Should you put in the time to learn investing yourself or should you hire a financial advisor? This is a question every investor faces. We lay out the reasons for and against here.
What is a financial advisor?
A financial advisor, sometimes called a ‘financial planner’ is a professional you hire to help meet your financial goals. In short, they help you make decisions about how to use your money. Typical services include offering advice on budgeting, paying off debt, saving and investing. Especially if you've not done it before, they can show you how to start investing.
Why do people use a financial advisor?
The logic is the same as paying for most services. For example, you can learn how to fix the broken pipes in your house yourself or you can hire a plumber. Same with personal financial advisors, they should understand all the financial products and be able to advise which ones work best for you to achieve your financial objectives. You pay them a fee to save you time and provide expertise that you may never obtain yourself.
What does a financial advisor do?
As mentioned, financial advisors can also be called financial planners. A financial planner *drum roll*… makes you a financial plan!
A financial plan is intended to achieve the following goals:
- Decide major goals like paying off mortgage or funding children’s university
- Be tax-efficient according to your sources of income and location
- Offer alternative investing and saving options
- Risk management & creating backup plans
Do you have to pay for a financial advisor?
Yes – and this is why most people shy away from using a financial advisor. Here is the bigger question – Will a financial advisor save me more money than I pay them in fees?
Keep reading for the answers but for now we will explain the ways a financial advisor gets paid.
There are three ways a financial advisor earns money for their service.
This is where the fee-only advisor is paid only by the client, either at a fixed rate or as a percentage of the assets they manage for you. This is often about 1%. This is generally thought of as the ideal solution for most people because the fee structure is very transparent and easy to understand.
Here the fee-based financial advisor gets paid both from fees that they charge you (the customer) as percentage of assets under management (AUM) well as commissions from the financial products they recommend to you, which are paid by companies like mutual funds and insurance companies who want people to use their service.
Stockbrokers, who make buy recommendations for stocks to their customers typically rely entirely on commissions that they charge you for selling the stock. Other investment advisors, for example those who work at a bank will get commissions from the investment companies whose financial products they recommend. This fee-structure can be cheaper but is most at risk of a conflict of interest.
How much money should you have to hire a financial advisor?
A general rule of thumb is that if you are setting aside 20% of your income for saving and investing, it can make sense to hire a financial advisor.
There are exceptions to this rule too. When looking to invest smaller amounts of money, say 1000 francs- it might not be necessary to hire an advisor. Some basic understanding of investing will be enough to invest the money into a pension fund or index fund for the long term.
Another common scenario is that you could have savings, but you need help to reduce your spending and need to create a financial plan to get back on track. People in a bad money situation might well be better off hiring an advisor who can help them fix it.
Is it worth seeing a financial advisor?
Hiring a financial advisor or not is an entirely personal decision and first needs an examination of your circumstances. Here are some questions to ask yourself (and truthfully answer)
Questions to ask:
Will you really get round to investing yourself?
Somebody needs to invest to ensure you are building wealth for you and your family. If it’s not going to be you or your spouse- then by de facto it needs to be somebody else. If you are willing to put in the time, there is a wealth of information online, including on the FlowBank Research page.
Do you have a defined investing strategy?
Maybe you own a few investments already that seemed like good opportunities when you were presented with them. But do they fit into an over-arching plan? If they don’t – they might be good investments but perhaps not suited to your goals.
How organised are your personal finances?
Are you the kind of person that has everything labelled in filing cabinet or well-categorised hard-disks with excel sheets? Or do you have papers, computer files and account statements scattered all over? If you are the latter, you might need an advisor just to help with organisation.
Are you about to take a life-changing decision?
About to buy a house, move abroad, have a baby etc? A second pair of eyes could help make the best financially from this important decision.
Are you stressed about money right now?
If trying to manage finances is just too much on top of work, family, socialising, exercising and everything else you have going on. Why not divest this job to a professional and save yourself some stress. They will probably do a better job than you while you are stressed anyway. Alternatively, you just need to prioritise your finances better.
If you’ve decided you don’t need a financial advisor then read no further – you can get a DIY (self-directed) investing account from FlowBank with competitive low commissions and the security of a Swiss Bank Account.
If you’ve decided you need a financial advisor, well what next? You’ll need to find a good financial advisor that will do a good job for you.
NOTE: Doing some of your own Do-It-Yourself (DIY) investing as well as hiring a financial advisor to help with the bigger picture is a great combination. They don't need to be mutually-exclusive!
How to find a financial advisor
The oldest and truest method of finding good services is to ask for recommendations from people you trust.
These days there can be a second way – social media. While it’s true that many good financial advisors won’t have a social media presence – it doesn’t hurt to search around for advice on financial topics that interest you – and if you find an advisor offering advice online that you like and the advice makes sense to you – it is a way for you to pre-judge the advisor before hiring them. Twitter, LinkedIn, SubStack and YouTube tend to have more substantial content, while Instagram and TikTok tends to be more surface-level information.
The other option is ‘Robo Advisors’. This is an automated investment service that is all done online without an actual person giving advice. These services will invest your money based on a questionnaire that you complete about your financial circumstances and financial goals.
Final FAQs about financial advisors
Can you trust financial advisors?
Yes but not all of them. It’s worthwhile establishing the advisor’s credentials and checking them out before entrusting them with your money. They should be a certified or chartered financial planner. NOTE: Also make sure to understand who will have custody of your funds if you open an account and transfer money.
Is it worth paying a financial advisor 1%?
Hopefully you will have a better feeling for this having read this article. The answer could be no but just think if some advice can prevent one bad financial decision or investment- that could easily cover the 1% fee and then some.
How often should you talk to your financial advisor?
Once a year or every time you have a big life event to consider. You want to be in regular touch but most of the information about your investment performance can be easily found in investment apps like FlowBank, so you really only need to contact your advisor for changes rather than updates.