The Informed Investor
Should You Hire A Financial Advisor or DIY?
A grinding screech rings in your ears as you come to the stop sign. You know your brake pads are worn out. Should you try to fix your brake pads yourself (DIY)? Or should you take your car to a mechanic and hire someone else to fix the brakes?
If you are not a mechanic and don’t know very much about changing brake pads, it might make sense to hire someone. Sure, you could spend time researching how to change brake pads online, order the parts, and even try to do it yourself. But what if you misunderstand the directions or make a mistake? What if the brakes don’t engage, and you get in a car crash? Would you be willing to take this risk? Most people who aren’t trained mechanics would probably choose to hire a professional to install new brake pads rather than try to do it themselves.
The brake pad situation is like financial planning. Developing and executing your own financial plan is possible, but is it wise? In the same way, your car may end up in a wreck if you change your own brake pads, so too could your financial future be thwarted―even derailed if you choose an inappropriate investment strategy or fail to take necessary details into account.
In my years of experience, I have found that most people lack the skills and knowledge to develop their own financial plans. This is why people seek a financial planner for guidance and why financial planning is a profession.
Why Hire a Professional Financial Advisor
You must be trained with a particular skill set to trust yourself to perform heart surgery or design a skyscraper. Specialized skills take years of training, practical experience, and perspective. Experienced financial planners also require long-term training and skills development.
Professional financial planners undergo extensive training, continued education, frequent testing, and practical experience. Reading a Dave Ramsey book or watching videos will not provide enough information to become an expert. Comprehensive financial planning often involves complicated calculations and understanding legal requirements and regulations―especially when it comes to taxes and tax efficiency. Financial planning also requires a disciplined approach. You can't learn these skills in a day; they take years to build.
Financial planning is also filled with complications and conditions. The everyday investor may not grasp the nuances of tax laws or be familiar with estate planning regulations. These rules and regulations often change over time, and financial planners must work to keep up with those changes. These factors make it difficult for ordinary people to develop their own financial plans.
In his book, Getting Started in Finding a Financial Advisor, Chuck Jaffe says, “…finances and money are not like food, where failure to follow a recipe or simply using bad ingredients can leave a bad taste in your mouth. You can throw out a bad dish and forget about it by the time your next meal arrives, but bad financial mistakes will be with you for years, possibly as long as the rest of your life.”
If you’re not entirely confident in your ability to master financial planning, you can alternatively trust a qualified expert. Unfortunately, I've seen many clients and potential clients who overestimate their own financial planning abilities when they need more essential skills and knowledge.
A few years ago, a couple in their 70s approached me because they were looking for a financial advisor to help them with a retirement plan. Up to that point, they had managed their own financial planning, but had little to show for it. They had few assets and recently incurred a lot of debt due to a home remodel. Their goal was to build a portfolio so they could cut themselves a monthly check for the rest of their lives.
During the interview, the couple asked several pointed questions, and I could tell they were wary of working with a financial advisor. Of course, given the amount of deception in the industry, I can't blame them. However, if they had done their research, they would have known about the benefits of the fee-only model. A fee-only advisor (like Allodium) is a fiduciary and puts the client’s interests first. They do not sell products, take commissions, or charge hidden fees. Regardless, the couple’s suspicions were apparent. At one point, they asked me, “What’s been your company’s typical performance?”
I informed them that a diversified, long-term portfolio might have an expected return of about 7 percent. When I relayed this information, they said, “Well, our Vanguard mutual fund is returning 8.5 percent, so why should we go with you?”
Why, indeed. To me, the answer was clear. They were currently invested in a risky, 100-percent stock portfolio that was narrowly diversified in one asset class of large-cap domestic stocks. In addition, they also had yet to consider the tax implications of moving their money from that portfolio. In their minds, investing was easy and straightforward—pick the portfolio that yields the highest number. However, there are dozens of other considerations involved in creating a truly effective and logical portfolio that this couple did not realize.
I can hardly blame this couple for not understanding the details and nuances of creating a diversified investment portfolio. Not having a more robust understanding is why only a few can take on their own financial planning.
Should Everyone Work with a Professional Financial Advisor?
In my experience, people fit into one or more of the following four profiles:
- No interest in financial planning/investing
These are the people who have no interest in finance at all. They would rather be golfing, shopping, or doing anything else besides thinking about financial planning or investing. They prefer a hands-off approach.
- No time for financial planning/investing
This group may be interested in doing their own financial planning or investing, but they don’t have time. They are busy professionals, parents raising kids, or highly active people in their communities. Because of their busy lives, they don’t have time to pay attention to financial planning and would benefit from professional assistance.
- Lack of the skills needed to master financial planning/investing
Because financial literacy is low in our nation, many people fall into this bucket. Some of these investors may be able to build their skill set, but this would take a significant amount of time and commitment. Complex terminology, acronyms, and regulations make it difficult for many to grasp critical concepts fully. Financial planning and investing can get complicated and nuanced.
- The Goldilocks types
Some investors possess the “Goldilocks” combination of interest, time, and skills. They are willing to do the research, take responsibility, and stay disciplined. Accomplishing this is not an impossible combination, although it's rare. Many people can handle some basic financial planning, but the more specialized aspects of financial planning require a deeper level of financial insight and industry knowledge.
Motivated individuals, with time, can engage in personal financial planning; however, they need to know their limits and admit when they're over their heads. Those individuals just getting started with financial planning or those with a small net worth might benefit from consulting robo-advisors or virtual advisors. Though this route has risks, it can provide a reasonable starting point.
Consider the big picture when deciding whether to hire a personal financial planner or do your own financial planning. Financial planning is tremendously important for your future and your family's future. It is something to take seriously. If you're willing to pay a mechanic to fix your car or a plumber to fix your sink, why wouldn't you consider hiring a financial advisor to guide you in making crucial financial decisions?
Learn more about David Bromelkamp
The information provided is for educational purposes only and is not intended to be, and should not be construed as, investment, legal or tax advice. Allodium makes no warranties with regard to the information or results obtained by its use and disclaim any liability arising out of your use of or reliance on the information. It should not be construed as an offer, solicitation or recommendation to make an investment. The information is subject to change and, although based upon information that Allodium considers reliable, is not guaranteed as to accuracy or completeness. Past performance is not a guarantee or a predictor of future results of either the indices or any particular investment.