5 Signs It's Time to Change Your Financial Advisor
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How do you manage your finances? Do you have a financial advisor, or do you do it yourself? If you've taken the DIY (do-it-yourself) road, you're very much in line with fellow Europeans
A CNBC and Acorns survey reveals that only 17 percent of Europeans use a financial advisor for their finances. One must note that these findings are from the March 2019 edition of the survey. The October edition of the same poll puts these figures close to 1 percent. While we understand that it's a huge difference, the rather valuable insight is that very few Europeans use a professional financial expert to manage their finances and instead rely on their knowledge, expertise to handle their money.
However, is that a brilliant strategy? The answer would be both no and maybe. Let's take up the first part of our answer.
A survey from GoBankingRates.com finds that a majority of Americans can't even answer basic financial questions, a finding consistent with other similar studies. So it makes a little sense for people to manage their own finances.
However, there is a flip side as well. Financial experts believe that the availability of relevant information online, videos, articles, infographics, could be a reason why more Americans are confident in handling their money.
Are you in a similar dilemma: hire an expert or DIY? We're going to find out what a financial advisor does, when is the right time to change your financial advisor, and how to choose one?
Why should you hire a financial advisor?
If you were to get a dental implant, you'd probably go to a dentist instead of your spouse do it for you, right? Sadly, when it comes to managing finances, many spouses (15 percent) leave financial management to their partners.
Research finds that have a financial advisor can have a profound impact on your financial health. More than 66 percent of Americans with a financial advisor feel financially secure against 30 percent without a financial advisor at their side. Having a financial advisor gives them a sense of moving in the right direction.
While some may be skeptical of advisor fees, research finds that the right financial advisor can very well compensate an investor for the asset management fees through impressive returns.
Copyright: Portia Antonia Alexis
Here are a few of things that a financial advisor can do for his clients:
Help you define your financial goals. What are your short-term goals? How do you see yourself financially after 25 years? How much money would you need during retirement?
These are some of the most common financial questions you may have. A financial advisor can help you define specific short-term and long-term goals and create a strategy to achieve them.
For instance, if you're saving for the down payment of your first house, where should you keep that money? Or how much money do you need in the first place? Is your checking account the right place to keep it? Your financial advisor understands your housing requirements and can give a ballpark idea of how much money you may require. Similarly, he can suggest the right saving instruments, such as a high-yield savings account, to deposit your money.
Similarly, your financial advisor can help you identify your retirement goals. Instead of having no estimate, he can put together a figure, backed by an investment strategy, to offer a sense of financial certainty.
Find investments that work for you. Not every investment suits your retirement portfolio. If you're well in your 50s, investing in equity might be a risky choice. Similarly, if you're in your late 20s or early 30s, putting all of your money in bonds or CDs may not be the smartest way to grow your wealth.
A financial advisor understands your goals and picks investments that will help you achieve them. Furthermore, he can advise investments that suit your risk profile, thereby limiting your overall risk exposure.
Let's take the above example. For someone in his 50s, it is best to apply a conservative investing approach that focuses on consistent long-term returns instead of growth. At the same, a portion of your portfolio should be invested in growth-oriented financial instruments to fund your income for the next several years.
Help you gain more financial control over your life. Research finds that people having a financial advisor finds themselves in control of their life. Nine out of 10 Americans reveal that having financial order in their house makes them both confident and happy.
Financial problems can cause stress, and it's not just major money issues, such as bankruptcy or an overwhelming amount of debt. Sometimes, it's more about having financial control in your life, knowing how much money you're bringing in, where you are spending it, and are you moving toward your financial goals.
A financial advisor helps you understand money better, creating strategies that work in your favor. You can be relieved of your stress with the right financial expert by your side.
Hold experience in addressing, resolving financial challenges. Financial advisors hold years of experience in managing finances, and as much as you would like to consider your circumstances unique, they're often not. The chances are quite solid that your advisor has already helped someone facing the same challenges.
Let's take the example of debt. If you have a huge debt, which only seems to grow despite your regular payments, your advisor can create a strategy to repay your debt, negotiate better payment terms, and guide you through the entire process. If you have a mix of debt, with both high interest and low-interest loans, paying down the most expensive debt while making minimum payments on others might help you save money on interest payments.
The key is to be transparent and as open as possible about the issues. By working together with your financial advisor, you may just regain your long-gone financial freedom.
As good as it may sound, not every financial advisor has your good interest in his mind. It's critical to evaluate the performance of your investments regularly, ensuring that your advisor is keeping the promises he or she made initially.
Let's have a look at some signs that indicate that you need a new financial advisor.
1. You're not on track to meet your financial goals.
Most of the financial advisors will start a relationship by understanding your financial requirements, goals, and challenges.
They'll list your short-term and long-term goals, and advise strategies to achieve them.
All good so far, but you suddenly notice that your investments aren't helping you achieve your financial goals. In fact, if anything, you're nowhere close to your financial goals or even on the right track.
It's understandable if the investments occasionally miss their mark, but if that's not the case, you need to change your advisor immediately.
As a responsible investor, you must track your financial goals and returns periodically.
2. Your advisor recommends investments that aren't suitable for your portfolio.
Every time you speak with your financial advisor, he pitches a new investment product and instead insists on purchasing it. Sounds familiar? That's a red flag, and if it's happening with you, consider having a new advisor.
Every investment product or financial instrument has a risk profile, and the product must suit your risk tolerance level. It's your financial advisor's job to recommend products fitting that criteria.
Instead of blindly investing in a financial instrument, do some individual research, and if you have doubts, ask your financial advisor. One must understand that financial advisors often receive commissions for recommending a product, so you should always do personal research.
3. Your life is due for a significant change.
Are you on the verge of retirement? Is there a major life event that would affect your financial life? You need to make sure that your financial advisor is qualified for your new economic requirements.
Most investors tend to stay loyal to their long-term financial advisors, and for all the right reasons; however, if you're retiring or there's another financial change in your life, your financial advisor should be able to realign his financial strategy to suit your needs.
The best way is to ask your financial advisor for recommendations or suggestions and crosscheck it with a third-party expert. You can get professional advice on a per-session basis, so you don't need a new advisor simply to validate the new strategy.
4. You're not receiving monthly or quarterly reports.
Most of the financial advisors provide monthly, quarterly, and annual reports to their clients. That's how you track how your money is doing. These reports should be detailed, helping you identify realized profits or losses, understand how your portfolio is doing, and provide a list of relevant accounts, such as portfolio number, demat account, 401k account or Roth IRA account number.
Additionally, you have complete rights to seek access to your online investment portfolio. Your financial advisor should have no problem whatsoever in sharing it.
However, if you don't get at least quarterly and annual reports, it's time to ask questions, and if your advisor isn't answering, there's your cue.
5. Your advisor changes your portfolio without informing upfront.
Did your financial advisor add a new product or investment without consulting you? It's a common practice among financial advisors to rebalance your portfolio for maximum growth or minimizing any impact from market volatility, provided you gave them consent upfront. However, if you didn't do it and your advisor anyways changed your portfolio, it's time to find a new advisor.
If you've identified one or several of these red flags, its likely time to change financial advisors. Here are a few suggestions for hiring the right advisor this time around.
Find out if your financial advisor is a fiduciary. Fiduciaries are investment advisors who are registered either with a state regulator or the SEC. It's their duty to act in your best interest, and in case of any possible conflicts of interest, they must notify you in advance.
You must understand that not every investment advisor is a fiduciary, and stockbrokers, broker-dealers, and insurance agents aren't bound with the same duty to work in your best interest.
You can ask your financial advisor for his registration number and crosscheck it on the NAPFA (National Association of Personal Financial Advisors) website.
In addition to the fiduciary standard, find out if your financial advisor has any specific certifications, such as CFP (Certified Financial Professionals), ChFC (Chartered Financial Consultant), or AIF (Accredited Investment Fiduciary). It'll help you understand their qualifications and whether they're suitable for your financial requirements.
Ask how your financial advisor gets paid. How a financial advisor gets paid can have a massive impact on your portfolio composition. Financial advisors operate through with different fee structures, where some are fee-only advisors, whereas others may receive a commission to recommend a particular product. There are other fee models, such as asset management fees or success fees (hedge funds).
While there are no rules defining the ideal compensation models, it's critical that your financial advisor discloses it.
Verify credentials and customer feedback. Checking the credentials of your financial advisor is only the first step. It's critical to find out if there're any possible complaints registered against your advisor. You can do that by merely going to the SEC website, CFP® Board, or checking your advisor's records with the FINRA (Financial Industry Regulatory Authority). If you find a complaint, ask your advisor about it, although multiple complaints are a red flag.
In addition to checking official records, ask your financial advisor for references. Any good advisor would be happy to share them. Speak with the previous or existing clients of the advisor and get thorough feedback. You can search more about your financial advisor online.
The right financial advisor can make your life better, peaceful, and financially rewarding. It's crucial to do thorough research before hiring a financial expert. Even when you have someone looking after your finances, make it a habit to track your portfolio. A little bit of caution and routine checkup will go a long way in securing your financial future.