What should you know before getting a professional to help you manage your personal finances?

The article should be able to answer three important questions for you.  

  1. Do you need a professional to help you manage your personal finances? 
  2. What type of professional do you need?
  3. What questions should you ask a professional before hiring him/her? 

 

Do you need a professional to help you manage your personal finances?   

 

In order to answer the question above, please read the yes or no questions below:  

  1. Do you have the knowledge to manage or learn how to manage your finances? 
     
  2. Do you want to manage your finances by yourself?   
     
  3. Do you have the time to manage your finances by yourself? In other words, are you willing to spend your own time rather than the money to pay for a professional to do it for you?  

Let's see an example that may help you better understand the questions above. I have noticed that many people are trying to decide whether to hire a tax professional or just buy tax software, such as Turbo Tax, to prepare their tax return. If you think you have learned all the tax ramifications of your situation and would like to spend as much time as necessary on this, you should do it by yourself. However, you need to be cautious of the information you get from the internet. Also, you need to make sure the information you rely on is up to date and could be applied to your specific situation. The rule of thumb here is that it is always safe to get the information directly from the official source. For instance, you should go to Internal Revenue Service official website or talk to one of their representatives to seek the answers to your tax-related questions. 

Go back to the yes or no questions. If your answer is yes to all three questions, I should congratulate you for being able to manage by yourself. However, if your answer is no to any of the three questions, I would suggest that you keep reading and consider getting some help from a professional who is right for you.  

 

What type of professionals do you need?

 

In general, there are two options, a generalist or a specialist. You could choose a professional who specializes in a specific area of personal finance or just a financial planner who may not be an expert in everything but who could help you make a decision based on a holistic view of your situation. A financial planner is just like your family doctor. And other professionals, such as insurance agents, tax professionals, real estate agents and estate attorneys, are like medical specialists.

For example, when you need professional help on your taxes, you may either go to H&R block or find an independent tax professional who will prepare and file your tax return and try their best to reduce your tax liability as much as possible. No matter which tax professional prepares your return, the tax you own or the refund you are able to get based on their calculations should be similar if they are equally knowledgeable. Alternatively, you may consult with a financial planner. In spite of saving taxes for the current year, a good financial planner also evaluates your overall financial situation and tries to minimize your total taxes in the long run by using proper tax planning strategies. The financial planner makes sure your tax decision will not affect your other financial goals. For instance, contributing to a traditional IRA can help save some taxes for the current year while Roth IRA may save you more taxes in the future. Another common example, if one of your goals is to buy a home through a mortgage in less than three years, it may not be wise to take certain expenses or deductions to lower your income for the current year because the income shown on your tax return will affect how much mortgage you could get.   

The biggest drawback of consulting with a financial planner is that the cost is usually separate and additional. A financial planner is usually a generalist and may not be licensed to implement certain recommendations on your behalf. Back to the doctor analogy again, your family doctor may have some specialties, but he/she may still need to refer you to a specialist.  Use the tax example above, even though you could get a lot more value from a financial planner through tax planning services, he/she may be not licensed to actually prepare your taxes.   

In the end, the question really comes down to whether it is worthy to pay additional fees to a financial planner who could prevent you from making some costly mistakes. It should really be based on your specific situation and judgment.   

 

What questions should you ask a professional before hiring him/her? 

 

There are so many titles in the personal finance industry, and there are so many people calling themselves financial advisors or even financial planners. You can easily get confused, and it is very hard to tell the difference. No matter what professionals you are looking for, my advice would be to interview at least two to three of them before you make a decision. Your own due diligence is very important. I am listing a couple of questions for your reference and hope that they could be helpful when you talk to a professional. Please be aware that the questions below may be not applicable to all professionals in personal finance. 

  1. What services does the professional provide? Whom does he/she usually work with?

    In most cases, the answers can be found at the professional's website. But you can always ask the professional before telling more about yourself. From the answers, you may know if the professional could help you or not.  It is important to find the one who specializes in offering help to those who share same problems with you. 
     
  2. How could the professional help you with his/her education, professional designations, and professional experience?

    Many professionals will show off their education, designations, and experiences even without being asked. When they do so, please ask them how it relates to your situation or in what way his or her background could help you. It is true that there are many designations in this industry. However, some of them require nothing to get while some of them require years of work and commitment. Most importantly, if it is not related to the help you need, it means nothing to you. Here is an article from Investopedia may help you learn more about some major financial designations in the U.S. 
     
  3. Is he/she independent? 

    If you do not want to work with a doctor who chooses drugs from one company only, it is the same principle for you not to consider any professionals who only sell their own insurance or investment products. No such a company has the best of everything for you. More importantly, independent should be defined differently to different people under different circumstances. For example, to a consumer who is looking for insurance advice, an insurance agent working for a specific insurance company is not independent. But for the same consumer, another insurance agent working with all insurance companies is independent. Yet the second agent is not independent if he/she is giving investment advice by selling insurance products.
     
  4. How is the professional compensated?

    The key is to understand what conflicts of interests between you and the professional is. After that, you need to consider whether you believe this professional could make independent and objective advice to your best interest, not his/hers. For example, it's hard to trust a professional is objective if he/she receives commissions each time he/she sells a product to you. Conflict of interest always exists no matter how a professional is compensated. However, I believe paying a professional a fixed fee purely based on time or service they provide, as many accountants and attorneys do, could reduce conflicts of interests dramatically. This is the reason that why X and Y Advisors, Inc. charges fixed fees for our financial planning and tax services.   

The following three questions are only applicable if you are looking for an investment professional.

  1. What is the professional's investment methodology? Who is going to actually manage your money?

    There are so many different investment philosophies and methodologies. I also have my own preference, but I am not trying to convince you here. Without going into too many details about actual investment management, I just want you to understand who is actually managing your money behind the scene -  the professional himself or an outside investment firm with billions of dollars under management with proven track records, and ask yourself who you trust.  
     
  2. Is the professional investing his/her own money the same way he/she will be recommending to you?

    If the answer is no, ask yourself again why you should trust a chef who does not eat the food he/she cooks?   
     
  3. Does the professional have a clean professional regulatory record?

    My advice is to stay away from someone who does not have a clean regulatory record unless you know the person and trust him/her personally. It is just not worth your time and effort to dig into all the details and try to figure out what happened to that professional before. You do not need to ask this question directly. You can find more about an investment professional including his/her regulatory record through either or both links below. If you cannot find a professional's name through either of the two links, it means that he/she is not legally eligible to give investment advice in the United States.

    https://adviserinfo.sec.gov/ and https://brokercheck.finra.org/ 
     

After all these questions, there is a final and the most important question you need to ask yourself:  do you feel comfortable with this person? Do you like this person? Do you trust him/her? It's not a good idea to hire someone you dislike in the first place. 

 

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