By Lee Sherman
In theory, there’s nothing wrong with choosing your parent’s financial advisor. They may have been working with the same one for years and have fully vetted their choice. Also, there may be overlapping considerations such as whether your family has set up a trust or whether you need to understand what should happen to their estate when they pass.
That said, it may be time to get out from under the shadow of your parent’s financial advisor and find one of your own. Here’s why:
Your financial situation may be radically different from your parents and you may have different values that come into play. It’s important that your financial advisor be a fiduciary. Fiduciaries are legally bound to act in the best interests of their clients, as opposed to pushing certain financial products where they receive a commission. You should also ask whether the financial advisor is fee-based or fee-only. A fee-only advisor is most likely a fiduciary. You pay them directly and they are beholden only to you. Fee-based advisors are sometimes not fiduciaries and can receive commissions on the financial products they sell in addition to the fees they are charging you. It’s certainly possible that the financial products they are selling are the right choice for you too but unless they are a fiduciary, there’s more potential this is not the case. So be aware of a potential conflict of interest when choosing a financial advisor for yourself.
Can you trust this person?
Your parents may be comfortable with their financial advisor but this is a personal choice. It’s more like choosing a doctor than getting a haircut. After all, you are entering a relationship where this person will have access to all of your financial information and you need to be sure you can trust them. Unless you plan on becoming a financial expert yourself, you’re much better off availing yourself of the advice of your financial planner. If you have a particular interest, such as investing in emerging markets or only companies that are eco-friendly, that’s fine. But your financial advisor is best positioned to help you decide which investments best meet your needs.
Does it have to be a person?
These days, many people have turned to robo-advisors to automate investing. Robo-advisors rely on proven computer algorithms to manage your portfolio and perform services such as automatic rebalancing and tax strategies such as tax-loss harvesting. Robo-advisors can be a particularly cost-effective and hands-off way to build a portfolio but you may find you miss the human touch as your portfolio grows.
Getting started with a robo-advisor is easy. Whereas a lot of financial advisors only work with high-net-worth individuals, robo-advisors may not have a minimum investment and they charge very little. The cost difference between a human advisor and a robo-advisor can be profound. A robo-advisor may charge 0.25% of your balance. A human advisor might charge 1% or more. Like online dating, this option might be uncomfortable for your parent’s generation but young people today are used to doing almost everything online.
Whatever you choose, it’s important that you chart your own course and don’t just blindly stick with your parent’s choice. In the end, it may be right for you. But be sure to explore the options before deciding.
Lee Sherman is a contributing writer to MyPerfectFinancialAdvisor, the premier matchmaker between investors and advisors. Lee is an experienced journalist and editor with over 30 years of expertise with a significant history of writing in the personal finance and technology arenas.