This might be a somewhat controversial post, but I assume you’re here on this blog because you care what I have to say and want to hear my opinion on it. This isn’t a hard and fast rule, and in fact your situation might dictate otherwise. The topic today is financial advisors and whether or not I think that young professionals need them.
In today’s world, financial advisors are plentiful. You can find them in your town or city, and even online. Unfortunately our education system has left many young professionals clueless when it comes to financial planning and how they should spend/save their money. A financial advisor is a logical place to turn, especially when it seems they have our best interest in mind. However, it’s my strong opinion that you don’t need one and that on your own you can likely achieve the same results without their help and without paying their fees.
Often they’re not true financial advisors, just salespeople
This really irks me as I see it far too often with my friends. Many times their financial advisors are just insurance or mutual funds salespeople. Sure they offer you financial advice, but their advice often times is directed to buy more insurance (which you may need, to be fair, but not always the case) or buy higher fee mutual funds (which may or may not give you better results, but will definitely have higher fees). I feel that they are taking advantage of folks in a vulnerable state (financial matters) and not providing them with the best advice. If someone is giving me advice that I plan to take, I want to be sure that the advice is the best I can get, and that the giver of advice has my best interest in mind. There’s actually a word for this: having them act as a fiduciary, which means that by law they have to act with your best interest in mind. If you’re ever meeting with a ‘financial advisor’ be sure to ask them that: if they will serve you in a fiduciary role. If they’re not, I wouldn’t waste my time with them, as they’re more salespeople than advisors!
The secret to success is simple
For most of us, it doesn’t take too much planning or maneuvering to achieve solid financial returns. I’ve outlined many strategies here on my blog for how I think you should spend/save your money (i.e. the 75% rule) and I’ve also espoused the benefits of simply investing in index funds (link). I personally am following both of these rules, and it’s working out great for me. I’m achieving the results of the market, which is typically better than I used to fare with focused mutual funds. Keep it simple: save and invest the right amount (15% retirement, 10% savings) as you can, and then invest your money in index funds. Schwab, Fidelity, Vanguard and other brokerages all have good options that mimic the market’s returns and have a very low fee (<0.1%). Park your money there and I truly believe you’ll achieve all the results you could achieve with a fancy investment strategy.
Most of us don’t have enough to justify their help
A good financial advisor will likely charge you a couple hundred dollars an hour for pure advice, or will give you advice as part of managing your money, for which they’ll charge 1-2%, which is on top of other fees that you’ll incur. As mentioned previously, I’ve found that I can achieve great results using simple index funds in the market. I don’t see the need to pay a few hundred dollars for some advice that validates that I’m already doing as well as I can be. I certainly don’t want to give up 1-2% of my assets to achieve a similar result that I could with just using index funds. Other than that, having a good homeowners/renters policy should keep you safe enough with insurance.
Young professionals don’t often have enough to warrant complex advice, and the fees that we would pay an advisor (if they truly are that) probably won’t achieve benefits worth those fees! Feel free to leave comments here letting me know if you disagree – I’d love to hear both about positive and negative experiences with financial advisors!