Many people wonder: should you use a financial advisor? In other words, is it worth paying for financial advice? That’s a good question because you should always watch your expenses. Financial advisory fees are no exception.
As a financial advisor, I’d love to say it is always best to use a professional, but that’s not necessarily the case. Sometimes it can make sense to manage your own money. Other times, however, you may be taking on far more risk than you realize. Or you might be saving a bit in fees but then losing out on advice that may make or save you significant money over the long run.
You might have friends who manage their own money. Frequently, those do-it-yourselfers may do exceptionally well at times, but one thing is often lacking: consistency. Here’s the problem: investing for your future is a marathon, not a sprint. Too many people make significant gains during strong markets, only to give all or part of it back later. And you can’t plan your future on short-term gains. You need sustainable wealth that you can count on.
With money, what you do consistently usually makes the most significant impact on your future. That means you need to be doing the right things at the right times to help achieve financial security and, ideally, financial independence. After all, that is usually the goal: you want to reach the position of being able to work or not, by choice. Most people, even those with high incomes, sadly, do not achieve this goal. Why not? It requires consistent right action, discipline, and access to any needed knowledge and skills you may lack.
When is doing it yourself a reasonable choice?
1) If you don’t choose your financial advisor carefully
“No enemy is worse than bad advice.”
Sadly, there’s not a lot of standards to call yourself a financial advisor or wealth manager. Some out there are committed professionals with the experience, training and skills to help you succeed. However, others may be part of a business model that incentivizes them to focus on sales instead of your results. These advisors may not help you move toward your goals, so you may be better off without them. I’ve written extensively about this in the past, so feel free to view past articles or download our free ebook for tips on finding only the best-quallfied advisors to help you.
Also, advisors that don’t provide independently verified track records can be difficult to monitor. If they don’t voluntarily offer you the information necessary to hold them accountable, you may not know there’s a problem until it’s too late.
2) If you have up to date knowledge
If you’re in a profession where you stay up to date on investments, estate planning, and tax law, you may have the requisite knowledge to manage your own money effectively. Then, doing it yourself definitely can make sense as you can put your knowledge to use and save on advisory fees. However, if you’re not regularly immersed in these fields, it may mean that you are not fully informed or up to date. This can create dangerous and potentially expensive blind spots.
3) If you have have less to lose (and don’t mind taking on big risks)
If you’re just starting out, single, and have less to lose, managing your own money might be acceptable. That way, if you have a larger than anticipated loss, it might not set you back as much.
In that case, your taxes are probably on the simpler side, too. But as your income grows, investing and managing your money tax efficiently can many times make a big difference. So, once you reach that level, it can help to have a financial advisor who is knowledgeable in these specialized areas.
Now, let’s look at the other side of the coin. When does it make more sense to work with a financial advisor?
When is it better to work with a financial advisor?
1) You’ve got more to lose
Once you’re farther along in life, you may not want to lose more money than you can easily make back. That’s where an objective and knowledgeable second opinion can help you achieve your goals and avoid expensive mistakes. If you have dependents, it’s even more important to have professional help managing your risk.
2) You’re looking to secure your financial future
With the right financial planning, you can insulate your financial life so that an unexpected event is less likely to knock you off course. And you can focus on making the most of your resources, so you can seek to achieve financial independence sooner rather than later.
Yes, you can sometimes achieve that yourself, but that requires an incredible amount of planning and, most importantly, discipline. A quality financial advisor can help you create a roadmap to your ideal financial future, then help you implement the plan and stay on track. That way, you have a much better chance of achieving your goals.
And in today’s busy world, that’s usually far more practical for most people.
But as stated earlier, what’s critical is it can’t just be any financial advisor. You need one that has the expertise, experience, and ethics to help you succeed.
So how do you find that?
Insist on transparency and accountability
As a consumer, it’s hard to know if your financial advisor is good at investing. Have they done well for clients over the years, or not? One of the few ways to find out is to look for a firm that voluntarily complies with GIPS® standards.
GIPS® stands for Global Investment Performance Standards, which are worldwide standards for investment reporting maintained by the nonprofit CFA Institute. GIPS® compliant firms voluntarily choose to publish their track records, year in and year out, so you can plainly see their results. All data is net of fees and expenses, so you can see how effectively the firm manages client money compared to industry benchmarks.
As you can probably guess, those willing to be transparent are likely very confident in their ability to generate solid returns for their clients. That’s why it is wise to ask and, ideally, just consider those who are GIPS® compliant. If not, how can you tell if they are competent investors?
Look for the CFP® mark
Investing is essential, but estate planning, tax efficiency, and risk management are critical too. That’s why it’s crucial to find an advisor who has the specialized knowledge and expertise to help you in these other areas as well.
One way to verify that is to look for those who have earned the CERTIFIED FINANCIAL PLANNER™ mark. The CFP® credential is widely considered the gold standard for financial planning. Earning this mark requires significant study, experience, and passing of a rigorous exam. In addition, CFP® practitioners have to meet continuing education requirements, which helps them stay up to date in today’s changing investment and tax environment.
There’s no substitute for experience
Finally, look for significant experience helping people achieve their long-term financial goals and protect their assets. Financial professionals tend to learn the most through challenging markets. We haven’t seen difficult markets for a while, other than for short stints. By only working with those with significant experience, you can be reasonably assured they have successfully guided clients through changing economic and market cycles.
Conclusion: Do it yourself or hire a professional?
As you can see, every situation is different, but if you’re serious about your future, just make sure you have these bases covered either with your own capabilities or by engaging a carefully chosen professional.
If you’re looking to hire a financial advisor, we offer a no-obligation, free review to see if we can help you achieve your goals.
John Odell, CFP® is CEO of Arroyo Investment Group, LLC, a fee-only financial advisory firm based in Pasadena, California, but serving investors nationwide. As a GIPS®-compliant firm, we bring institutional quality, high performance investment management and comprehensive financial planning to individuals and families.