Paying a financial planner an ongoing fee to handle every aspect of your financial plan can make sense if you're extremely time-pressed or if your finances are particularly complicated. Ditto if you're very rich. Paying for ongoing financial advice (and hand-holding) may also be worth it if you've had trouble sticking with your investment plan through the market's many ups and downs. The best advisors earn their keep many times over by saving investors from their own worst tendencies to buy high and sell low.
For most other investors, however, I'd argue that it's not that difficult to create a sensible investment plan on your own, and helping you do that is the focus of my newsletter, Morningstar PracticalFinance. At the same time, I'd also tell you that you're better off delegating certain financial tasks--some of them investment-related, some of them only tangentially so--to a professional. Paying for advice on an a la carte basis enables you to pick and choose the best professional for a given job. For example, you should turn to an attorney to draft your estate plan, whereas a well-versed accountant or advisor may help you manage your stock options.
I'm all for keeping your finance-related costs as low as they can be, but here are a few of the key tasks where paying for professional advice is apt to be money well spent. (Note: This is not an inclusive list.)
Setting Up an Estate Plan
A quick Google search turns up scores of Web sites geared toward helping you write your own will. Creating a will in this fashion may be better than doing nothing, and an estate-planning kit may suit your needs if your situation is particularly uncomplicated and "vanilla."
However, it's hard to know whether your situation is truly generic or out of the ordinary unless you have basic knowledge of estate-planning issues and terminology. For example, you may want to treat your free-spending son differently in your estate plan than you would your financially fit daughter. Having a high net worth, previous marriages, a special-needs beneficiary, or strong charitable interests--just to name a few situations--may also call for a more customized estate plan.
That's where a competent estate-planning attorney comes in. He or she will ask you scores of questions about your own situation and what you hope to achieve with your estate plan and then ensure that your estate-planning documents are a reflection of your wants and needs. A good estate-planning attorney can also help you with the aspects of estate-planning that extend beyond your will, including setting up trusts, appointing powers of attorney, and making sure that your beneficiary designations are simpatico with the rest of your estate plan. Finally, an estate-planning attorney can help you keep your plan up to date as your life changes. For a discussion of some of the pitfalls of improperly drafted estate plans, read this article.
Handling Stock Options
Over the years, I've frequently served as an informal teacher and coach to friends and colleagues on the topic of stock options. In the course of these discussions, I've often wondered why the tax treatment of options is as Byzantine as it is and how anyone navigates this minefield without some outside help.
Because stock options can prompt knotty tax questions (and the exercise of incentive stock options may trigger the dreaded Alternative Minimum Tax), an accountant who has had plenty of experience with stock options should be your first resource if you're attempting to navigate the stock-option maze. You don't want to settle for an accountant who deals with stock options just once or twice a year--you want someone who has witnessed many different scenarios and can propose a range of solutions.
But stock options aren't just complicated because of taxes. In fact, most accountants would acknowledge that an assessment of your company's future stock performance trumps taxes when it comes to deciding how to manage your stock options. Thus, if your accountant isn't comfortable discussing investment issues, you may also want to turn to an investment advisor to decide how to manage your options. An advisor or accountant can also provide a much needed "fresh set of eyes" in this situation, thereby helping ensure that you're looking at your company's prospects in an objective light.
In a similar vein, you may also want to turn to an accountant and/or financial advisor for guidance if your portfolio includes company stock or restricted stock.
Creating a Retirement Plan If You're Self-Employed
In addition to being able to make their own hours and work in their slippers on occasion, self-employed individuals have another perk that the rest of us worker bees don't enjoy: They have the opportunity to save even more in their retirement plans. Whereas most individuals can put as much as $16,500 in their company retirement plans in 2009 ($22,000 if you're older than 50), the self-employed can receive tax breaks on as much as $49,000 in retirement savings. And if you're the one setting up the plan, you can select the plan that best suits your needs.
On the downside, entrepreneurs have a dizzying array of retirement plans from which to choose, ranging from SEP IRAs to 401(k)s to profit-sharing plans to defined-benefit plans. Selecting the right one for you depends on many different factors, including the size of your business, the number of employees you have, the administrative costs of getting it up and running, and the size and frequency of your expected contributions. Hiring a financial advisor, preferably one who specializes in setting up these plans, can help you navigate the many choices.
Getting Ready for Retirement
With inflation spiking, figuring out whether you'll have enough to retire is complicated enough. To further complicate matters, many individuals retire with multiple sources of retirement income--a company retirement plan, multiple IRAs, taxable assets, and of course Social Security. (If your spouse has retirement assets in his or her name, that adds an additional layer of complexity.) That raises the question of whether your current assets will generate an adequate income stream, as well as what sequence you should use when tapping those assets. This article provides a primer on some of the key considerations for pre-retirees looking to begin tapping their assets, but as you'll see, it's plenty complicated. Hiring a financial advisor at this juncture can be invaluable in helping you think through all of the key issues, project cash flows from your various sources of retirement income, and arrive at a retirement strategy that makes sense for you.
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