I am an obliger, so I always do well when I have someone else nudging me to get something done. This is one of the reasons I always ask, if not beg, readers to submit topics. I have a spreadsheet of over 300+ topics to cover but only so many hours in the day, so I like to prioritize the content I know you want. This week, we’re tackling the questions of “Should I Use a Financial Advisor?”
Through our Ask a Budgeting or Personal Finance Question page, Becky submitted:
I have no desire or background in investing. What is your opinion of using a financial advisor? I can’t stand the idea of paying someone 1% of my investments. If I use Fidelity or Vanguard should I be able to execute my retirement income on my own? Is there help or support in the retirement community for that?
- A financial advisor works for you, so interview them before hiring them to run the business of your money
- Look for a fiduciary who doesn’t try to sell you products they make commissions on
- Not all financial advisors charge the same fees; depending on your portfolio balance, an AUM or fee-only structure might be cheaper
- If you don’t have the knowledge or confidence, a financial advisor can help mentor you until you’re ready to DIY
- There are other options to consider, such as robo-advisors, if you’re looking for a compromise between a financial advisor and DIY
Should I use a financial advisor?
I love this question because it’s one I’ve struggled with myself. I don’t think the answer is the same for everyone and can change over time, which makes it one of my favorite “it depends” topics.
If you don’t have a background in investing, having a financial advisor for a season can be a great way to buy you experienced guidance and to help you get comfortable investing. We covered in our key to building wealth article this well-known, not so secret nugget of financial wisdom: it isn’t enough just to save regularly; you have to invest that money to take advantage of the power of compounding interest.
We never recommend investing in anything you don’t understand, so having a financial advisor guide you in the beginning can help you learn about investing—so long as you have someone in your corner that wants to help empower you and isn’t just there to sell you products.
Here, we come to the first caveat to understand in the financial advisor debate:
Not all financial advisors are equal.
While they should be, many financial advisors are under no obligation to have your best interest in heart when helping manage your money.
To help weed out these bad apples, you want to start by considering only financial advisors that are fiduciaries.
But again, we need to look deeper, as some financial advisors who carry the fiduciary title might still have conflicts of interest. If this is the case, they likely aren’t the best professional to have in your corner.
How do you know if there’s a conflict of interest?
One key sign is to pay attention to what they propose to invest you in. How do you know before you give them your money to invest?
You interview them.
Your financial advisor works for you. They aren’t an employee, per se, but they are your paid consultant. You control and run the business that is your money and your financial future. You want to make sure you have the right person for the job. Don’t just hand over the keys to the kingdom to the first Tom, Dick, or Harry you cross on the street. That’s a recipe for attracting the Bernie Madoffs of the world.
When interviewing potential financial advisors, give them background information on your current situation. If they’re worth considering for the job, they’ll ask you about your personal goals because, as always, personal finance is personal. What you should do with your money depends on what you want your money to do for you. This is why having a goal is the very first step on our FIRE ladder to financial freedom.
If the financial advisor mentions using insurance as a savvy investment strategy, that’s a red flag to run away like Sir Galahad the Brave. (“Brave Sir Robin ran away… When danger reared its ugly head, he bravely turned his tail and fled.“) Some financial advisors and insurance agents push products like whole life and universal life insurance like cookies at a PTA meeting because they make a fat commission stack. When you look at returns on these types of investment/insurance products, you’re almost always better off investing in plain old vanilla index funds.
Why do I need a financial advisor then?
The truth is, most people probably don’t need a financial advisor. There are a few key checkmarks to assess when determining if you should go the DIY route.
Are you disciplined enough to stay on track?
There are so many free and paid retirement calculators, apps, and programs that can help you reverse engineer the future of your dreams. It’s a simple—but hard—task of putting the rubber to the road.
If you know your target savings amount each month, it’s easy enough to automate that savings into solid investments of your choosing.
Can you emotionally handle the volatility in the stock market?
Once you’ve automated your savings and investing, are you committed enough to your plan to ride out the woes of market volatility? If you get cold feet and Runaway Bride out of mutual funds, ETFs, or index funds, you’ll be buying high and selling low in the prime of your saving years, which is the opposite of what it takes to succeed.
If you get heartburn every time the market dips, my first piece of advice is to stop looking! I do my best to avoid checking the balances of my investments, except for a few intentional checks once or twice a year to make sure I’m still on track. It’s hard to remain on track when you obsessively check and see the squiggly line of your investment’s value. (Trust me, I’m querying my latest manuscript right now as a writer; the obsessive checking is not good on the old ticker.)
If you can’t help yourself, you’re a candidate for a financial advisor who can help you keep calm and carry on. If you have analysis paralysis on where to begin, or don’t trust the stock market or how it works, a financial advisor could be a good idea for you as well, as they can help you get comfortable. Think of them as your mentor, taking you under their wing under you feel comfortable striking out on your own.
Do you know what to invest in?
The truth about successful investing is that it isn’t sexy. It’s pretty damn boring, actually. Our investment portfolio contains a whopping five different index funds with steady, long-term track records of growth and returns. Oh, la la!
If you’re lost in a sea of different investment options and don’t know if crypto is the right way to go, a financial advisor again could be a useful mentor for your apprenticeship.
Let’s circle back to a key premise though: you still shouldn’t invest in anything you don’t understand. Otherwise, you could easily find yourself with a majority of your retirement savings funneled into a crappy whole life policy.
This means that everyone should spend at least some time brushing up on investing 101 so that they are comfortable with the basics.
Becky mentions in her question that she has no desire in investing. Honestly, I was the same at first. I always joked that I took care of today (the budget) and my husband handled tomorrow (retirement planning). For years, we operated our household under this system. I had a vague idea of where my monthly ACHs to Vanguard went, and my husband trusted I wasn’t hiding half our income in an offshore account in Sweden. But what if something were to happen to me or him? We both needed to know the basics of what the other was doing to survive. So I invited him into my monthly budgeting process, to which he came kicking and screaming, and I begrudgingly let him recommend his top pick for an audiobook on investing.
A Random Walk Down Wall Street was longgg and dense, but I learned a lot. It also gave me more trust in my husband and our process.
The desire wasn’t there, but the need was. So treat it like homework or a job at work. You don’t have to know a lot, but you should know a little. We’re working on building out the retirement station to help, with the goal of making that learning a lot less dense, though maybe not shorter than finance books—I have always been an over writer and I like to talk a lot about the nerdy stuff that excites me.
Feel free to nudge me in the Budget Brigade Facebook group with your retirement and investing questions. I promise that will get them up on the website faster.
Do you want to spend the time to develop a better understanding?
I talk a lot about opportunity cost and money. The decision between DIY investing and outsourcing the task to a financial advisor is no different.
If you have more time and want to save money, take the red pill and dive down the rabbit hole of personal finances. We’d love to have you join us.
If you’d rather spend a little more money and save the time, then take the blue pill and hire a financial advisor to handle the day to day, allowing you to focus on your higher priorities. Just check in on your “employee” and give them a performance review every year(ish) to make sure they’re earning their keep.
But 1% seems like an expensive salary to pay
If you have a significant investment portfolio—or have a lot of cash you could put to work in the stock market—paying an AUM (assets under management) fee to a financial advisor could make you want to dry heave. Trust me: been there, got the t-shirt.
Fee structures is another example of how not all financial advisors are the same. While this AUM structure is common among financial advisors, there are other advisors that work under a fee-only structure. You pay them a flat-rate or a set hourly rate, and they can help you formulate a comprehensive financial plan with your goals in mind. They can also help guide you in what you should invest in, but then they pass you the baton to do the bulk of the marathon.
How do I know if I can execute my retirement investing on my own?
Assessing the questions above can hopefully help Becky make this final decision. If you’re confident that you know what to invest it, or don’t mind spending some time to figure it out, even if it isn’t what you’d prefer to do on your weekend off, you’re halfway there.
Once you know what to invest in, if you have the discipline to stick with the plan and not jump ship when the stock market waters get rough, then you likely can skip paying a financial advisor and go the DIY route.
If you can’t but don’t want to pay 1%+ to a financial advisor to “actively” manage your investment accounts for you, look into a fee-only advisor instead to help you come up with a one-time plan that you can then execute yourself.
Behind the curtain: what we do at The Budget Brigade HQ
I strive to be honest and to give advice based on our experiences, so I don’t mind sharing what we’ve done personally.
I come from a family of number nerds, so I had a Roth IRA as soon as I started working around thirteen years old, when my primary job responsibility was to ice down the shredder to keep it from overheating. (I even made cute little signs for my box of papers waiting to head to the great shredding afterlife.)
At this wise old age of puberty, I had nary a clue what to invest in, so my custodial account was, rightly so, set up with a financial advisor.
In high school and college, I was more interested in IndyCar racing than index funds, so my account remained with my financial advisor. Even though I went and worked with their investment firm for a few summers, I still didn’t bother learning about investments because I was trying to get through engineering school without getting stress ulcers.
It wasn’t until I got married to my nerdy husband where investing became something worth paying attention to. He started with a self-guided brokerage account that we put a small amount of our investing into each month. We left the rest of our retirement with the financial advisor I’d been using for over a decade.
As my husband read more and more investing books, listened to podcasts, and educated himself on YouTube, he slowly convinced me he knew what he was doing and that, just as importantly, he was comfortable doing it. So we transferred our retirement accounts from our financial advisor to our self-guided brokerage account.
Should 13-year-old Lauren have executed her own retirement account? God no. Though I do wish I’d taken the time to learn more sooner, as I would have been more comfortable investing less in bonds and more in growth stocks, which could have helped my Roth IRA compound faster. As it is, my husband’s Roth IRA has almost the same balance as mine, even though he started years after me.
Do we need a financial advisor now? No, because we assessed the opportunity cost and decided to spent the time investment into learning about the stock market.
So should I use a financial advisor or not?
Using the criteria outlined above, trust yourself to make this decision. If you’re comfortable and confident, you do you in all your full DIY glory. If you’re still new to investing, there’s no shame in having someone guide you along the journey, even if just for a season of life as you learn and grow that confidence you need to strike out on your own.
You can also look into alternatives such as robo-advisors, which still charge fees but are usually cheaper than financial advisors and can provide limited guidance versus jumping fully into the do-it-yourself route at the start.