Investing and planning for retirement has changed a lot — mostly for the better.
Instead of paying fees and expense ratios, you can now invest on your own with robo-advisors and get an annual subscription to powerful planning and modeling software for the cost of a nice dinner out.
But there is still no replacement for human expertise. Which is why I decided to work with an advisor despite being familiar with personal finance and retirement planning.
Here’s what I learned and what you should consider if you’re thinking of hiring a financial planner.
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Types of Financial Planners
Before we dive into my experience, it’s important to know the types of advisors out there.
The financial services industry is, at best, a minefield of conflicts of interest and, at worst, shark-infested waters.
Some definitions will help you decide who you may want to engage with and who you will want to avoid.
- Fee-only: The advisor is paid solely by you and doesn’t receive commissions or fees from other entities.
- Fiduciary standard: The advisor is obligated to work in your best interests, even above their own interests, and must report any potential conflicts of interest directly to you.
- Suitability standard: This is less rigorous than the fiduciary standard and means the advisor cannot put you in investments or products that don’t align with your goals and risk profile. But they don’t necessarily have to put your interests above their own or disclose any conflicts of interest.
- AUM (“assets under management”): Shorthand for how an advisor gets paid, usually expressed as a percentage. For example, a “1% AUM” advisor takes 1% of your portfolio annually as their fee.
- Commission: A fee paid to the advisor for selling you an investment or insurance product.
- Advice-only: The advisor offers advising services but does not directly manage client assets.
As you can see from the different compensation types, there's a wide variety of conflicts of interest. And to make matters more complex, some advisors mix standards and compensation within their own portfolio of services.
For instance, an advisor might be a fee-only fiduciary in investments and planning but a commissioned agent when selling insurance products.
On top of that, there is no standard portfolio of services. Some advisors only work with investments and don’t do planning; some planners don’t do tax or estate planning.
Setting your expectations upfront and asking who gets paid by whom and for what will go a long way to preventing future regret.
RELATED: Common Investing Mistakes to Avoid
How I chose my advisor
My decision to work with an advisor was simple. I’ve spent three decades building a retirement portfolio and can see the sunset of my career just on the horizon.
While I’m knowledgeable about many personal finance topics, as the saying goes: “You don’t know what you don’t know.” I wanted to engage a professional to “check my work” so to speak.
I chose to contract a fiduciary, fee-only, advice-only Certified Financial Planner (CFP). I don’t need or want someone to manage my assets, and I certainly don’t want my advisor getting paid to sell me something.
In my situation, this was an obvious choice: Paying for a specific service at a specific point in time, without any ongoing obligation unless I choose to engage them in the future.
How To Prepare for Meeting Your Financial Planner
Engaging an advisor is a straightforward process, but some work beforehand will make things more productive and get you more value for both your time and your money.
Financial planning attempts to predict future events based on a set of inputs and assumptions. Missteps in those inputs will make the predicted outcome meaningless.
“Garbage in, garbage out” is the popular phrase.
Here are some tips for meeting with your financial planner:
Have a goal
You’re not going to get very far with a planner unless you’re planning for a goal, and the more specifically you can define that goal, the more accurate the plan will be.
Use the S.M.A.R.T. goal-setting technique (specific, measurable, achievable, relevant, and time-bound) for excellent results in that department.
READ MORE: How To Set Your Investment Goals
Have data
Good planning requires good data. Have current and accurate data on your spending, investments, and savings rate.
One of my CFP acquaintances laments that only one in 100 clients show up to their first meeting with accurate data on spending.
“When I ask about their spending and they respond, ‘I think …’ I know right then that the first meeting will be asking them to get me the real data I need,” he says.
Understand the language
Before you engage a professional, read a few books or resources (like Erika.com!). This will help you understand the basic language of personal finance.
While part of the job description of an advisor is to educate their clients, starting with the basics already covered will make the best use of everyone’s time, especially yours.
READ MORE: 25 Investment Terms to Know If You’re a Beginner Investor
What To Expect from a Financial Planner
For a one-time engagement, expect to have a series of two to three meetings so the advisor can collect data, get to know you and your situation, and clarify assumptions.
Most importantly, they will set expectations with you about what to expect from the process.
My advisor generated a comprehensive plan for spending throughout my retirement, an analysis of the taxes I could expect to pay, and a Monte Carlo analysis of the percentage chance my plan would get me to the end of this mortal coil still solvent.
They also generated scenario stress tests which pitted my plan against unusual conditions such as prolonged high inflation, poor market returns, and a sequence of returns risks in year one of retirement.
While all the scenarios are unlikely, it did give me a good idea of what it takes in the future to break my plan.
My advisor also generated an analysis of my current portfolio and made specific recommendations for changes to my allocation strategy, tax locations for future investments, and some tweaks to get higher returns for less risk.
The analysis also included a section on the fee structure I’m paying and some ways to simplify my portfolio and reduce fees and taxes in the future.
READ MORE: How Much You Need to Retire
TL;DR: Is a Financial Planner Worth It?
I found that bringing in a temporary co-pilot to look over my plan was a valuable experience and gave me a lot of confidence that my retirement plan is on track.
While I don’t think I need this sort of service on an ongoing basis, at certain milestones or after major life events, I will likely engage with a planner again.
Whether you need a financial planner depends on your finances, where you’re at in your retirement planning, and whether you’d like the comfort of an impartial eye on your portfolio.
For more advice on managing your money, check out these episodes of the Erika Taught Me podcast:
- How To Invest for Beginners (Step by Step)
- The Missing Piece in 99% of Financial Advice
- 10 Steps Towards Financial Wholeness
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