The COVID-19 pandemic has changed the way many Americans view their financial situations, and by extension the role a financial advisor may play in their lives.
“Many are using the pandemic to reconsider their professional priorities, including going back to school, changing jobs, moving into a bigger place or starting their own businesses,” says Lamar Watson, a financial planner and founder of Dream Financial Planning in Reston, Virginia. These are no small questions to answer, prompting many to question whether they should hire a financial advisor.
While some experts say a good rule of thumb is to hire an advisor when you can save 20% of your annual income, others recommend obtaining one when your financial situation becomes more complicated, such as when you receive an inheritance from a parent or you want to increase your retirement funds.
People need to be honest with themselves if they are interested in managing their money, says Daren Blonski, managing principal of Sonoma Wealth Advisors in California.
“You can’t do it on a part-time basis,” he says. “It’s short-sighted to think you can weekend warrior your portfolio.”
During a bull market, when stocks seem invincible, “everyone does well because the tide rises, but then the market changes on a dime and delivers a pie in the face to those who thought they mastered stock investing,” Blonski says.
Investors got a taste of what the end to the long-term bull market might feel like during the March 2020 stock market crash. While that downturn was short-lived, it served as a potent reminder that the market can turn at any point. Having an expert in your corner when it does can make a world of difference.
“Having a financial advisor in the COVID market and beyond to help work through and make decisions on investments is incredibly valuable,” says Adam Lampe, CEO and co-founder at Mint Wealth Management.
Do You Need a Financial Advisor?
Ultimately, the only person who can determine whether you need a financial advisor is you. Every investor’s situation is different, so everyone will find different value in an advisor relationship.
Generally speaking, a financial advisor will probably be worth it for you if:
— Your financial situation is too complex for Google to help.
— You want help creating an investment strategy.
— You need tax guidance.
— You have a hard time keeping your emotions out of your investing decisions.
— You’re nearing retirement.
A financial advisor may not be worth it for you if:
— You are comfortable making your own investing decisions.
— You don’t need help managing your portfolio.
— You aren’t interested in complex planning strategies such as tax minimization.
— You aren’t nearing or in retirement.
Your Financial Situation Is Too Complex for Google
Anna N’Jie-Konte, founder of Dare to Dream Financial Planning in Kensington, Maryland, says a good reason to get a financial advisor is if your financial situation is too complex to just Google the answers you need. “The decisions you are trying to make are too complex, with multiple layers, and you cannot easily tell what applies to you and what doesn’t,” she says.
One of the biggest changes Lampe has seen since the start of the pandemic is people making large financial moves, such as transferring large sums of money electronically, without speaking with someone face to face.
“There’s a reason why people come to advisors to help them with their taxes,” he says, “because it gets complicated and we have to help them think out loud to get through certain things and make decisions.”
You Want Help Creating an Investment Strategy
Diversifying a portfolio is crucial to avoid volatility, which increases the amount of risk and potentially the amount of income your retirement funds generate. A diversified portfolio helps to ensure stability during a market downturn or extended geopolitical event.
When investors allocate large percentages of money in sectors such as tech, they are betting on those industries outperforming for the long haul. “If you overallocate, you might make the money in the short term,” Blonski says. “The market is going to take that back from you in the long term. When things get overbought, they often get oversold.”
A financial advisor can help you ensure you aren’t overexposed to certain industries, sectors or companies so that your portfolio isn’t wiped out if certain parts of the market fall out of favor.
You Need Tax Guidance
Another reason to see an advisor, according to N’Jie-Konte: if you find yourself not making decisions because you feel overwhelmed or afraid of making a mistake.
While socking away the majority of your hard-earned savings in a 401(k) plan or traditional individual retirement account is a good strategy, other options help investors pay a lower amount in taxes and save money for retirement.
Some investors get caught up in “analysis paralysis” and wind up contributing nothing to retirement accounts because they cannot decide between contributing to a Roth or traditional IRA, N’Jie-Konte says.
“I am a fan of keeping it simple and using numbers to cut through the emotion,” she says. “For retirement, you just need to contribute something.” She says she would much rather see people contribute to a Roth IRA — when a traditional may be more optimal — than contribute nothing.
You Have a Hard Time Keeping Your Emotions Out of Your Investing Decisions
When the market is volatile or undergoing a massive decline because of geopolitical events or weaker economic conditions, investors can fall prey to their emotions.
Investors often want to purchase stocks when the market is relatively overvalued, Watson says.
Too many investors think they can successfully time the market over an extended period of time, even though active trading usually leads to underperformance, he says.
Relying on logic and data can be challenging, but advisors can help investors stay the course and stick to their financial goals. “Advisors are less likely to become emotional about the market and can provide a different perspective,” Blonski says. “Most retail investors get caught in the fear of missing out and they sell when they shouldn’t sell and buy when they shouldn’t buy.”
You’re Nearing Retirement
Managing a retirement portfolio is arguably more complex than a pre-retirement one, because in retirement you are dependent on your portfolio for income. This means the delicate balance of managing risk and return is even more delicate once you retire.
“What a good financial advisor focuses on is modeling out different and unexpected potential scenarios, and then helping you to understand within your risk what is realistic, what is not and what are the pitfalls in the market that people should avoid,” says Judith Lu, founder and CEO at Blue Zone Wealth Advisors. This is especially important when you’re trying to preserve capital and generate a consistent stream of income from your portfolio, as in retirement.
“If your advisor is not talking to you about that kind of planning, that’s a sign you probably need a new advisor,” Lu says.?”It’s easy to wing it during good economic times, but what happens if you don’t have a plan for the difficult or unexpected situations?”
As you near and enter retirement, “you have to be really careful to protect your capital,” Blonski says. “It’s good to have a second pair of eyes on your portfolio.”
Before people decide to retire, they should review their expenses, especially health care costs, including Medicare and supplemental plans. They also need to factor in long-term-care expenses and determine when is the best time to take their Social Security benefits and how it affects their taxes.
Finding a Financial Advisor
There are many benefits of a financial advisor. Once you’ve decided to work with an advisor, the question becomes how to find the right financial advisor. Your financial situation will provide a good clue. If you’re nearing retirement, look for a retirement planning specialist. If you are a small-business owner, find an advisor who specializes in helping people with small businesses.
“A key part of choosing to work with a financial advisor is assessing the fit of your personalities,” says Dann Ryan, managing partner at Sincerus Advisory. “The financial planning process should be a collaborative one. You should be in a situation where you are comfortable with the advisor’s expertise, but also with the strategies you partner on together to create.”
A strong rapport and mutual understanding with an advisor will help ensure you have the confidence to execute the plan you create together and are comfortable asking any financial questions you have now and in the future, he says.
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