Home > Personal Finance > Do You Need a Financial Adviser?

Comments 0 Comments
Advertiser Disclosure


When you’re sick, you go to the doctor. When your car dies, you find a mechanic. But when it comes to your money, do you really need a financial adviser, or can you do it yourself?

Here’s this week’s question:

Do I really need a financial adviser to handle my money, or will I do just fine in a low fee Vanguard [mutual fund] or something similar?
– Robert

Going It Alone: Penny Wise, Pound Foolish?

Every year we cover income taxes, and every year, we offer advice like this:

Remember, most preparers are simply entering your information into a software program. Rather than pay hundreds to someone else, you could spend a lot less and … do it yourself.

The same logic applies to managing your money. Money management isn’t rocket science. In fact, I’d consider it more basic than income taxes. Providing you’re willing to do a little reading, you can easily do it yourself. For example, let’s look at Robert’s case. Here’s what he might consider:

  • Step 1: Decide how much he can put into long-term savings. Long term means money he definitely, positively won’t need for at least five years.
  • Step 2: Subtract his age from 100 and put that percentage of his long-term savings into a simple, unmanaged stock index fund. So if he were 40, he’d put 60% (100 minus 40) of his savings into a fund such as the Vanguard 500 Index Fund or 500 Index ETF. (I typically suggest Vanguard because they’re low cost. I have no affiliation with them.)
  • Step 3: Take the remaining part of his long-term savings, 40%, and divide it equally. Leave half in an interest-bearing, risk-free savings account, put the other half into a bond mutual fund, such as the Vanguard Intermediate-Term Bond Index Fund, or an ETF.

He’s done. No pro needed.

If Robert is concerned about putting too much into stocks, especially all at once, he could invest gradually over time. If he feels that investing 60% of his long-term savings into stocks is too risky, he could choose to invest less. And if he’s confused by terms such as “500 Index,” “bonds,” and “ETF,” he should read more.

Bottom line? Robert, and most other investors, can safely go it alone, provided they’re willing to do a modest amount of reading and research.

That said, there may come a time when anyone might consider seeking the services of a professional. Perhaps the amount of money involved is large enough to be intimidating, the options so complex you feel out of your depth, or you just want confirmation you’re on the right track.

Fine. There’s certainly nothing wrong with turning to a pro. There is, however, something that can go wrong if you turn to the wrong kind of pro. So let’s explore how to find the right kind.

What’s in a Name?

In a past life, I worked as a financial adviser for several big Wall Street investment houses. While I called myself a stockbroker back in my day, those in the advice business these days rarely do. Instead, they use titles they presumably hope will convey trust: financial analyst, financial adviser, financial consultant, financial planner, investment consultant and wealth manager, among others.

When it comes to quality advice, these are all interchangeable labels. None require any specific education, skill or certification. In fact, your barber probably has stricter licensing requirements than are needed to call yourself almost any kind of financial adviser or consultant.

More Important Than Titles? Compensation

The problem with the investment advisory business is this: Most advisers make money from commissions. And anyone who makes money from commissions can never be completely trusted.

Overly harsh? Maybe. There are certainly many commission-based advisers who are both sharp as a tack and honest as the day is long. But they’re working within a bad system, one that requires them to move your money around to get paid, when often that’s not in your best interest.

Furthermore, typical advisers aren’t required to act as a fiduciary, meaning they are not required to place your financial interests ahead of their own. Instead, they adhere to a lesser standard of conduct, known as suitability. Suitability requires only that they suggest investments that are suitable for an investor with your goals, risk tolerance and financial means.

An example to illustrate the distinction: Suppose your goals and risk tolerance suggest that a stock mutual fund is right for you. There are two similar funds available. One charges a 5% commission, and the other 2%. A fiduciary would be legally required to suggest the fund with the lower cost, because that’s obviously in your best interests. The suitability standard, on the other hand, allows the adviser to suggest the fund that pays them the higher commission, because either fund is suitable.

The simple truth is this: A system built on commissions and without fiduciary standards invites abuse. That was true when I started as a stockbroker 34 years ago, and it’s true today.

Who Can You Trust?

To receive objective advice, you’ve got to take commissions out of the equation. There are three ways to do this. The first is to replace commissions with an annual fee based on the amount being managed. I explained the pluses and minuses of that setup last year in the post, “Ask Stacy: Why Is My Investment Adviser Charging a Fee on Idle Cash?

The second way to take commissions off the table — and the better option, in my opinion — is to pay for your financial advice by the hour, the same way you do with an accountant or lawyer, by going to a fee-based financial planner.

The final option is to learn the ropes yourself and make your own decisions.

How to Pick an Adviser

Here’s how to go about picking the right adviser, however they get paid. These rules also apply to picking an accountant, lawyer, doctor or mechanic.

  • Ask your friends or co-workers for referrals. The most useful will be those sharing a situation somewhat similar to yours.
  • Check credentials. You don’t have to be a genius to pass the exams required to obtain securities licenses. Look beyond that and check out educational background and other professional credentials. The Certified Financial Planner (CFP) designation is a good one.
  • Ask about experience. Credentials and education are nice, but as with most things in life, experience is often the best teacher. If two professionals charge the same price, you’d certainly rather have one with 20 years of experience versus 20 months.
  • Ask them for referrals. Any professional in any field should be happy to provide them. Of course, only an idiot would provide referrals who would bad-mouth them, so don’t put too much weight on this one.
  • Talk to several before you decide. This is easily the single most important thing before hiring any service professional. Only after you talk with several possible candidates for the position will the positive attributes you’re seeking surface in one of them.
  • Ask how they get paid. If you read what I wrote above, this one should be obvious.

This post originally appeared on Money Talks News.

More from Money Talks News:

Image: iStock

Comments on articles and responses to those comments are not provided or commissioned by a bank advertiser. Responses have not been reviewed, approved or otherwise endorsed by a bank advertiser. It is not a bank advertiser's responsibility to ensure all posts and/or questions are answered.

Please note that our comments are moderated, so it may take a little time before you see them on the page. Thanks for your patience.

Credit.com receives compensation for the financial products and services advertised on this site if our users apply for and sign up for any of them.

Hello, Reader!

Thanks for checking out Credit.com. We hope you find the site and the journalism we produce useful. We wanted to take some time to tell you a bit about ourselves.

Our People

The Credit.com editorial team is staffed by a team of editors and reporters, each with many years of financial reporting experience. We’ve worked for places like the New York Times, American Banker, Frontline, TheStreet.com, Business Insider, ABC News, NBC News, CNBC and many others. We also employ a few freelancers and more than 50 contributors (these are typically subject matter experts from the worlds of finance, academia, politics, business and elsewhere).

Our Reporting

We take great pains to ensure that the articles, video and graphics you see on Credit.com are thoroughly reported and fact-checked. Each story is read by two separate editors, and we adhere to the highest editorial standards. We’re not perfect, however, and if you see something that you think is wrong, please email us at editorial team [at] credit [dot] com,

The Credit.com editorial team is committed to providing our readers and viewers with sound, well-reported and understandable information designed to inform and empower. We won’t tell you what to do. We will, however, do our best to explain the consequences of various actions, thereby arming you with the information you need to make decisions that are in your best interests. We also write about things relating to money and finance we think are interesting and want to share.

In addition to appearing on Credit.com, our articles are syndicated to dozens of other news sites. We have more than 100 partners, including MSN, ABC News, CBS News, Yahoo, Marketwatch, Scripps, Money Magazine and many others. This network operates similarly to the Associated Press or Reuters, except we focus almost exclusively on issues relating to personal finance. These are not advertorial or paid placements, rather we provide these articles to our partners in most cases for free. These relationships create more awareness of Credit.com in general and they result in more traffic to us as well.

Our Business Model

Credit.com’s journalism is largely supported by an e-commerce business model. Rather than rely on revenue from display ad impressions, Credit.com maintains a financial marketplace separate from its editorial pages. When someone navigates to those pages, and applies for a credit card, for example, Credit.com will get paid what is essentially a finder’s fee if that person ends up getting the card. That doesn’t mean, however, that our editorial decisions are informed by the products available in our marketplace. The editorial team chooses what to write about and how to write about it independently of the decisions and priorities of the business side of the company. In fact, we maintain a strict and important firewall between the editorial and business departments. Our mission as journalists is to serve the reader, not the advertiser. In that sense, we are no different from any other news organization that is supported by ad revenue.

Visitors to Credit.com are also able to register for a free Credit.com account, which gives them access to a tool called The Credit Report Card. This tool provides users with two free credit scores and a breakdown of the information in their Experian credit report, updated twice monthly. Again, this tool is entirely free, and we mention that frequently in our articles, because we think that it’s a good thing for users to have access to data like this. Separate from its educational value, there is also a business angle to the Credit Report Card. Registered users can be matched with products and services for which they are most likely to qualify. In other words, if you register and you find that your credit is less than stellar, Credit.com won’t recommend a high-end platinum credit card that requires an excellent credit score You’d likely get rejected, and that’s no good for you or Credit.com. You’d be no closer to getting a product you need, there’d be a wasted inquiry on your credit report, and Credit.com wouldn’t get paid. These are essentially what are commonly referred to as "targeted ads" in the world of the Internet. Despite all of this, however, even if you never apply for any product, the Credit Report Card will remain free, and none of this will impact how the editorial team reports on credit and credit scores.

Your Stories

Lastly, much of what we do is informed by our own experiences as well as the experiences of our readers. We want to tell your stories if you’re interested in sharing them. Please email us at story ideas [at] credit [dot] com with ideas or visit us on Facebook or Twitter.

Thanks for stopping by.

- The Credit.com Editorial Team