Is a financial advisor worth the cost? First Things FirstI 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 AdvisingHere 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).
Reasons to Use a Financial Advisor (#1) Behavioral Finance CoachI 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 IntermediaryFor 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’sI 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 IlliterateThere 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 LifeGiven 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 HomeYou 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