A financial adviser can provide invaluable assistance in helping you navigate the very complex world of investment. But before you hire one, Christine Benz, Morningstar's director of personal finance, suggests that you answer these three questions.
How soon in your investing life do you need to hire an adviser?
It is completely individual-specific. But I think it depends on the complexity of the individual situation, certainly.
You may have sort of idiosyncratic situations like a large family business that you are operating. Or maybe a special-needs child and you'd like to try to figure out - How do we set money aside for this child? If you've got some situation that puts you a little outside of the norm and maybe it is too complex for you to manage on your own, that's certainly a signal that you should look for some kind of help.
If you need advice in the realm of tax planning as well as insurance coverage and estate planning, then you might want to consider a financial adviser to help you with your overall financial plan.
Another indication that you might need some sort of financial help is if you have tried to do it yourself and found that you are not especially adept at managing your own portfolio plan. Maybe you really have sat out this recent bull market for example, your portfolio hasn't performed well at all, you found yourself making some of these behavioural mistakes where you sell yourself out when the market is really volatile only to jump back in when it is high. You may need some sort of an adviser to serve as your behavioural coach to be a check against some of those bad timing decisions that can crop up.
So doing some introspection, thinking about the complexity of your individual financial situation as well as your wherewithal of managing your financial plan in the past, those are things that can help you decide whether it's time to seek additional help.
How much capital should you have ready for investment before you select an adviser?
In most instances, this will be dictated by the adviser, because many advisors do operate with minimums; they won't work with clients who have less than a particular amount. So you may not have complete discretion over this.
Certainly, if you are a very small investor, just starting out and every rupee that you're putting toward your retirement assets really needs to work as hard as it possibly can for you, you may be able to get away without an adviser. You may be able to rely on off the shelf advice (such as robo advice) or just investing in a good equity fund, and that would be especially true if you're just starting out and also you do not have a particularly complicated financial plan. So there is not a single rupee amount that you would need to amass to work with an adviser, but certainly the larger the portfolio, the more relevant and the more helpful an adviser will tend to be for you.
Are you prepared to pay the adviser's fees, however they decide to charge?
It's really important to understand how your adviser is getting paid for his or her work. I sometimes talk to consumers and they say, “Well, I don't pay my adviser anything.” Well, yes, you do. If it is a distributor who is guiding you, he would be getting compensated by the asset management company. So it's important to know what sort of fee structure is this adviser employing and then think about what sort of bite that might take out of your return over time.
It may be that adviser fee is very well worth it, that adviser will help you do much better with your total plan than you can do on your own. But it's important to understand the fee structure and understand how potentially it will detract from your portfolio’s return over time.
A version of this article appeared on Morningstar's Canada website.
