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Not everyone needs a financial advisor.

As a financial advisor and certified financial planner, I know I can't help every prospective client who comes through the door. Sadly, the financial advice industry has become so confusing for investors to navigate, that many investors now need a college-level course on the subject just to figure out whether they should even consider working with an advisor.

The result is that many individuals who actually could benefit from ongoing financial counsel don't seek it. Here are a few of the most common objections I hear from investors who really should consider working with an advisor.

My Financial Situation Is Simple

One reason many investors are hesitant to work with a financial advisor is they feel their financial life is too simplistic to justify the cost of an advisor. While this is certainly true in some cases, there's also a tendency for investors to assume that because they are in this situation, it must be common.

No matter how similar they may seem, no two financial situations are exactly alike. Even the most "basic" of situations on paper can mean a wealth of planning opportunities for an investor. Just as the saying goes, "you don't know what you don't know", it isn't always readily apparent what financial decisions were made up to this point, what changes to consider now, and what preventative planning should be done today.

Here's an example:

  • Investor: "I'm a software engineer and my wife is a physician. We have two young kids and own a home. I also do some consulting on the side. Our top financial questions are: where to save beyond our retirement plans, saving for college, and determining the best use of a small inheritance and extra cash in our bank account."

For this family, there are a number of follow up questions that would begin to help clarify what potential planning opportunities exist and what aspects of their situation may have been overlooked for quite some time.

Perhaps the parents could use some of the extra cash or the inheritance to "superfund" 529 plans, or maybe it's possible to reduce their taxable income while saving for retirement by contributing to a SEP IRA for the consulting work. How long has the inheritance and extra cash been sitting in the bank, earning next-to-nothing? Is there an estate plan in place? Where are the old 401(k) and 403(b) plans and what's the investment strategy? Does it make sense to consider a Roth conversion or utilizing a Roth 401(k) at work?

In truth, these questions aren't even the tip of the iceberg.

I'm Not Sure I Need Someone to Manage My Investments

There are two types of do-it-yourself investors: individuals who are interested in the markets and think of investing as a hobby of sorts, and individuals who pick an investment mix when starting a new job and never really look at it again.

Although most individuals could benefit from some financial guidance from time to time, that doesn't mean an ongoing advisory relationship makes sense for that person. Particularly for recent graduates or individuals just getting started saving for retirement, a financial advisor may be overkill.

In other situations, it may be worth considering whether self-managing is in your best interest, particularly over the long-term. In lieu of an ongoing relationship with an advisor, DIY investors often search for a one-off financial health checkup; that is, review their asset mix and other financial decisions they've made to this point.

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It may sound reasonable, but in many situations, this type of insular advice without any ongoing support or help implementing the recommendations falls well short of the guidance an investor actually needs. Knowing when to ask for advice is a good thing, but a plan on paper isn't worth much if just stuffed in a desk drawer. In a recent article in the Journal of Financial Planning, Moira Somers, Ph.D. sums up the gap between asking for help and acting on it:

"The authors of Changing for Good (a classic book on behavior change) claim that, at any given time, only 20 percent of us are ready to bridge that intention action gap. That is, only one in five people who freely admit to having a problem is truly committed to taking corrective action on it in the immediate future."

Putting all of the financial planning components aside, properly managing your investments can be a great deal of work. An advisor can suggest that the self-managing investor consolidate all of their old retirement plans at one institution and even provide guidance on an asset allocation in order to have a unified investment strategy, but in this case, it's up to the individual to do all of the paperwork, contact each custodian, place the trades, and make it happen. Time is our most precious commodity, and for many of us, a very limited resource.

Especially in prolonged market rallies like we've experienced, it can be difficult for a DIY investor to assess their investment choices. Researching every investment option available in a 401(k) plan can be daunting, and even more so with the unlimited investment choices available in an IRA or a brokerage account. Performance may be strong when the market is up, but if lacking diversification, losses can be swift and sharp when the market retracts.

For individuals who aren't particularly interested in the topic of investing, the amount of research required to feel comfortable investing may be prohibitive. It is not uncommon for high-earning individuals to be sitting on a few hundred thousand dollars in a bank account, simply because they didn't know what to do with it.

Depending on your comfort level with investments and the time you're willing to devote to it, it may be worthwhile to explore working with an advisor. The costs of going to cash when the market dips or staying in cash are very real, and can certainly be measured (and also compared against advisory fees).

The Benefits of Working With a Financial Advisor Are Unclear

It can sometimes be difficult for investors to fully understand what an advisor may be able to help them with. There's no product demo to watch and advisors cannot guarantee investment performance or any specific outcome. Even though an advisor may offer standard services to their clients like retirement planning or investment management, depending on the clients' specific situation and needs, what the advisor actually helps one client with may look completely different for another.

This is usually why advisors need to learn more about an investor's life and financial situation before they can adequately explain their services and how they may be able to help.

For example, retirement planning for an unmarried executive in their 50s will look a lot different from retirement planning for a couple in their mid-40s who are also saving for their two kids' college education. So what's the value of working with an advisor? Vanguard's Advisor's Alpha study actually aims to quantify the benefits of working with an advisor. Their findings indicated that an advisor has the potential to add a net return of about 3% for clients, through varied advisory services and an ongoing relationship.

Of course investors need to consider how different service offerings and fee structures may vary in their situation, but it's helpful to assess how an advisor may be able to "add value" to your bottom line outside of market performance.

One of the most common traps for individuals is over-spending and lifestyle inflation. It's hard to see the forest through the trees when it comes to your own spending, and it usually requires the advice from an independent money coach to objectively assess when it's time to cut back. Changing your lifestyle isn't usually an overnight thing - working with an advisor can help individuals and families stay on track by putting their financial choices into context and even ringing the "alarm bell" on occasion.

Just as the benefits of staying invested can compound over time, so too can the benefits of saving more along the way.

I Don't Understand What It Costs to Work With a Financial Advisor

It is sometimes a bit scary to think about the number of investors who are searching for a financial advisor and unaware of what to look for or how an advisor's compensation method may impact the relationship.

For its part, the financial services industry hasn't exactly tried to clarify these points. Technical jargon and ever-shifting terminology sometimes make it difficult for individuals to navigate the process and feel confident about moving forward with an advisor.

While this is not an exhaustive discussion on the topic, most financial and wealth advisors are compensated in one of these two methods:

  • Fee-based relationship: Fee-based advisors are typically paid two different ways: by the client and by a third party. Clients will usually pay an advisor a percentage of their portfolio that the advisor manages, and at the same time, the advisor may also receive commissions from third parties for selling life insurance, annuities, by placing trades, and/or by selecting certain funds or securities for the investor's portfolio.
  • Fee-only relationship: Unlike fee-based advisors who receive compensation from multiple sources, fee-only advisors are only paid by their clients, typically as a percentage of assets under management. Because the advisor does not sell products or have a financial stake in their recommendations, investors may feel more confident that the advice they're receiving is objective and in their best interest.

So which one is right for you?

Again, it will depend on your situation. Because fee-only advisors are only paid by their clients, the advisory fees paid by the client may be higher than in some fee-based relationships. On the other hand, because this arrangement avoids many of the conflicts of interest associated with an advisor making recommendations where they also stand to receive a commission, investors may feel more comfortable taking advice from an advisor who doesn't have a financial stake in it. Due to the different compensation methods, many fee-only advisory firms tend to have investment minimums, which may preclude some investors from having access to fee-only advice.

How Do I Know I Can Trust a Financial Advisor?

Unfortunately, there is no such thing as a sure thing. Trust is a real concern for any investor entering into a new relationship with a financial advisor, as it should be. Just as compensation methods vary among financial advisors so too do the standards in which advisors are held.

  • Registered investment advisor: If a firm is a registered investment advisor, it has a fiduciary duty to always act in the best interest of the client - this is the highest standard of care as established by law.
  • Suitability standard: If a firm isn't considered a fiduciary, they're likely following what's called a suitability standard. This means that recommendations to a client must only be considered "suitable" for their situation, not necessarily what's in their best interest.

When speaking with advisors, dig deeper into exactly how they're structured and compensated. Although a fiduciary duty is the most stringent standard, some advisors only need to wear their "fiduciary hat" when advising clients about their retirement assets. Further, not all registered investment advisors are fee-only, creating a potential conflict between their role as a fiduciary and ability to make commission-based sales. Always research the advisor and the firm on the or website.

Whether it is truly worth it for you to work with a financial advisor will ultimately be a personal decision. In addition to the considerations already mentioned in this article, also research which qualifications and credentials may best suit your needs. Since anyone can hold themselves out to be a financial planner or advisor, additional credentials can help you compare advisors' qualifications. For example, the CERTIFIED FINANCIAL PLANNER™ professional designation is typically considered the "gold standard" for financial advisors, as the Chartered Financial Analyst® designation is to asset management.

By: Kristin McFarland, CFP

McFarland is a wealth advisor at Darrow Wealth Management, an SEC registered investment advisor and fee-only wealth management firm in Massachusetts.