Could the Value of a Financial Professional be Infinite?

Saw this today.

"The findings from CreditKarma’s?survey?are a shocking reminder about the varying degrees of attention to which Americans pay their own finances.

The study found that 61% of women say they don’t know how to calculate their net worth (61%), with roughly 4-in-10 men saying they don’t know. Among the survey’s other disturbing findings: 21% of respondents aged 59 and older — those most likely closest to their retirement years — reported having nothing." ("Here's the average net worth of Americans at every age — how do you stack up? (Plus 3 simple tips to boost your wealth if you're way behind)", MoneyWise, Chris Clark)

There are two disturbing facts. The first and most alarming is that just over 20% of those over 59 have nothing saved for retirement. While alarming, I suppose it's not surprising since the poverty rate among older Americans is over 10%, and so it's not hard to believe that the 10% of American just above the poverty line are in tough enough financial straits that saving for retirement it extremely difficult.

The second is that about half of Americans don't know how to calculate their net worth. Depending on how the question is asked, it's possible that people simply don't know what net worth means, so they would obviously not know how to calculate it. I'm sure a larger number of people know if they owe more than they have (or at least I sure hope so). However, this goes back to a point often made that Americans are financially illiterate. Depending on the poll you look at, between 40% and 60% of Americans are financially illiterate.

When you consider a number of results of various polls, we see that only about (and these are all rough numbers) 30% of Americans use a financial advisor. These next numbers are very rough because they are tough to get at from the way most polls are structured, but people who use an advisor usually report that they are more financially literate than those who do not, so bear with me as I make some gross estimates. Let's just say that about 70% of people who use an advisor are financiall literate. I suspect it may be even higher if the advisor is doing a good job. That means that the 70% of people who do not use an advisor are below average in financial literacy, let's just say they are more toward the 60% or even possibly 70% illiterate.

We also know from studies that a large percentage of DIY investors are not doing as well as those who use an advisor. This should not be surprising with the high rate of financial illiteracy. Now, that isn't to say that a DIY investor can't do a good job. There is a lot of good information out there, and there is no reason that a person who truly works at it, can't understand personal finances, financial planning and investing. Those of us who are licensed and have attained at least some certifications know that there is significant work involved. In other words, to understand these topics well requires a lot of discipline and research. To create a detailed plan requires the use of at least relatively sophisticated software. The free applications and software provided by some investment companies is better than it used to be, but there is also a learning curve for many people who may not want to take the time to learn it.

If we add in the psychology of money and how difficult it is to objectively analyze your own situation and make investment decisions, as well as how much bad advice is out there and how easy it is to be persuaded by that bad advice, there seems to be a logical (although perhaps self-serving) conclusion that almost everyone should consult a financial planner or advisor. Whether or not that person needs to have their assets managed by an advisor or whether or not that person needs a planner to complete their financial plan for them is an open question. However, the value that hiring a planner or advisor to assist with the process of learning about financial planning and investing for the vast majority of Americans is great enough that every American, including DIY investors who know a lot, should at least schedule a consultaton.

It is difficult to say with certainty, but the data suggests that if a person hired a professional to guide them in creating a plan for savings and investing, and accountability, they would be much better off and that the return on the money spent would be very high and, in fact, infinite for some people (something saved for retirement compared to nothing).