Should I Use A Financial Advisor or Do It Myself?

If you're debating between using a financial advisor or taking a DIY approach to managing your money, there are a few key factors you need to consider, like your financial needs, goals, and life stage.

A financial advisor can provide guidance on investing, planning for significant life events, and preserving wealth for future generations without a lot of leg work on your end. On the other hand, if you have the time and expertise to build a financial plan on your own, you could be set.

In today's guide, we'll explore a few situations where you might want a financial advisor and some scenarios where doing it yourself makes more sense.

What Do Financial Advisors Do?

First things first—financial advisors offer a wide range of services, including investment management, tax planning, and estate planning. They can be independent agents or work for larger financial firms.

The term "financial advisor" encompasses several types of financial professionals, including stockbrokers, insurance agents, tax preparers, investment advisers, wealth managers, certified financial planners (CFPs), and certified public accountants (CPAs). While some advisors focus on investment management, others specialize in areas like tax planning, retirement planning, or estate planning.

Financial advisors set their own compensation structure, so their costs vary pretty widely depending on their services and expertise.

Pro Tip: Only work with fiduciary advisors who are bound by a standard of ethics that requires them to be more transparent about their expenses and make investment decisions that put you first.

How Do-It-Yourself Financial Planning Works

Managing your own finances can be empowering and cost-effective, but it requires the right tools, knowledge, commitment, and discipline.

Educating yourself about personal finance is crucial when managing your own finances. Budgeting tools, investing apps, and financial calculators can help you track your expenses, manage investments, and plan for long-term financial goals.

Successfully managing your own investments requires a significant time commitment and discipline. You’ll need to regularly review your financial situation, research investment opportunities, and stay updated on financial news, which can feel like a second full-time job.

You’ll also need to adhere to a budget, keep your money in the right savings accounts, and avoid impulsive financial decisions to set yourself up for long-term success.

When to Work with a Financial Advisor

Now that you have a better idea of what goes into working with a financial advisor vs going the DIY route, here are a few situations when you might want to seek out professional guidance from a financial advisor:

1. Limited financial knowledge: If you have limited knowledge when it comes to financial planning, working with a financial advisor can provide you with valuable insights and expertise to help you make informed decisions about your financial future.
2. Complex financial situations: When factors like multiple income sources, diverse asset allocation, retirement planning, estate planning, or high net worth make your finances more complex, a financial advisor can offer tailored strategies to help you navigate challenges.
3. Long-term financial goals: If you have long-term financial goals such as buying a home, saving for your children's education, or planning for retirement, a financial advisor can help create a customized roadmap to achieve your goals.
4. Market volatility: During periods of market volatility or economic uncertainty, a financial advisor can help you make rational decisions and potentially mitigate the impact of stock market fluctuations on your investments.
5. Inheritance/windfall: If you receive an inheritance or windfall, getting advice from a financial advisor can help you manage the sudden influx of wealth effectively and make decisions that align with your financial objectives and risk tolerance.
6. Tax planning: A financial advisor can provide tax planning strategies to help minimize your tax liabilities and maximize your overall financial position. Working with an advisor could be key if you have a complex tax situation.
7. Retirement planning: As you approach retirement age, a financial advisor can help you assess your retirement readiness, create a sustainable withdrawal strategy, optimize your retirement income, and choose the right retirement accounts. They may even have tips for making the most of your social security benefits.
8. Insurance needs: Landing on the right types and amounts of insurance coverage can be tough. While health and life insurance are a great start, you might also benefit from long-term care or disability insurance. An advisor can evaluate your insurance needs and recommend the right policies to protect you and your loved ones.
9. Behavioral finance: If your emotions tend to get in the way of your financial decision-making, a financial advisor can provide objective guidance to prevent impulsive decisions that might negatively affect your financial plan.
10. Life changes: Whether you're self-employed, going through a divorce, or facing a significant life change, a qualified professional can offer specialized financial advice tailored to your unique circumstances.

When to Do It Yourself

While financial advisors can provide valuable expertise, there are instances where taking the DIY approach may be the better choice.

1. Basic budgeting and expense tracking: If your financial situation is relatively simple and you have a good handle on your income and expenses, you might be able to manage basic budgeting and expense tracking on your own.
2. Routine investment management: If you already have a strong investment strategy and a straightforward portfolio, managing investments independently or using a robo-advisor can be a more cost-effective option than hiring an advisor.
3. Limited financial resources: Financial advisors aren’t cheap. If your financial resources are limited, the annual fees associated with hiring a financial advisor may outweigh their benefits, making it more practical to handle your finances on your own.
4. Educational opportunities: If you have the time and you're willing to learn about personal finance, you might find that educating yourself can equip you with the knowledge and confidence you need to manage your finances without professional assistance.
5. Clear financial goals: Having a clear vision of your financial goals and a disciplined approach to achieving them can make it possible to handle your finances without a financial advisor's input.
6. Comfort with technology: With the availability of user-friendly financial tools and resources, you may feel more comfortable managing your investments independently. For example, robo-advisors are a low-cost way to get guidance on your investments without paying a fortune.

Should You Work with a Financial Advisor?

Financial advisors aren’t the right fit for all situations, so it’s helpful to ask yourself if you’ll benefit from their services.

1. Assess Your Financial Goals

Before deciding whether to use a financial advisor or manage your finances on your own, you need to assess your financial goals.

Ask yourself the following:

• What is your current financial situation?
• What are you aiming to achieve in the short and long term?
• Are you looking to save for retirement, buy a house, start a business, or fund your children's education?

Understanding your financial objectives will help guide you to determine the level of support and expertise you need.

2. Consider Your Financial Aptitude

Consider your understanding of complex financial concepts, your willingness to stay updated with market trends, and your ability to handle the intricacies of financial planning.

This self-assessment will help you gauge whether you have the expertise needed to manage your finances effectively without professional assistance.

3. Weigh the Value of Your Time

Managing finances can be time-consuming and requires constant attention to market changes, investment performance, and financial regulations.

Consider whether you have the time to dedicate yourself fully to this responsibility, or if your time would be better spent focusing on your career, family, or other interests.

Determining the value of your time will help you decide whether leveraging a financial advisor's expertise would be beneficial.

Key Takeaways

Whether or not you should use a financial advisor depends on factors like your financial knowledge, available time, and the complexity of your financial situation.

Financial advisors can provide expertise in investment management, financial planning, tax planning, and other key aspects of your financial life, but they’re not the right fit for all situations. If you do work with an advisor, it's important to choose a trustworthy one who acts in your best interests.

Ultimately, weighing the pros and cons and considering your individual needs will help you make the right call about whether or not you should work with a financial advisor.