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When To Pay A Financial Pro

Posted: Aug. 28th, 2010  |  By Forbes

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My father always told me, "You get what you pay for," and I remember distinctly that being true when my friend Nancy hired an interior decorator to help her with her living room. Nancy didn't know the first thing about decorating, except she knew the mauve couch had to go. After researching "how to" sites on the Internet, where she could try out different colors and room designs online, she realized that the more she did, the more confused she got. So she decided to hire a professional. When I went to her open house to see the unveiling of the new room, I was completely amazed at the transformation. The mustard-colored couch and deep sea blue rug matched the colors of the watercolor art work that hung on the faux finish walls, but it didn't feel forced. It fit like a favorite pair of gloves. The room felt welcoming and relaxing--sort of inviting you in. Needless to say, it was night and day from what my friend could do if she did it herself. In this case, hiring a professional was worth every penny.

In today's environment of having access to virtually unlimited financial and economic information, the challenge we face many times is truly when to do it ourselves, and when to bring in a professional. I have seen evidence of financial mistakes and oversights that people make from not having enough information, or up-to-date information, when they did it themselves. But over the years, we have seen there are also times where doing it yourself pays off--saving you money that you can use for other things. The question becomes knowing when to seek help, and when to go it alone.

Here are some tips on when to "do it yourself" and when to bring in the pros.

First, Ask Yourself These Questions
Do you have the aptitude? My friend could see right away that design and color schemes were not her cup of tea. Depending on the nature of your decision, ask yourself if this is an area in which you excel. Are you good with numbers? Are you a good researcher? Do you have a good grasp of financial concepts?

Do you have the interest? One of our planners loves taxes and said that she would love to work for a tax planning company during tax season on the weekends. I would rather crawl through broken glass. It's not that I couldn't do tax work, I just don't want to. If you don't have the interest in a certain area, you probably aren't going to be as thorough as you would if you enjoyed the subject. As a result you could miss something important.

Do you have the time? In today's economy, many people are putting even more focus on their jobs, striving to be more creative and to add value to the company they work for. Or maybe you want to focus your time on other things like your family or your hobbies. Would you get more value by hiring someone to manage your money or draft your will and estate-planning documents while you design your company's new product, write blog posts or read to your children? Consider where your time is best spent right now.

In addition to asking those questions, consider what type of advice it is that you need.

When To Pay For Tax Advice
Today's tax software programs, such as Intuit's TurboTax and H&R Block's At Home, are very comprehensive and easy to use. For basic tax returns, they are often sufficient. One of the drawbacks to using software is the absence of someone to consult with or to defend you in an audit, although some programs now offer audit relief plans.

There are two main reasons to hire a CPA or tax professional: complexity and planning. If you have enough deductions to file a Schedule A--in 2010, $5,700 for single filers; $11,400 for married filing joint--then a professional can help you maximize deductions for things such as non-reimbursed employee business expenses and charitable contributions. For many, when your return becomes more complex (e.g. declaring income in several states, owning a rental property, having a business or home office) the advice of a professional becomes crucial, and it often pays for itself.

A CPA can advise you on gray areas and red flags, helping you to decide if claiming a particular deduction is worth any potential audit that may arise. Advisors also keep up with current tax law changes and can make suggestions that save you money not only in the current year, but in future years as well. Their job is to pick up things that you might have missed. For example, a friend of mine cashed in her IRA a few years ago and she and her husband would have paid a 10% penalty for early withdrawal had they filed their taxes alone. Instead, their CPA asked if they had paid any college expenses for their son. As it turns out they did, and so my friend saved about $700 in penalty tax because the CPA was able to connect the dots. (Withdrawals from an IRA to pay eligible college expenses can be taken penalty free. For more on how to tap retirement accounts penalty free, click here.)

Hiring Protection From The IRS

When To Hire An Estate-Planning Attorney
For a simple will naming a trusted family member as guardian for your children, you may be safe doing it yourself. Don't forget to also put in place additional documents such as a medical power of attorney, a health care directive (living will), and a durable financial power of attorney.

Eight Steps To Protect Your Family

If your situation calls for more advanced estate planning, such as setting up a trust or providing care for someone with special needs, then you may want to work with an experienced attorney. A good attorney will also have questions to ask that you haven't thought of, such as "Do you want the guardian of your minor children to also manage the children's assets?" The guardian you select may be the best person to raise your children, but not necessarily a good choice for handling their money. For this reason, many people name a separate person to act as the financial custodian.

An attorney can also help you set up parameters that are irrevocable once one of the trustors passes away. My colleague's mother recently passed away with a living trust in place that was set up to split her estate into two separate trusts. The first trust, a spousal trust, allowed her husband full use and access to one half of the estate (she had gotten an inheritance and wanted him to enjoy half of it). The second trust would eventually go to her two children, but her husband could enjoy any income from it during his lifetime. Well, he met a younger woman--20 years younger--and has been using trust assets to take her on weekend trips and cruises ever since. His children are now working with an attorney to reinstate the trust (which was irrevocable) and secure their half of the inheritance. No one dreamed that Dad would ever do this, but having the trust in place at least gave the children some recourse. An attorney was needed to set it up correctly in the first place, and they are glad for it. If they had done it themselves using a simple will, they would have no recourse.

When to Hire A Financial Planner
Well, to state the obvious, you want to use a planner when you have more to plan. Working with a financial planner or advisor is a long-term relationship/partnership to help you grow assets and protect assets as well as meet financial goals--most commonly retirement and college savings. There is an amazing amount of information available now for the "do it yourselfer," but a planner can be helpful not only with overall comprehensive planning, but also in some ways you may not have thought of.

Financial planners may be able to offer investment strategies that you would not have considered for yourself. For example, many retirees now are rolling over a portion of their 401(k) into a lifetime income annuity to give themselves a guaranteed lifetime income stream to complement the variable income stream they take from their 401(k). This might not be something a "do it yourselfer" would think about.

A planner can also make a difference when couples have disparate knowledge about and interest in money. In other words, if one of you is money savvy and the other is not, having a financial planner can help bridge the knowledge gap between the two of you. We've seen many times how one spouse or partner makes all the money decisions because he or she has the interest and the aptitude. In one case I recall, the husband had an aggressive risk tolerance and the wife was conservative, but she didn't participate in the money decisions. Not surprisingly, when their portfolio lost value it caused a great deal of problems between the two of them. When they went to a financial planner, it made all the difference in the world because they started making joint decisions and she started participating in their finances--not just letting him handle everything (and then blaming him for bad decisions). There is also the comfort of knowing that your spouse has an advisor to work with if something happens to you.

Whether we decide to "do it ourselves" or whether we decide to work with professionals, gathering information and doing our own research along the way can only help us with our financial decisions. Being better informed, even when we decide to work with advisors, makes a difference. There may be times when it is clearly the right decision to use a professional, such as my friend deciding not to be her own interior decorator, and then there are times when it is not so clear. What I have found, however, is that Dad was right when he said, "You do get what you pay for."

Liz Davidson is CEO of Financial Finesse, the leading provider of unbiased financial education for employers nationwide, delivered by on-staff Certified Financial Planner™ professionals.




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