When Is It 'Worth It' to Hire a Financial Advisor?

Personal financial planning can be instrumental in your growth. It helps you compartmentalize your goals, create appropriate strategies to achieve them, draw a timeline for every target, and finally use your saved up money efficiently towards your needs. All of this sounds easy and doable, but the intricacies of financial planning can be challenging, especially for those who lack professional expertise in investing.

A financial advisor adds a lot of value to your personal financial planning. These individuals can offer clear insights into different types of investments, timely guidance, help with tax management, and above all, provide you with a roadmap to financial freedom. A lot of people view financial advisors as costly professionals who take away a chunk of your investment returns. As a result, hiring a personal financial advisor is often associated with the wealthy. While it is true that a financial advisor is certainly a necessity for a high net worth individual, these professionals can also play a pivotal role in the lives of low and medium income households. Financial advisors, in today’s day and age, offer a host of services that can fit into any budget. They offer hourly services or charge monthly fees, so you can comfortably opt for their services as per your budgetary constraints. In addition to this, some financial advisors also charge a percentage of your AUM (assets under management), so their fee gets balanced out by your investments and does not seem like an intrusion into your monthly spending. If you wish to manage your finances backed by a sound financial plan that matches your needs, future goals and investment horizon, consult with a financial advisor who can create a customized plan for you.

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Given the many useful services and ways in which financial advisors can help you, the concept of hiring a financial advisor only for specific reasons is an archaic philosophy today. There really is no right time to hire a financial advisor as everyone’s requirements, the need for help, or the degree of help required can differ. Moreover, in most cases, these needs are not a one-time occurrence but instead a periodic need. However, broadly speaking, there are some situations where hiring a financial advisor can be worth it.

Keep reading to find out what a financial planner does and the circumstances in which it might be worth it to hire one for your financial needs:

1. When you are planning for retirement

Retirement planning is one of the most crucial aspects of personal finance. Retirement is a tricky phase. It usually happens when you are old and have limited energy in life. This curtails your ability to work and earn and chase money as you can when you are young. However, the responsibilities do not decrease and nor do your expenses reduce. The regular expenses like groceries, fuel, electricity, water, etc., remain the same. Moreover, newer expenses like health care also get added. Therefore, it is critical to prepare for these expenses in advance and save enough for any financial need in retirement.

Retirement planning can be a bit challenging. The workplace 401(k) is only one part of retirement planning, and while it may offer you great benefits, these benefits may not be conclusive. Life expectancy has drastically increased in the present times. The average life expectancy in the U.S is 79.11 in 2021. However, with 97,000 people over the age of 100, the U.S. also has the highest number of centenarians in the world. Assuming you live till the age of 100 and retire at the age of 65, you would still have 35 years ahead of you. This can be a long time to survive without adequate funds. Hence, the need to invest in a combination of equity and debt, along with some balanced funds for steady growth, is paramount. You may also need to invest in real estate, gold, cryptocurrencies, etc. Figuring out the right investment instruments, the correct time to enter and exit the market, the perfect time to shift from equity to debt, and the most efficient way to lower the taxes on your profits can all be tricky decisions. However, a financial advisor can help you with them all. A financial advisor costs money to hire, but they can also give you lifetime rewards that keep you financially safe.

2. When you need to pick the right asset allocation

There are different types of assets for investment. These include fixed income assets, equity, cash and cash equivalents, real estate, and more. Asset allocation refers to a strategy that divides your investment portfolio among these asset classes. This is done to balance risk and reward and maximize your chances of earning profits. Asset allocation can be done based on a number of factors, such as your short term and long term goals, investment horizon, risk appetite, age, budget, and other needs. For instance, youngsters are often advised to keep a high concentration of equity in their portfolio, while moving to bonds is often recommended as you move closer to retirement. This ensures capital appreciation in your younger years and capital preservation in your later years. Finding the right asset allocation can be hard and confusing without any prior investment and knowledge of investing. This is where hiring a personal financial advisor can help you. It is better to avoid mistakes that can affect you for a lifetime and start your investment journey with the apt allocation of assets from the very start.

3. When you need help with tax management

Saving, investing, and earning money is one aspect of money management. And as important as these three things are, they cannot make the base of your personal financial planning without taking into account - tax. You pay taxes on everything. If you earn an income, you pay income tax. If you earn a profit, you pay capital gains tax. If you inherit an estate, you may be liable to pay estate tax. This may seem unfortunate, but your money is truly only given to you after deducting tax. Hence, adopting tax efficient strategies is paramount for all individuals. Financial advisors can help you lower your tax liabilities by suggesting suitable investment instruments. For instance, health savings accounts (HSAs) are not just a savings plan that helps you pay for your healthcare costs in retirement. They also help you save tax in multiple ways. Firstly, the contributions made to the account are tax-free. Secondly, your money grows in the account tax-deferred. And lastly, when you use this money to cover any medical expense in retirement, you do not have to pay any tax on it.

Another example of tax saving strategies can be the decision to pick a Roth or a traditional individual retirement account (IRA). If you expect to earn more money in retirement than you do now, then you could consider investing in a traditional IRA. Traditional IRAs take contributions from pre-tax dollars. Roth IRA, on the other hand, is ideal if your present tax liabilities are higher than you expect in retirement. It may be confusing to predict this. Moreover, a lot of people also assume that retirement earnings are always lower than your present income. However, this is not always the case. Your investment returns can be higher than your present salary. It is all about how well you plan for the future, and getting a professional on board can help you make better predictions for the future and accordingly make more suitable decisions. Additionally, a financial advisor can also help you adopt strategies like using tax exemptions, tax credit, tax loss harvesting, and more.

4. When you are making an estate plan

An estate plan contains all the legal directives on how you wish to distribute your estate among your heirs. It includes a will as well as other estate planning tools like a power of attorney, health directives, trusts for minors or disabled children, and a lot more. Passing on your estate to your beneficiaries is a complex process. It involves planning and proper execution to ensure that your money and possessions like financial assets, collectibles, jewelry, etc., reach the nominees. Moreover, estate planning also includes tax saving strategies that lower taxes like estate and inheritance tax. A financial advisor can help you plan your estate smartly, so your beneficiaries are not burdened with tax liabilities and complicated legal procedures like a probate. A personal financial advisor can help lower estate taxes when you pass on your property to your children, grandchildren, or any other beneficiary. They can recommend gifting to avoid tax or donations to charities. This helps to distribute your wealth without incurring taxes.

In addition to this, if you own a business, a financial advisor can also recommend ways to plan succession. Succession planning refers to transferring your business to your children or grandchildren or any other successor. Succession planning is essential at an individual level as well as to ensure that your business stays steadfast in your absence from work. Financial advisors can guide you on issues like transfer of the business to the next of kin, sale of the company to an employee or an outside buyer, as well as retaining the core principles of the business no matter who inherits it. Moreover, there are plenty of legal procedures and financial undertakings when a business is transferred to a new owner. All of this can be carried out with the help of a professional financial advisor.

5. When you have made an investment error

Constant work stress, the pressure to provide for your loved ones, and the need to match up to your peers can be the primary cause of financial anxiety in most people. These factors can sometimes coerce you to make decisions impulsively without relying on rationality and past performance. When things go downhill and matters seem out of your control, bringing a professional on board can be the only way to rectify your mistakes. If you think you have made an error of judgment like investing in a mutual fund scheme that does not seem to deliver the expected returns, buying stocks of a company that has suffered a sudden fall, exiting a scheme at the wrong time, or are facing any other similar issues, getting immediate advice from a professional financial advisor can help you control the damage and take the right course of action as soon as possible.

Apart from investment errors, a financial advisor can also help you solve an extreme debt situation where you find it hard to repay your loans. They can recommend parallel investments in short term instruments that can offer sufficient returns to settle your debts. They can also help you create a budget to minimize your expenses and maximize your savings to avoid such a situation in the future.

To conclude

If you are still wondering if financial advisors are worth it, understand that financial advisors carry several benefits that can help you get your finances on track and live a life of financial security. Hiring them can be beneficial to all irrespective of age, income, or investment goals. So, do not hesitate to hire a financial advisor. Things like money, time, or effort spent on hiring a professional advisor may seem like a lot in the short term; however, the value they can provide can be greatly beneficial in the long run. Hence, try not to base your decision to hire a professional on these factors. Instead, look at your financial goals and your future needs and assess how valuable a professional’s help can be in achieving them. Once you have your answer, you may want to go ahead and contact a personal financial advisor in your area.

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