Why I don’t think you need a financial advisor, part II

Why I don’t think you need a financial advisor, part II

A few years ago I did a post on “Why I don’t think you need a financial advisor” in which I discussed my thoughts and feelings around young professionals getting a financial advisor. Often times financial advisors are just insurance salespeople in disguise and don’t have your best interest in mind or are charging you for something you really don’t need. I’m a little older, a little wiser and my financial situation has changed a bit since the last post, and I recently took a conversation with a financial advisor, to check in and see if my feelings had changed on whether or not I needed one. Spoiler alert, they haven’t and I thought I’d explain why.

How things can go wrong

Money is a very personal thing to each of us, it’s how we live our lives, it’s often how we compare ourselves to others, it’s what we set goals about, it what we worry about, celebrate, and what we do our best to keep safe and hope grows. First and foremost, if I am getting personal advice on my finances, I want to make sure they have my best interest in mind. Our world is full of advertisements; it’s how companies reach new customers. These advertisements make their way into finance as well, and mutual fund and investment companies all charge fees for their services. Now I don’t mind paying them a fee; they are in theory doing me a service that I cannot do myself or do not have the time for. However, I do mind paying more than I need to, and hate paying more for something that I could be paying less for. Where I think financial advisors get a little sticky is when they allow their judgments to be clouded by whoever is paying them the most. Financial advisors’ incentives may not align with you and they might steer you into a fund to invest in that has slightly higher fees, and from which they earn more.

What’s worse is this behavior; allowing advisors that you trust and take seriously to knowingly take advantage of your financial situation by not giving advice in your best interest – is perfectly legal! They don’t have to tell you any of this! The good news is that there is a magical phrase that you can ask to make sure they are looking out for you – acting as a fiduciary. A fiduciary is bound to look after your interest ahead of their own. So, before you start talking to any financial advisor, ask them if they serve as a fiduciary. If they don’t, politely end the conversation, and if they try to give you an excuse for why they’re not – leave the conversation even quicker! John Oliver had a great segment on this topic if you’ve got 21 minutes and want to learn more/laugh. 

You may not think that a few percentage points can make a difference, but they can and will! Saving for your financial future is all about repeating small efforts and having them pay off over time (i.e. compound interest and long-term growth), and paying more in fees is like filling up a bathtub that has a leak in it. Sure it’ll fill up but it’ll take a lot longer and you’ll have wasted a lot of water! 

Photo by Giorgio Tomassetti on Unsplash

What I think you really need

Phew, getting off my soapbox here, it’s worth calling out that I don’t think that all financial advisors are bad, and there are many that act as fiduciaries and will look out for you. However, even if they are looking out for you, I think that many young professionals just don’t need much of their help. As in, any valuable service a financial advisor can provide isn’t worth what you’ll pay them (in my opinion). I think that a baseline education for yourself is all you need and then to remain disciplined. If you can do both of those, I just don’t think you need a financial advisor.

Here are the basics that I do think you need. Firstly, follow the 3 cardinal rules of personal finance: 1) Income = Savings + Spending (i.e. don’t spend more than you earn) 2) Learn to master your money otherwise it’ll master you (i.e. have a budget and a plan with goals) and 3) Focus on a little everyday (i.e. success is found more often in the repetition of small actions over a long period of time). Set aside 3-6 months worth of expenses in an emergency fund for yourself. After that, aim to save 15% for retirement, ideally through work to ensure you get the full match if your employer offers one (either Roth vs 401K is fine, I don’t think there’s a right answer, it’s somewhat opinion based). Make sure you have good insurance, starting with renters/home, health and auto. Once you get married and start having kids, start getting more serious about a life insurance policy but don’t set it up in such a way that it feels like winning the lottery if one of you dies. I’m a big believer in term life and not whole life and although there could (and likely are) be books written on the subject, I just like my investments to be investments and insurance be insurance. Whole life confuses me greatly. One story I like to share is that 3 friends and I, all young professionals and fairly financially savvy spent hours one day going back and forth and trying to make sense of whole life and didn’t walk away understanding it. If something financial is that confusing, I like to stay away from it. Be cognizant of getting disabled and have some sort of insurance, I’ve found that coverage offered through work is often adequate or can affordably be supplemented. Keep your investments simple; put them in a good index fund. You’ll diversify your portfolio (i.e. not keeping all your eggs in one basket), get an average return (average beats sporadic) and not pay much at all for it. I keep most of my money in a Vanguard Index fund. 

That was a lengthy paragraph but hopefully that makes sense! Have a good foundation as a safety net, and then focus on growing your money in tax advantaged accounts (Roth, 401K, 529 for college, HSA/FSA for healthcare costs). Do invest and save, but keep them simple. Even the so-called financial experts on average don’t beat the average return of the stock market. Doing all of this can be easy and fairly automated, and not something I think you need to pay someone to do for you! 

Photo by Bench Accounting on Unsplash

How things might change my mind 

All that to say, I do recognize that one day I might be in a spot where I would like to actually pay an expert for their advice. When it comes to financial advisors, they often charge a fee of 1-2% of your assets, which I think is way more than young professionals need to pay. A good financial advisor is likely just putting your money in index funds and you can do that on your own. Perhaps you don’t trust yourself with your own money and are prone to selling it all and heading for the hills when things look bleak or throwing every penny into the market when things look good, but even then I feel like 1-2% is more than you should pay. Focus on self-discipline and save yourself some money! The one type of financial advisor I might pay is one that is fee based, i.e. charging a flat fee for their time and efforts. I’ve heard of some that will charge maybe $1,000 or so a year for an annual plan and meetings and advice throughout the year. Although I still think that’s too high I realize that one day I might need that. 

As I get older and my financial situation gets more complex, I may look into a financial advisor. More types of investments, more insurance needs, a larger or older family, these are more advanced situations that I might like some advice or a second opinion on, however until then, I’m good with my current state! 

Summary

A lot of financial advisors don’t have your best interest in mind and won’t tell you that they don’t. It’s not like they’re going to rob you (hopefully not) but a leak in a ship is still a leak and I don’t like leaks in things that I’ve worked so hard to build. It doesn’t take an advanced degree to do well with your personal finances. Have a plan, have a safety net, be disciplined, take advantage of tax-favored plans and save/invest.  If you do feel the need one day to get advice, try to pay a flat fee vs. paying a percentage of your assets.

Curious to hear your thoughts! Any good/bad experiences with financial advisors that you’d like to share? 

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