you a penny for the first conversation. Start talking to a few advisors and find the one who fits your needs best.
