Do I Need a Financial Advisor?

So often in life we try to do things ourselves, not wanting to pay others to do what we think we can do ourselves such as painting and landscaping. Is it because we think we are lazy if we don’t do things ourselves or that we just think these jobs are easy or not that complicated, so we can easily do them?  I think the answer is different for everyone, and it depends on the “job.” For example, my wife and I have tried our hand at several projects such as painting and realize, for us, sometimes it is best to leave certain jobs to the professionals who make a difficult and tedious job look easy.  Other tasks, however, after educating ourselves and acquiring the necessary information and tools, we roll through the task without a hitch, personalize it to meet our taste, and save money that would have been unnecessarily wasted.

Investing is one of those areas where you can acquire the necessary tools and information, so you can be the “expert” in YOUR investing and save money that is unnecessary to spend.  So when people ask me whether or not they need a financial advisor, I would say you DO NOT, but you DO need to understand some things and educate yourself on some of the basics before deciding to take on this task alone.  let’s discuss whether or not you need a financial advisor.  Let’s break these down and discuss whether or not you need a financial advisor.  

What You Need To Know To About Financial Advisors: 

There are three things you need to consider when deciding if a financial advisor is right and necessary for you.  These key factors are: portfolio value, financial value, and emotional value.  

Portfolio Value:  In a study that Vanguard conducted in 2020 of 44,000 advisor-backed accounts that had been previously self-managed, they found that the advisors helped account owners with their portfolio construction, their risk tolerance understanding and behaviors, the tax efficiency, the fees, and the rebalancing of the portfolios.  From that group, two-thirds of the individuals changed their equity allocations by at least ten percentage points.  In addition, more than 90% of those investors changed their international allocations, most increasing their foreign holdings, helping to eliminate their home-bias.  So, this all sounds like you DO NEED a financial advisor.  Yes, these are all positives.  However, what the advisors did and do is NOT complex.  With some education, I think you can do this yourself.  Just as I told you in the beginning, sometimes my wife and I outsource but if and only when it is not to our advantage to do it ourselves.  

Financial Value:  The role of a financial advisor is to set up your portfolio. Most will meet with you once a year, when you ask for the check-in, and they pick and choose what THEY think is best for you.  They make money off of your portfolio, so your earnings pay their AUM fee.  An AUM fee is the assets under management.  This fee and the AUM varies from each financial institution.  You need to be aware of the AUM fee and the way it is calculated since some financial institutions include things like bank deposits, mutual funds, and cash into their calculations or snapshot of your accounts. Just be aware of AUM fees and make sure to ask direct questions if you decide to seek out the help of a financial advisor.  On average AUM fees range from one to two percent.  This may not seem like it is high, but it can really be massive over a span of time.  Let’s look at how costly this can be.

Example: You contribute $500.00 a month for 30 years. The total contribution would be $180,000.00. If the growth was 7% without any fees, this account value would be $588,032.77. Let’s add in some of the fees that may appear “insignificant.”  At 0.50% AUM, the same $500.00 a month for 30 years, would amass to $536,000.00 with $52,000.00 being paid out in fees.  At 1.00% , the amassed amount would be $498,000.00 with $98,000.00 in AUM fees. Lastly, at 2.00% AUM fees, the amassed amount would be significantly less at $409,000.00 with $178,000.00 in fees.  As you can see, fees DO matter.  My advice is to pay close attention to AUM fees if you choose to utilize a financial advisor.  

In addition, be aware of the type of services your financial advisor offers.  Some, if you are lucky to find one who is actually concerned about your overall financial health, might also offer help with financial planning, wealth management, paying down debt, building an emergency fund, and managing college savings. So they can serve a purpose.  Vanguard’s 2020 study notes that eight in ten people have an 80% change or greater of achieving their financial goals. That is a good percentage.  However, make sure you research the financial advisor very carefully, the services he or she offers, and all of the fees as well as how the fees must be paid for the financial advisor.  

Emotional Value:  This is so much more important than knowing and understanding the what or the how. You must know yourself and your financial investing comfort.  Know how you would react to different financial situations. This is a pinnacle piece in assessing your financial situation and decision making.  Personally I think this is paramount since most of us have not lived through real market turbulence and market volatility. Think through real life scenarios to assess your emotional investing resiliency and temperament. For example, what about your financial situation if you lose your job, another pandemic occurs, your significant other passes away, or you are left without any inheritance? How would you react to any of these situations?  Maybe we should add something about the current market volatility?Would you hold onto your investments, keeping them intact, or would you sell? Be totally honest with yourself?   

Keeping all of this in mind, especially your portfolio value, financial value, and emotional value, you should be able to make the decision whether or not to use a financial advisor. If you do decide to go the route of securing a financial advisor, there are four things you must ask the advisor first.  

  • How do you get paid?
  • What is your background and are you a Fiduciary?  
  • How much access do I have to you?
  • What is your investment philosophy

If, however, you decide to forgo a financial adviser, take time to educate yourself.  My Investing 101 book is a great resource for your starting place.  Also, turn on my post notifications on Twitter and Instagram and subscribe to my Youtube for timely financial advice on topics such as Cryptocurrency.  Check out Budgetdog for help budgeting, financial planning, paying off debt, and all things financial. Always feel free to contact me for more specific advice and answers to your questions.

Published by Budgetdog

👨‍💼| CPA that quit 9-5 for @budgetdog 💵| Millionaire goal: 30 years old 💰| Paid off $76k of debt in 1 year 🏠| Paid off home BEFORE 30

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