Is Paying For Financial Advice a Luxury?
Is Paying For Financial Advice a Luxury?
I have gleefully retold the story of why I fired my previous financial advisor. On the other hand, I have also memorialized the loss of a friend who was my first financial advisor. In neither account do I deny the strength of the fiduciary responsibility, yet if you read both posts back to back you may feel my views are rather schizophrenic. And the truth is, although we in the financial independence community are big fans of DIY, there are times when it makes sense to pay to have something done right. The question thus remains. Is paying for financial advice a luxury or a necessity?
First, I should make clear that I’m not talking about accountants and lawyers here. The details of tax efficiency and legal estate planning are above most of our abilities or time allotment. I’m mainly referring to financial advisors that tell you how to invest cash and may give you some pointers about insurance.
Second, I think there are many definitions for luxury. In my case I am referring to:
Luxury: A condition or situation of great comfort, ease, and wealth. Something that is expensive and not necessary. Something that is helpful or welcome and that is not usually or always available.
Is Luxury Wrong?
Before even commenting on whether paying for financial advice is a luxury, it is important to contemplate whether luxury is in itself a bad thing. As I have lamented before, money is an intermediary. If you have enough of this intermediary, why not use some of it on something of great comfort, ease, or even not necessary.
We begin life with nothing, and if we are lucky, we expend most of our resources before we die. Why not pay for things that make us happy or remove a burden? Why not allow others to do some of the heavy lifting for us if we can afford it, and still be financially responsible human beings?
Investing Is Not Rocket Science
I have no doubt that paying for financial advice is a luxury.
Why?
Because it is unnecessary.
Investing is not rocket science. It is not only understandable, but within the grasp of almost all people intelligent enough to strive towards financial independence.
I can safely say that I learned the majority of what I needed to know about investing by reading a few books, and spending a couple of hours a month reading blogs. Am I an expert? No. Am I a novice? Yes. Do I know enough to match the returns and financial prowess of eighty percent of advisors? You better believe it. Sometimes perfect is the enemy of good enough.
Adequate financial knowledge is within everyone’s grasp for free.
Whether you want to grab it or not is up to you.
Who Needs an Advisor?
Simple. If you are emotional about money and will not be able to make good decisions in overly bear or overly bull markets, you need an advisor. If you are a high W2 wage earner who has no time for anything other than your job and are loosing thousands of dollars every moment you are not working, than you need an advisor. If you are wealthy and no longer want to bother thinking about the details, than you need an advisor.
Do you see a common theme here?
In each scenario, paying for financial advice is a luxury, not a necessity.
Final Thoughts
Financial advice may be appropriate for a certain segment of our population. That segment may even be large. But I think we have to call it what it is. Paying for financial advice is a luxury. And there is nothing wrong with luxury as long as we are clear-eyed and honest about what we are spending on.
I fired my financial advisor.
You may not want to.
Cool post Doc G – I’d take it further and say financial advisors are like supercars – the majority of the population will never be in the position to consider having one.
And for what it’s worth, I’ve never had a financial advisor – never felt the need.
I think your avoidance of advisors is prudent. I’ve had a few. Happier doing it in my own.
I see the value but have never had one myself. Then again I enjoy finances and structuring my accounts around my own biases.
What most people need isn’t an advisor but a mentor imho.
Yes. A financial Independence Coach.
My Dad always read some Harvard medical news letter. He was always cooking up some cockamamie theory about medicine and trying to put it into practice because the name Harvard held out some kind of expertise to him. His son was a well rained physician but… My Mom is the same way sans Harvard. I’ve spent years getting her tuned up on her medicine and the first thing she does is read about the side effects and then contrives to get off the med even though she needs it.
I think DIY financial planning is much the same. Some plumber from Poughkeepsie who calls himself FinanceBoy on some list is handing out his advice. It’s great to read but are you going to put 3 mil on the line based on FinanceBoy? How about a 10 mil portfolio? How about RE? If you RE you may have 50 years for your mistakes to compound you into the poor house. I think it’s neither luxury or necessity. It’s simply a choice. There are as many reasons pro as con. In my case tax loss harvesting and a market efficient portfolio more than pay for the cost. In addition I have a very well planned tax picture and a plan to maximize my SS benefit, and a plan to Roth convert in the most efficient manner. In addition if I pass on my adviser is there to keep my wife afloat. As much as anything that eases my mind. So you get what you pay for. My adviser charges less on AUM as the size of my portfolio increases. Presently about .3%. I really like the portfolio we have constructed. It’s not like a Bogelhead portfolio. I even own individual socks like AMZN! This is not to say every adviser has these chops. I spent a lot of time figuring out who to hire. Worked out for me. When it came time to pull the plug I went to my party and started a whole new life with no side jobs or hassle and my portfolio is considerably more than adequate. I’ve been investing for >30 years and I’ve done it both ways. I’ve been through many downturns and bubbles. I’ve lived through all kind of tax policy and risk. I’ve made more money with an adviser than without. Color me satisfied.
I like the angle about what happens after you die. If your spouse is not at the same level of knowledge as you, it could be very helpful to have an advisor.
I have been burned by “financial advisors” in the beginning of my career when they promptly put me in front loaded funds which I’m sure padded their own wallet and thus their own interest over mine.
I do like Gasem’s line of thinking of it may be necessary to get one on board to make the transition of finances to the surviving spouse easier. Although even those who shun financial advisors during their lifetime could prepare the spouse to seek help (and what to look for) when they pass.
I think we all have been burned at one time or another. There are some honest ones though if you search.
I agree, having a financial advisor is a luxury. Yes, the all the information in the world for DIY investing is available on the web. However, some people could get overwhelmed by the vast information out there. Ten years ago, when I started my internship, I had no idea how to specifically handle my finances. Sure, I knew the general concepts of save most of my money and invest the rest. But I found it hard to find specifics on the nitty gritty details of exactly how to invest. And there were many different opinions too. Plus, the plethora of personal finance blogs did not exist at that time (or at least I didn’t find any good ones). I was overwhelmed with all the options and somewhat fearful of the idea that I could lose a lot of money by making poor decisions. I suffered from analysis paralysis and I didn’t want to pay the cost of inaction. So I met with a financial advisor. Luckily, I found a good one or two and wasn’t royally screwed.
After a few years, I learned more about finance and became more comfortable with doing everything myself.
When you’re overwhelmed and scared, sometimes you need someone to hold your hand and show you the way. I think a good financial advisor is very appropriate in this case.
No question, if you don’t have the ability to do the due diligence yourself, you need help.
I have mixed feelings about financial advisors. As far as a need for one, I think it depends on the person. For example, I can pretty much handle my families investments because I have a decent knowledge base and I’m interested in the topic. However, my wife is the opposite. She probably doesn’t know a stock from a bond. If I go first, I fear what would happen to the nest egg. I guess I could just write a manual for a very basic cookbook investment plan by investing in index funds. Like Gasem indicated, a financial advisor would be useful in this case. As far as choosing the right financial advisor, that can be a very difficult thing to do. Many advisors are simply salesmen. They wouldn’t understand the first thing about the alternative investments that I’m interested in. Each dollar out of their AUM is less compensation that they receive. As the saying goes, no one will care about your finances as much as you.
I’ve had reasonable financial advisors, yet I still saw the benefit of going it on my own. I never really understood everything till I managed it myself.
Honestly Doc – If you were to look at the sum total of all the factors that matter for retirement net worth, I bet you that having afinancial advisor would likely only be a minor factor. Probably what matters a lot more for net worth in the long run is having an advanced degree, and saving and investing regularly and consistently over decades.
You make a good point. Though ti is notable that a 1-2% difference in returns can really compound over a few decades.