For a lot of people investing can be an overwhelming and daunting task. Should I invest in stocks? Bonds? Mutual funds? Puts? Calls? Should I just invest my entire net worth in Greek debt?!
Financial Advisors can help you sort through the confusion and guide you in your investment choices. However for most people, I just don’t see the value in hiring a financial advisor. Here’s why:
- Financial Advisors are salespeople first. – When I was in college, I majored in finance because I wanted to become an advisor and help people manage their money. However, once I graduated and started interviewing for positions I learned the truth. The companies that financial advisors work for don’t want someone who knows all about finance and investing. They want someone who can sell ice to an Eskimo. Oh yeah, they want someone who knows a lot of rich people too. Every company I interviewed for asked me to list out just about everyone I knew along with an estimate of their salary and net worth. When my girlfriend got laid off from her pharmaceutical sales job she had financial planning companies knocking down her door with the thought she had a large network of doctors she could now bring to them.
- Financial advisor’s aren’t miracle workers. - Having one manage your money isn’t going to guarantee you market crushing returns that will transform your savings into a Warren Buffett-esque fortune. Find the right asset allocation for your risk tolerance and a diversified portfolio of index funds will perform as well as anything a professional will put you in.
- Your interests aren’t the top priority. – There are good advisors and there are bad advisors. The bad ones will try to put you in funds with their company’s name all over it & will have you making all sorts of different moves while they sit back and collect commission on each one. Good advisors do have your best interests in mind, but you’re still just one of many clients that they have.If you have fewer than a few hundred thousand dollars to invest, it will be extremely hard to stay on your advisors radar. If you’re younger or have less money to invest it’s even more likely that you’re better off managing your own portfolio.
- Financial Advisors are expensive. – With online brokers like TD Ameritrade or Schwab you’ll pay $10 or less for every trade you make. Even the cheapest financial planners won’t come close to that. This means they’ll have to perform that much better just to overcome the higher fees they charge.
If you’re the type of person that generally has control over your budget and finances and has an interest in keeping up with investments my advice would be to manage your own money.
If you have a large amount of money (think $250,000+) or you’re really just not comfortable with the do it yourself approach. It’s important to find a good advisor that you can trust. Here are some tips:
- Make sure to find a “fee only” advisor – As you can probably guess, fee only advisors work only for a set fee. It could be hourly, per session or just a percentage of assets under management. Fee only advisors are preferable because all your expenses are known upfront. They aren’t working for a commission so they won’t be motivated to talk you into making unnecessary trades. You can search for a fee only financial advisor at http://napfa.org/
- Look at their certifications – Ideally you want an advisor with the CFP (certified financial planner) or CFA (Chartered financial analyst) certifications. Achieving one of these designations takes education, experience and the passing of a series of some very difficult exams. One of these designations isn’t an end all be all for finding good advisors, but it’s not a bad place to start.
- Conduct an interview – The first time you meet with an advisor, think of it like a job interview. Except this time around, you are the one doing the hiring. I’m not saying ask them generic question like “if you were a color what color would you be?” But ask probing, thoughtful questions that will give insight into their character and approach to managing money.
There is no one right answer to the question of “Do I need a financial advisor”. You have to assess your own abilities and willingness to manage investments without making rash emotional decisions. Whether you decide to manage your own money or hire an advisor, what is most important is that you make saving and investing a priority and follow the plan that best suits your needs.