If your assets have become substantial enough to raise concerns about proper management, it's the perfect time to check with a planner.
Few of us would feel confident about representing ourselves at trial or performing a medical procedure on ourselves. Yet when it comes to money, we're much more likely to depend on our own expertise - even if that expertise may be decidedly limited.
Is the do-it-yourself approach the best way to manage your money? And if not, is there a milestone or a benchmark beyond which it makes sense to bring in a professional?
Let's find out.
Do I Need a Financial Planner?
The first thing to understand about financial planning is that it's not simply the preserve of the wealthy. You don't need a massive portfolio to benefit from professional planning. Suppose you're a relative novice in terms of finances and investment. In that case, a planner can provide crucial assistance with fundamentals such as goal setting, investment options, and life insurance needs.
The most valuable thing a financial planner can offer is experienced judgment. A good planner knows when you'll need specialized help from an attorney or an accountant. A skilled planner can also help you avoid mistakes that cost you significant money in the years ahead. Getting expert guidance early can place you in the most advantageous position for long-term growth.
No magic number or threshold for assets makes hiring a planner a wise choice. Choosing when to opt for a planner is primarily a judgment call; if you feel your assets are substantial enough to make doing it yourself a risky proposition, it's probably the right time to hire a planner.
The Financial Planning Checklist
If you're unsure if hiring a planner is the right move for you, ask yourself the following questions:
- Do I feel knowledgeable about the market and the investment world?
- Do I have enough time to devote to actively managing my finances?
- Do I have the skill to make informed judgments about savings goals, investment opportunities, asset allocation, and insurance options?
If the answer to the above is a resounding "yes," you may be OK handling your own money - at least for now. Yet, if there's any concern, hiring a professional is at least worth exploring.
Finding the Right Planner
When evaluating financial planners, a crucial aspect to understand is fiduciary duty. This duty requires financial planners to act in the best interests of their clients above all else. Fiduciaries are legally and ethically bound to recommend financial strategies and products that best suit their client's needs, not the options that may provide the planner with the highest commission. This commitment ensures that a planner's advice and guidance are aligned with your financial goals, providing an added layer of trust and security in the planner-client relationship. When evaluating planners, most experts suggest ensuring that the planner is a "fiduciary financial planner" or simply a "fiduciary."
Further, understanding the difference between fee-based and commission-based financial planners is vital. Fee-based planners charge a set fee, which could be hourly, a flat rate, or a percentage of the assets under management. This model aligns the planner's incentives with the client's interests, as their compensation is not tied to the sale of any particular product. On the other hand, commission-based planners earn money through commissions on the products they sell, such as mutual funds, insurance policies, or stocks. This model could lead to a conflict of interest, as the planner might be incentivized to recommend products that yield higher commissions rather than those best suited to the client's needs.
Generally, a planner who charges an hourly rate is often a better long-term deal than a planner who charges a percentage of assets under management. Even a 1% annual fee can add up. For example, a $100,000 nest egg that earns an average return of 6% would be worth nearly $1.1 million over 40 years. But with a 1% annual fee, the final balance would be under $750,000.
If you think you'd benefit from a financial planner, the next step is finding the right person to help. This task can seem daunting, particularly if you need a referral on which to rely. In short, it's best to focus on someone with solid industry credentials (such as the CFP designation, which stands for "Certified Financial Planner") and positive client feedback. You can also verify that a planner is in good standing by visiting the CFP Board of Standards website.
Once you've compiled a list of candidates, schedule interviews with the planners who seem like the best fit. Ask them about their fee structures, experience, and why they'd be the best choice for someone in your position.
The Takeaway
While there is no one-size-fits-all answer to whether you need a financial planner, understanding the significance of fiduciary duty and the implications of different fee structures can significantly aid in making an informed decision.
The key lies in choosing a professional whose expertise, ethical standards, and approach align with your financial goals and circumstances. Ultimately, the right financial planner can be a valuable ally in navigating the complex world of personal finance, helping to turn your financial goals into reality.