If you’ve read my blog enough, you will know I believe in managing your own money. No one cares more about your money than you do. With that said, I also don’t think everyone should manage their money. That’s right, some of you are not cut out for it. You are better off with a financial advisor. Even if you are good at managing your money, it still might make sense to have a second opinion.
Do You Have The Expertise?
Groups like Bogleheads, for the most part, hate the idea of using financial advisors. On their forum, you will see many state you are best doing it yourself. I applaud people educating themselves about finance. I believe it’s a real problem in our society when many know the intricate details of some reality star’s life yet don’t have the slightest clue how to asset allocate their retirement account.
So while it’s important to educate yourself about finances, it doesn’t mean you should always go it alone.
Let me ask a question – Do you repair your own car? I’ll assume most people reading this will say no. But why don’t you? It’s because it isn’t your area of expertise, and modern cars are very complex machines. Sure you understand a car has an engine, transmission and brakes. You may even understand the concepts of how a combustable engine works, but you won’t go out and try to repair a car.
Let me give you a personal example. I’m a car nut and a self-described computer geek. I know a lot about both subjects, but I still took my Hyundai Genesis to a dealership (forget for a moment it’s still under warranty). I was having issues with getting my XM Radio activated. Nothing I would do could get the activation working. I knew well enough the issue was not technical. Something was wrong with the hardware, and not because I was doing something wrong with the activation process. The dealership was able to identify the problem and replace the part.
The dealership’s auto mechanic had the education, training and tools to correctly identify the problem and fix it. While I’m sure I could have done the same, the question would have been how long would have it taken me to do it? I haven’t spent years working with Hyundais, nor do I have the equipment to diagnose car troubles, access to the technical manuals, or understand the error codes. This is no different than a financial advisor. A good financial advisor should be able to help take your complete financial picture and identify where you need assistance. Personal finance can be complex, and this especially holds true with taxes.
I think financial advisors get thrown under the bus and overall get an unjustified bad rap. The issue I think is that people are not differentiating the good ones from the bad. How do people even know they are bad? Yes it’s true many are selling you products that might not have completely your best interest. It’s also a lack of an education with the investor themselves. One cannot know if an advisor is good or bad if you don’t understand finance. This is no different than knowing a good auto mechanic from a bad one.
Not all is bad with using financial advisors; just be aware how much you are paying for their service. A financial advisor can:
- Help you with asset allocation
- Help you achieve financial and personal goals
- Look at your entire financial picture. This can include: investments, assets, debt, income, insurance, taxes, and any possible estate planning. A stock broker will just try to sell you the latest hot stock.
- Help implement your plan
When buying any product or service it’s critical you understand what you are getting into – caveat emptor. A financial advisor is no different. Understand the terms of the relationship, and the benefits of this relationship. Ideally it should be a win-win for both parties. You are getting financial advice, and they are getting paid for their expertise. You are effectively buying their time so you can ensure you have more money than without using them. I find it interesting, many spending more time researching the house they will buy than developing a financial plan for retirement. Like a good real estate agent, a good financial advisor can guide you along the way.
This isn’t to say you should use any financial advisor you find. Oh no, far from it. Many charge high fees for poor results. Worst yet, many then get you into funds with front loaded, or annually loaded, fees. So annually you could be paying 2%,3%, 4% of your portfolio in fees! Your investments have to beat that amount annually for a real net positive return. This isn’t even including inflation! Many financial advisors will also put you into actively managed funds that over time usually perform worse than a comparable index. So you get hit at three levels with bad financial advice:
- High cost management fees
- High cost mutual funds
- Poorly performing actively managed mutual funds
I’ve always been an advocate for low cost index funds, and they should be a majority of your portfolio. If you do use a financial advisor, make sure you understand the fees and what you are getting into. You are best to find a financial advisor that believes in your same investment strategy. In this case using index funds to assemble your portfolio.
Yes there are cheaper alternatives without any possible conflicts of interest. In most cases I prefer a flat fee financial advisor. That way there’s no possible conflict of interest, and I’m paying them directly for their time and expertise. Up front it may not be the cheapest option, but you should get the most unbiased opinion.
Do You Have The Emotional Intelligence?
A second factor is emotional intelligence. This is often overlooked when considering an advisor. I don’t know about you, but I’ve heard countless stories of individuals who took most of their money out of the stock market at or around the peak of the financial crisis. Ironically, in March 2009, this is exact time the stock market was at its lowest. Many amateur investors (and professionals for that matter) did the exact oposite thing, making their returns much worse.
A good financial advisor can be their coach to talk you down from the ledge. What most investors should have done at that time was rebalanced their portfolio and stuck to their long term plans. A financial advisor would have helped you down this path. So with some investors, even an exorbitantly high fee financial advisor, they would have done much better with professional advice.
With the recent wave of of online financial advisors it’s possible to get passive investment advice at the fraction of the cost of traditional financial advisors. I expect this area to grow and eventually become the primary way individuals get their investment advice. Companies like Betterment, Personal Capital, and Wealthfront are new competitors in this space.
Managing your own money can be time consuming and require many hours of reading, but the payoff can be huge. However, some people may not have the temperament to go it alone. Some should use a financial advisor. If you do use a financial advisor, make sure you has the same investment philosophy as you do. A fee based financial planner is the most objective, and your best bet if you need financial advice.