Should I Use A Financial Advisor?
Aurobindo Sundaram
CISO | Startup advisor | Board member | VC fund advisor ? Photographer | Sharer of financial & life lessons
Should I use a financial advisor?
That question comes up so often in my posts and private messages that it's worth an article.
I have a strong opinion, "No", but there's nuance here. You'll have to make your own decision, but let the sections below guide you. And at the end of the article, you'll think to yourself, "He said No, but really he meant No-ish."
Yep.
There are 4 sections to this article.
Section 1: There are good reasons to use a financial advisor.
? They do this for a living.
? They're up-to-date on tax, death, and healthcare laws.
? They see situations like yours all the time.
? They're akin to a tennis coach - while you could improve a fair bit by watching on the internet and playing with others, you'll rarely get beyond the hump without a coach. Hence why Novak Djokovic, the #1 player in the world, has one.
? They see blind spots you've missed.
? They give you a realistic sense of whether you'll hit the goals you're trying to hit.
? If you lack the ability to follow through on financial plans, a financial advisor can be like a "buddy" who motivates you to do the right things.
? This is the crucial point - during periods of uncertainty (booms and especially busts), an advisor can calm you down and keep you from making the most tragic of mistakes ("buy low, sell high", "sell at the bottom", "liquidate", "trade a lot", "assume you know better than the market"). I cannot overemphasize this.
In fact, Vanguard , the champion of low-cost index-fund investing, performed a study in 2019 that indicated that advisors could bring significant gains to clients. (Here's the article.) Notably, the report said advisors would do this by, "providing cogent wealth management via financial planning, discipline and guidance, rather than by trying to outperform the market." (emphasis mine)
Section 2: On the other hand, financial advisors can be sub-optimal and cost you returns.
? Most financial advisors are not fiduciaries, which means they do not have to act in your best interest. They can recommend high-fee investments that benefit them, not you.
? Very few financial advisors beat the market over the long term. Anyone who says otherwise is lying. If Warren Buffett can put his investment portfolio in a low-cost index fund, who are you to think you're smarter?
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? Financial advisors who charge you a "percentage of assets under management (AUM)" fee annually are almost always ripping you off. The graph below shows what happens to a hypothetical investment over the years, with and without the fee. You are losing 11% of your profits annually. Is that worth it?
? Financial advisors (the unscrupulous ones) will charge you all sorts of fees (upfront fees, management fees, broker commissions, annual fees) and do not have to be transparent about them. Do you know how much you are actually paying every year?
? For almost everyone in relatively straightforward financial situations, using these credos, "Pay down debt quickly. Invest in low-cost funds. Buy term life insurance to protect your family." is all the guidance you'll ever need. And that's for free. You're welcome.
Section 3: So, what's a person to do? Here's a checklist to decide if a financial advisor is right for you.
? Do you have the discipline to invest consistently in the market and not worry about day-to-day, month-to-month swings in prices? You don't need an advisor.
? Are you comfortable with the boredom of the investing process? I.e., are you OK with investing in a target date retirement fund and just letting it be for years, perhaps decades, and trusting that, in the long run, the market will reward you? You don't need an advisor.
? Are you early career and/or just have education debt to pay off? You don't need an advisor - just pay off debt and invest as above.
? Are you prone to panic and make financial decisions when the market is volatile? You may benefit from an advisor.
? Do you have a complicated financial life (e.g., high net worth, multiple financial accounts, inheritance issues, foreign property, etc.)? You may benefit from a project-based or hourly-fee advisor.
? You are not knowledgeable about the market, you don't have the time or inclination to spend any time on investing and are OK with giving up a decent share of your returns for an advisor to run the show for you. You will benefit from an advisor but are giving up a lot. Do this with your eyes wide open on the returns you're choosing to give away. See the chart above to get a sense.
Section 4: And finally, here's how to select your advisor.
???? Use a fiduciary advisor (you can find one at?NAPFA.ORG). Ask the question and have it answered in writing, "Are you a fiduciary?" Not "fiduciary-like". Not "fiduciary-equivalent". FIDUCIARY.
???? Have an initial conversation to determine fit. It's as much you interviewing them as them interviewing you. That conversation should be free.
???? Look for (and ask for) transparency of costs. Be cautious of someone who wants to take on your entire portfolio (the costs can be significant). If you see "% of AUM" in your cost structure, run the other way - AUM is assets under management and even a 1% cost can deeply dent your future gains.
???? The best way to use an advisor is with an hourly rate or a project rate. That is, one of, (a) I'll pay $300 an hour for your advice once every 5 years and then go off and implement it (perhaps it takes 15 hours, that's $3,000 every 5 years which is a steal.); or (b) I'll pay $2,500 for you to review my finances and tell me what I need to do differently to meet my goal of retiring in 10 years.
???? Look for a money-back guarantee. The advisor I used in 2022 offers a 30-day money-back guarantee AFTER they give me my plan if I'm not thoroughly satisfied. He did an excellent job, by the way. Would I use him again? Yes, sure - in 5 years' time so we can check back in on goals versus progress.
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