7 Common Myths of Working With a Financial Advisor
Has anyone asked you, "how much do you value your time?" This question is not in the context of a work environment but, instead, your "free time" - your time away from your profession.
Time and money management are an integral part of society, and quite often, these life skills are developed and fine-tuned throughout our life. But sometimes, we emphasize developing our time management skills (this is a huge requirement of any employer) and sometimes lose focus on money management skills. Occasionally, we also cannot do both at the same time, either. Let's face it, after a long day at work or handling a household sitting down to create a budget, looking over the investment portfolio, or even create personal financial goals often do not come as second nature.
One of the reasons people seek a financial advisor's guidance is because they want to get back their time to focus on something else and understand that they can delegate this duty to someone else who is much more knowledgeable. A great financial advisor will help you by giving you the necessary tools to improve your money management situation. Also, they can be a more substantial resource.
We all have heard some of the common myths about hiring a financial advisor. These myths then cause misleading falsehoods, which lead to the hesitation of working with a financial advisor. Let's face it, sometimes we are more prone to talk about other topics, but when it comes to our finances, it seems like it is a taboo topic.
Here is a question for you: When you feel something is wrong with you, do you self treat your symptoms, or do you go to a doctor even though there may be a common myth about working with a doctor? I hope you answered that you would go with a doctor since that is their profession and their goal is to help you feel better.
The same applies to financial advisors. Their goal is to assist you with your finances and make sure you reach your financial goals.
Let's look at some common myths:
Myth: A financial advisor only works with a clientele that has a large sum of money.
The financial advisory industry is shifting. This is an old myth that cannot escape many people's minds. The industry has been evolving to introduce lower-cost technologies that make it flexible for financial advisors to serve clients in all spectrums. Even serve clients that don't quite make "a large sum" of money. Yes, some financial advisors require a minimum requirement, but that's "old school." This "old school" way of doing business may have been great in the past, but moving forward, this shift in the industry will help those in a part of their life that seek the most help with their finances.
This myth is most familiar with the young professionals since they are barely starting a job and perhaps have incurred a high debt with student loans. Quite honestly, this is the best time for a young professional to seek financial guidance from a financial advisor. Working with an advisor will provide a strategy to pay down student loans and provide insights into their employer benefits (401k, other tax-sheltered perks, equity-based compensation, etc.).
Myth: I live a normal life. I don't need a financial advisor.
Sure, life isn't complicated now, but what happens when it does get complicated? Life is as unpredictable as we know it (COVID-19 is a perfect example). Perhaps one small emergency can lead you to debt. Or even worse, you lose your job. Then what is the plan? Or you switched jobs now what? Should you move your 401k by withdrawing it, or would transferring the 401k to an IRA make sense?
Do you buy insurance before you get into an accident or after it has occurred? I hope you said before because it defeats the whole purpose of getting insurance after the fact. When you buy insurance, you don't anticipate having any complications, but it gives you an assurance that you feel protected if something does happen. Having a financial advisor provides that sense of relief.
Also, you may make bad financial mistakes when you don't have the proper guidance. Suppose you had a second set of eyes to tell you that perhaps the decision you are making isn't a good idea, and these are the domino effects of making that decision. Perhaps seeing it from a different perspective may make you see how a bad financial decision can have an everlasting effect.
Myth: Financial advisors are expensive. Why should I pay someone else? It's my money.
Like any profession, financial advisors receive compensation for their services; in this case, it is for their advice. Each financial advisor has different fee structures. Some of the most common fee structures are one-time fees for financial plans, fees for each financial plan, hourly fees, upfront and/or ongoing fees, etc. If they manage your investments, it is typically an annual percentage fee of your investment account's charged quarterly value. For example, a 1% yearly fee but charged every quarter at 0.25%, therefore, 1% divided into four, which equals 0.25% of your account's value from that quarter.
There is a variety of fee structures, just like there are flavors of ice cream. There is a financial advisor out there that meets your needs. Always ask how a financial advisor receives compensation. Some are fee-only financial advisors, which means that you know exactly how much will be charged and not sold on commission products. Don't get intimidated by the fees. Remember that this is an investment for your financial goals. You are delegating this to a knowledgeable professional and gaining back your time. Recall the first myth.
Remember the question from the beginning: "How much do you value your time?" Having a financial advisor may help you save and earn more than what you pay in fees. Quite simply, the world in finance and financial planning is quite intricate. If you can find the time to learn it and keep up with it, then you are taking away time to focus on other things such as your passions. A financial advisor knows to help you reach your financial goals. You can think of it like this, if you have a broken pipe at your home, will you want to repair it? Or would you call a knowledgeable plumber with years of experience to fix it for you?
Myth: Financial advisors control my money and make only decisions that benefit themselves.
The ultimate control and decisions fall on the client. A financial advisor provides the insights, guidance, years of experience, and perhaps proper introductions to other professionals. Most taxable investment accounts are open to your disposal since it is your money. There are investment accounts such as retirement accounts (IRA, Roth IRA, SEP-IRA, 401k, etc.) that may have a tax implication if withdrawn early before retirement age.
Financial advisors are fiduciaries - by law, they must take into consideration the best interest for you. They only provide the investments, financial strategies that benefit you regardless of their compensation. Therefore, their beneficial interest is when you benefit.
Want to know more about a financial advisor's fiduciary standards?
Myth: All financial advisors are the same. They provide the same things.
The next time you go to the grocery store, look at the people within the produce section. A person may like purple grapes rather than green grapes. In essence, if everyone were the same, then we would live in a dull world. Financial advisors are different when it comes down to their personality. You may have more of a deeper connection with a financial advisor because they love and have a dog just like you. Perhaps you share the same passion for traveling around the world or your favorite sports team.
While financial advisors provide the same type of service, their mastery of specific topics is quite different. For example, financial advisors may have a niche market, such as working with Millennials, growing families, doctors, lawyers, influencers, actors/actresses, engineers, pilots, military, etc. Each niche market has a different set of financial situations. Also, remember your financial situation is not the same as your next-door neighbor or your friends. Each person has a different financial situation.
Myth: I won't understand what a financial advisor will say because they will speak only in numbers, and I will get lost with the vocabulary they use.
As a financial advisor, especially when managing investments, there is a Know Your Client (KYC) initiative. This initiative is to safeguard both the client and the advisor. Recall that financial advisors are fiduciaries and, therefore, by law, have to make sure that they consider your best interest. The same goes for your understanding of what financial planning strategies or investments you to use. If you are new to investments and financial planning, financial advisors will provide the language that makes it as simple for you to understand - this is why they ask many questions when they first meet with you. They want to get to know your level of understanding to ensure they provide the best way to communicate with you.
Myth: I can do it all on my own; I don't need to pay a financial advisor.
With the rise of technology and media, there is valuable information out there. You may feel inclined to do everything on your own - this is perfectly fine.
At some point, there is information overload. Which information is more valuable than the other? The financial world is very intricate (as stated before), and it is evolving with different law changes and tax codes. But what is your profession/expertise? Is your profession to keep up with the evolving world of finance? If it is not related to finance, then why are you risking the potential to make a mistake? Like my previous example, if you have a broken pipe at home, will you have the time to do it over a weekend, and how confident will you be if you did a good job?
Robo advisors have become a trend, but these Robo advisors cannot be reached when you need to talk to an actual human when there is an emergency. Robo advisors are built to be low-cost, but there's a reason why they are low-cost.
It's great that you understand basic financial topics. This means that you have fine-tuned your money management skills, and you will know the right questions to ask when interviewing a financial advisor. The best way to bridge your knowledge is by seeking out a knowledgeable financial advisor who will then be able to help you reach your financial goals.
There are many more myths about working with financial advisors. These are just a small sample, but I am sure by now you get the point. Financial advisors are no longer something that you need a vast amount of money, such as a large salary or large investment account. The financial advisory industry has made it feasible for everyone to get the necessary help to meet your personal financial goals and regain the time to focus on other things. As a client, you remain in control because you seek the guidance of a professional with years of experience. But ultimately, you regain back your time, delegate the job to a professional who has the knowledge and expertise to assist you in your unique life, and you get to improve your money management skills. So, how much do you value your time and money?
If you begin your journey to find a financial advisor, don't be afraid to ask questions. Focus on researching the financial advisor individual and their firm. The Securities and Exchange Commission (SEC) has a database that maintains all registered US financial advisors that must act as a fiduciary. Visit adviserinfo.sec.gov to do your due diligence.