Do I need a Financial Advisor? Four Reasons to Use a Financial Advisor

Is a financial advisor worth the cost?   Are there reasons to use a financial advisor? The short answer to these questions is “it depends.”   The long answer is that this post is here to help you sort it out.

We have spent a lot of time discussing the gold standard of financial advising.  Today, we will discuss how a financial advisor can provide value.  Hopefully, this will help you determine if a financial advisor is worth the cost.

Before I do that, I should say that the physician and personal finance blogging community has a pretty long track-record of tearing down financial advisors.

While I do not take back any of the strong opinions I’ve made on this topic, I do want to recognize that there are times when financial help is useful.

Is a financial advisor worth the cost?  First Things First

I am a proponent of Do-It-Yourself investing in order to minimize investing costs and to produce the biggest “bang for our buck.”  However, we also have to be real about this.

Some people simply do not want to manage their own personal finances.  Or they, at a bare minimum, want a professional to look things over and make sure they aren’t doing anything they’d later regret.

We will go over the reasons for considering an advisor below, but first I want to describe the gold standard of advising just in case you’ve missed my previous posts.  That way, if your ADHD kicks in and you exit this page, you’ll have seen this first!

The Gold Standard for Financial Advising

Here is the gold-standard for financial advising:

  • Fee-only model (i.e. they do not sell commissioned insurance products)
  • Fiduciary (i.e. they are legally/ethically bound to do what is best for their clients)
  • Experience with people like you (i.e. if you are a physician, they should have experience working with physicians).
  • Flat-fee model (i.e. you pay them when they work and not based on how much wealth or assets that they are managing).

In my opinion, the first three are non-negotiable.  They are table stakes in this conversation.

A flat-fee model is the best model with the least conflict of interest, in my opinion.  If you must use a financial advisor who operates under an Assets Under Management (AUM) model, it is necessary to educate yourself on where the conflicts exist. Some of the prior links will help with this.

The following are reasons to use a financial advisor, assuming you do not want to become a Do-It-Yourself investor.

Reasons to Use a Financial Advisor (#1)
Behavioral Finance Coach

I love when people ask me, “Have you seen what the market has done today!?!”  I usually tell them that I never look at the market, and that studies have shown you will do better if you just stick to the plan and ignore it.  So, why bother looking?

While I have a strong stomach for market turmoil, others might not.  In fact, many investors lost a large portion of their retirement savings when they realized their losses (i.e. actually sold their assets when the value dropped).

Looking back to 2008/2009, you’d call such a person foolish as the market then went on one of the most unprecedented bull market runs in history. However, at the time, the fear was very real for those people.

If you do not fit squarely into the group who can look at market history and stay in the market when it dips, dives, or turns – then a financial advisor will be worth their weight in gold.

If an advisor simply prevents you from selling (and actualizing losses) during a depression or correction, they will recoup their cost and much more.

In this way, they can be your behavioral finance coach and prevent you from making grave mistakes.

In the end, behavioral finance is often more important than the investment choices we make. If you cannot prevent yourself from buying high and selling low, this is one of the good reasons to use a financial advisor.

Reasons to Use a Financial Advisor (#2)
Third Party Intermediary

For those of us that are married or have kids, we know the feeling.  We experience it when you explain something to your spouse or child until you are blue in the face – just to get an awkward confused look in return.

The familiar feeling comes when – not five minutes later – someone else explains the same thing (usually in just about the same words), and it “clicks” for your family member. This usually results in us saying, “That’s what I just said!”

It is a frustrating experience, but it should help us realize the number of times we have seen how beneficial it is to have a third party help us figure things out.  Sometimes it simply takes a fresh face or voice to have it all make sense.

This doesn’t mean we are inadequate.  It’s just the way humans work.

The same phenomenon happens in money when a financial planner or money coach sits you and your spouse down to discuss the life you want to live.  Having a fresh perspective that is relatively unbiased can prove helpful while swimming through these choppy waters.

If you and your spouse are having a tough time getting on the same page financially, this is one of the other great reasons to pay for a financial advisor.  They can serve as a referee, counselor, and supporter all at the same time.

Reasons to Use a Financial Advisor (#3)
 Dotting the i’s and crossing the t’s

I have a friend at work that loves talking money.  He knows a good bit about it, and really enjoys investing.  When it comes to personal finance, he and I differ in a couple of major ways.

One is that he invests in individual stocks in his taxable account (whereas I’ll only invest in passive index funds in mine).

The second way that we differ is that he uses a financial advisor.  The first time he mentioned his advisor, I was a bit surprised given his financial literacy and knowledge.  He explained to me that he just wanted to make sure everything was being done appropriately.

I’ve mentioned before that most people break pretty neatly into three groups when it comes to finances.  The second group wants professional help to “dot the i’s and cross the t’s.”

I have no problem with this, and think that, if there are major questions left unanswered, there is actually a lot of benefit to getting professional help.

Though this is one of the good reasons to pay for a financial advisor, it is also one of the scenarios where it makes the most sense to pay a flat-fee.  When you need counsel or a second opinion, just pay them a set rate for reasonable advice.

Reasons to Use a Financial Advisor (#4)
The Financially Illiterate

There is a large swath of people (including many physicians) who want someone else to run their money.  They want nothing to do with the technical decision of their finances.

This group is in the most dangerous and precarious situation, because they know next to nothing about personal finance or money.  For this reason, this group absolutely must find a gold-standard advisor described above.

The right financial advisor for the financially illiterate is worth far more than this person will ever pay.  That said, the wrong one – well, they would probably be better off doing it on their own.

If you are reading this site, you are unlikely to fall into the financially illiterate group.  However, you are very likely a friend of a bunch of people who do fall into it.  Do them a solid and help prevent them from getting fleeced by the financial industry.

Point them to this post, or to any other that helps them realize the importance of finding the right kind of help.

Reasons to Use a Financial Advisor (Bonus)
Transitions in Life

Given my recent experience writing an open letter to my wife and getting destroyed by a certain contingent of twitter, I can’t believe I forgot to make a comment on this bonus of having a financial advisor.  So, this section was added as a bonus after the original post.

Thankfully, my friends over at Xrayvsn and Money with a Purpose reminded me of it.  Xray and Fred made the point that, for a married couple, a financial advisor would provide a tremendous amount of help if one of the people died.

The advisor would know the history and decisions that have been made and would be able to direct the surviving spouse.  This is another excellent reason to use a financial advisor, and one that should have been mentioned in the first post!

Take Home

You might be surprised, but the truth is that not all financial advisors are bad. In fact, there are some really good ones out there.  They are just rare.

I hope that this post sets the record straight.  I am not anti-financial advisor by any measure.  I do stand to promote the right kind of advisor who conducts business in the right manner.

So… is a financial adivsor worth the cost?  It still depends.  Be as much of a do-it-yourself advisor as possible.  But, if you need help, recognize that there are plenty of good reasons to use a financial advisor.  And some of them are pretty legit.

Do you use a financial advisor? Are there other good reasons to use one?  Are you vehemently opposed?  Let us know. Leave a comment below.

TPP

8 thoughts on “Do I need a Financial Advisor? Four Reasons to Use a Financial Advisor

  1. Another going point is to have someone on board to ease the transition in case something happens to the main individual who handles the finances. If one spouse, for instance, is the investor and has shaped his or her finances in the most efficient way, there is a risk that the household suffers financially if he or she passes away and all of a sudden the non-involved spouse has to now have this financial machine thrust upon him or her.

    A financial advisor who knows how the dead spouse had been shaping the the financial plan can then advise the surviving spouse and have a more seamless transition.

  2. As a financial advisor, I appreciate this post. And I know your passion for protecting physicians from unscrupulous advisors. I do take exception to your depiction that good financial advisors are rare. Bad financial advisors are rare. It’s just that they are the ones who are newsworthy. Media doesn’t care to tell a story of someone who does things right. That doesn’t play. Someone who swindles people or sets up a Ponzi scheme or sells products people don’t need are the ones we hear about. They, however, are the rare ones.

    Discussions about financial advisors by the physician and the FIRE bloggers usually only talk about advice on investing. Good financial advisors do much more than that. Yes, they keep investors from making dumb mistakes during market turmoil. They also look at all aspects of the client’s lives. Things like college funding, insurance (property, health, life, disability, long-term care, etc.), estate planning, retirement funding. Social Security claiming analysis, tax planning, including tax-efficient retirement income planning, and many other areas.

    As Xray points out, we also help in the transition when the primary financial person dies. That’s another thing DIYers don’t think enough about.

    If all I did was manage people’s money, I would be overpaid. It’s much more than that. I wish the blogging community, many of whom are young and enjoying one of the longest bull markets in history, would understand that life is not as simple as they try to make it. Life is more than a three-fund Vanguard portfolio.

    You don’t know what you don’t know… until you know.

    I appreciate the balanced view. You’re a rare breed, my friend.

    • Fred, I appreciate your perspective as always.

      I’ll say that I haven’t had the same experience with advisors, but that might be due to the circles I swim in. Most physicians have had pretty terrible experience with advisors and those that haven’t usually don’t know any better (they are loaded up with whole life policies and actively managed funds and don’t know any better).

      That said, there are some great advsiors out there and so the physician finance community shouldn’t slam them all. That’s not fair.

      And I agree with both you and Xrayvsn. Can’t believe I just wrote a letter to my wife (yes, that one) and didn’t include the point about an advisor being helpful in that situation.

  3. TPP,
    There is no doubt you physicians have a bullseye on your foreheads. The intensity of starting a career after so many years in training, getting the large income, and, in most cases, having no education on personal finance, makes you ripe for the bad advisor. It’s probably a fair point that your group sees more bad advisors than most.
    You, PoF and Xray are three docs who are objective and balanced in your writing about advisors. I’m grateful you use your voices in that way.

  4. There’s another reason for using a financial advisor. Getting started. Most people don’t have the time (or don’t prioritize the time) to sift through thousands of blog articles or finance books to develop a comprehensive financial plan. People get analysis paralysis. Or decision fatigue. A good financial advisor can help these people get started and point you in the right direction. That’s how it was for me, at least. Then once I felt confident about doing it myself… I discontinued their service.

    Btw, a part of this post reminds me of a topic you talked about on the What’s Up Next podcast

  5. Thank you for this measured post – I always appreciate your perspective (and have missed you lately on WCI 🙁 ). Fred aptly stated that doctors have a bullseye on their foreheads and I often feel the same as a financial planner when it comes to talking to doctors. Unfortunately, it is well deserved for many in our profession and I don’t even attempt to approach doctors locally who are not involved in the online physician finance community.

    Otoh, I do believe the fiduciary movement has caught fire (not FIRE lol) and is breeding many new believers, often young but others like Fred and me) who are fervently dedicated to the best interests of the client. The landscape is a lot changed from 10 years ago and doctors have a better chance of finding an advisor who will advocate for what is best for the client.

    An added bonus to this post (for me) is that I now know who Fred is :-). Followed the link to his website and am very impressed with what he has to say and his perspective. Fred, if you’re reading this, would love to touch base with you sometime!

    Thanks, as always, TPP, for an unemotional, rational post to help your colleagues improve their financial wellbeing.

    • Sorry to be absent from the forums a bit 🙂 we moved last month and life has gotten busy lately.

      Thanks for your supportive comments. Fred is a great guy. Met him at FinCon and he has been a great friend in the blogging world as well.

      All about highlighting the people who are doing financial advising right (and to point out the ways it can be done poorly).

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