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When it's worth paying for a financial adviser — and when it's not

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Last month I did a Reddit "Ask me Anything" on personal finances to promote my new book on the subject. I got hundreds of questions and comments about a wide variety of financial questions.

This being Reddit, many questioners were young adults who wanted advice about how to manage their credit cards and tens of thousands of dollars in student loan debt. Many were early in their work years and trying to figure out how best to save for retirement or (eventually) their children’s college. Some older questioners were nearing retirement and wanted a better plan for how to draw down their savings safely and effectively.

I hope I helped these readers make better financial decisions. But if you’re facing a tricky financial situation, or just struggling to make ends meet, online resources aren’t always enough. So you might help yourself by doing something counterintuitive: paying a financial professional to advise you about how to manage your money.

I come to this view somewhat reluctantly. Financial services don't come cheap. If you’re already struggling to make ends meet, it’s hard to justify paying someone to help you. Helaine Olen and I note at length in our book that many specific products and services offered by financial professionals are overpriced or actually harmful. You don’t need someone to sell you complicated variable annuities, actively managed mutual funds, or "heard on the street" stock tips. You’re better off sticking to vanilla index funds.

Still, the right advice, offered under the right consumer protections, can save you a lot of money in the long run. A financial professional can help you get a handle on your spending, sensibly structure and manage your financial portfolio, help you understand the trade-offs as you consider whether and how to buy your first home, and a lot more.

Free resources will only get you so far

Of course, you shouldn’t spend money for financial advice if you get the information you need for free. For example, your employer’s benefits office might be able to connect you with an adviser from a reputable provider such as Vanguard, Fidelity, or TIAA-CREF who can provide sensible information — sometimes more substantial guidance — about your retirement accounts. There are also automated online services called "robo-advisers" that help people choose the best mutual funds for their retirement savings.

But of course people face financial challenges that have nothing to do with investing for retirement. Am I ready to buy a home? What kind of insurance should I purchase? How can I reduce my expenses to save for my children’s education?

For complex financial questions, there’s no substitute for having a face-to-face conversation with a human being. And this advice can be extremely valuable — saving thousands of dollars in lower fees, a lower tax bill, or saved expenses.

If your income is low, you might be able to find a financial coach who will give you advice for free (more on that below). But if you make too much to qualify for these services, then you should consider paying for a financial adviser.

Paying the full bill ensures you’re getting impartial advice

Some financial "advisers" are really salespeople who make money by steering clients toward expensive financial products and then pocketing commissions. If an adviser isn’t charging you (or perhaps your employer) money, then he or she may be making money on the side in ways that creates huge conflicts of interests.

So the first time you meet with a financial adviser, you should have a direct and cordial conversation about how your financial professional expects to get paid. Some advisers make money by charging clients directly. Others work for nonprofit organizations that provide financial advice for people who couldn’t otherwise afford it. But if an adviser makes the conversation awkward or gives vague answers, that might be a sign that the adviser has a conflict of interest; you probably should go elsewhere.

More specifically, your financial adviser should commit in writing to act as a fee-only fiduciary adviser in all of her dealings with you. This guide from the National Association of Personal Financial Advisers (NAPFA) provides useful advice, including ways to check on complaints from past clients. NAPFA’s website can help you find a fee-only fiduciary adviser in your area.

The case for paying an adviser by the hour

There are two different ways to hire a financial adviser. One option is to hire someone to manage your assets for an annual fee, perhaps 1 percent for average investors. That’s valuable for some people who need ongoing investment management or have recurring life issues that require ongoing advice.

But it’s also pretty expensive. Barring special circumstances, most people don’t need that level of continued hand-holding. Leaving aside your home, your wealth should be concentrated in low-cost index funds that don’t require active monitoring. You can use cheaper services and online tools to understand whether you are saving and spending at a sensible pace. And the fees do pile up.

Therefore, an hourly adviser is often more sensible. The Garrett planning network and others allow you to find a fee-only fiduciary adviser in your area who charges on an hourly basis.

This person won’t sell you securities or continually manage your investments, but she can answer a wide variety of important questions. Advisers may also be aware of tax breaks, insurance products, or other financial opportunities you’re not. Millions of people could benefit by bringing their shoebox full of papers to an hourly adviser and buying an hour or two of focused advice. She will provide useful answers and send you on your way.

You can expect an hourly fee around $250 for this sort of service. This isn’t cheap, but it often pays for itself. If this person helps you make a more sensible budget, or if she finds a 401(k) investment that charges just 0.1 percent less than what you currently pay, the visit will more than pay for itself in the long run. You’re not wasting your time on sales pitches for overpriced investment products. And you’re not hitching your wagon to someone for a large recurring expense.

You might qualify for financial coaching

Suppose you have a modest income and you need more basic help. Maybe you’re trying to get a handle on credit card debt, establish and follow a sensible budget, improve your credit rating, or save up an emergency fund for car repairs or sudden medical bills. For these basic issues, you might consider attending sessions with a financial coach.

Such coaches can help you get on sound financial footing, and provide feedback and accountability to help you stay on course. The Working Families Success Network is one way to find such services, which are now available in many cities across the US. Your local United Way may also offer valuable services through Financial Stability One Stop Centers.

Unlike the commercial services I discussed earlier, financial coaches are typically free. They are usually connected with nonprofit social service agencies and can often help you with other needs you might have such as job assistance, legal aid, or tax preparation. They can connect you with other kinds of resources if you’re in more serious financial trouble and have debts you can’t realistically pay.

The Urban Institute recently conducted a nice randomized trial of financial coaches provided by two providers in New York and Miami. The mixed findings are instructive regarding both the benefits and the inherent limitations of such efforts.

Clients who worked with financial coaches reported being less stressed than their counterparts in the control group, which didn’t meet with a financial coach. Clients were also more likely to do basic things well: paying bills on time to reduce late fees, reducing balances in long-term delinquency, making regular deposits into a savings account, chipping away at high-interest debt, building up a modest emergency fund.

Financial coaching didn't much help with bigger challenges such as avoiding foreclosure or bankruptcy, where the fundamental problem is that people didn't have enough money to meet their obligations. It’s unclear that such services help people markedly reduce their spending, which isn’t easy. Financial coaches also would not be appropriate for more complex investment questions that typically arise for clients of higher incomes.

Coaching helps people do the relatively easy things better, which is no small thing.

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