Why you should invest in financial advice
A question that I hear a lot is, “why do I need a financial advisor?”
Look, I’m clearly biased as this is what I do for a living. But, prior to entering this profession, I wasn’t 100% sure what the true value add was.
I’ve always felt confident enough that I could manage my own finances.
Clearly I’m not alone in that category as the chart below highlights that about 66% of the people younger than age 35 believe they can manage their investments more effectively than a “professional”.
When it comes to working with a financial advisor, it goes well beyond just managing investments.
So, for those that may be wondering what it’s like to work with an advisor, or are just curious on how the relationship works, here are some popular questions I get:
Why do I need an advisor?
To be clear, not everyone will work with an advisor in their life. There are people out there who are pure Do It Yourselfers (DIY’ers), and there is nothing wrong with that!
But for others, having an advisor is vital. Finances can be overwhelming, so an advisor can help you act with confidence and bring clarity to financial headlines.
The goal is to formulate a financial plan that is tailored to your aspirations and goals.
You create a partnership so you can discuss where to put your money, how to diversify and invest in funds with low costs, address changes and how to do all of this while keeping taxes in mind.
As you go through life, there are many complex and hard decisions you have to make. An advisor can help you make great financial decisions while also avoiding unforced errors when your emotions inevitably come into play.
Get someone to serve as your soundboard, someone that can help take the emotions out of your decision making, and to also get a ‘second pair of eyes’.
What separates a “great” advisor from a “good” advisor?
Like any industry, you can get service from anyone, and nowadays you can even have a “Robo advisor”.
But a “great” advisor is one that seeks to inspire, teach, and help you learn. A saying we like to live by is, “people don’t care what you know until they know that you care.”
A great advisor has the courage to be transparent and honest, one who is always approachable.
Obviously finances are extremely personal and some are intimidated to talk about their situation. So it’s vital to build that trust factor.
Some may think that an advisor will always be the person telling you to save more, cut back on your spending, or demand you give them more money.
While this can be warranted at times, a great advisor provides balance and gives you reassurance.
It’s very rewarding to let someone know that they can afford that vacation or house renovation because they have been doing the right things and built out a plan that allows them to live the lifestyle they want.
How will our relationship work?
Every relationship is different but generally, an advisor needs to understand some important things about you:
What are your objectives? Are you saving for a particular goal? What is your investing timeline? How much risk are you willing to take?
It’s all about getting you the best life possible with the money you have.
Once the relationship is established, you would generally have two formal meetings with an advisor per year.
The line of communication should be completely fluid and you should be able to contact your advisor at any time and expect answers within a respectable time period.
Again, a great advisor prioritizes his/her clients and provides prompt service.
How do I know how the advisor is investing my money?
During your initial meetings, the advisor would want to understand what this money is for.
Once this has been identified, the next step is portfolio construction.
This means that your advisor aligns your portfolio with your goals (i.e. I want to buy a house in 5-years, let’s create a portfolio with this timeline in mind).
An advisor is, generally, independent, and a “fiduciary” which means they act in your best interests (although some you can call bullshit on this).
Your advisor should be explaining their philosophy when it comes to investing and keep you up to date as much as you would like.
What other services does an advisor provide?
Again, working with an advisor typically goes well beyond just your investments.
You create a financial plan and then address the endless amount of change throughout your life (marriage, changing jobs/careers, moving, education planning, charitable gifting, death, illnesses, etc.)
You should also utilize the advisors professional network/referrals. There are endless options when it comes to attorneys, CPAs, real estate agents, etc. So it’s helpful to have someone do that screening process for you and recommend people they trust.
The most important thing an advisor can do is, besides making you money, save you time, and provide a great return on life.
How does the advisor ultimately get paid?
In the old days, advisors would make money from commissions. Each trade they placed, they would earn some sort of commission.
While this can still be applicable, the industry has mostly transitioned to what is called a ‘wrap fee’.
Essentially, the cost of an advisors services is wrapped into one sole fee. That fee is typically a percentage of the amount of assets you have with the advisor (this fee varies but base case is typically around 1% per year).
Are there any guarantees?
As you have heard me say before, there are never any guarantees when it comes to investing. General rule of thumb is that if an advisor is promising you a specific rate of return, they are full of shit (unless you purchase some sort of specific product like an annuity).
The only guarantee you should get from an advisor is great service and that they “tell the truth and let the chips fall where they may.”
As mentioned, this can be viewed as a bias take as this is what I do for a living.
But hiring a financial advisor/coach can be one of the best investments you can make.
Disclosure: This material is for general information only and is not intended to provide specific advice or recommendations for any individual.