Should You Hire a Financial Advisor?

The following is adapted from FOOLISH.

One question people rarely ask me, but surely must ask themselves is, “Should I even hire an advisor?” They probably don’t ask me because they assume I’ll say yes.

I am an advisor, after all.

However, being a financial advisor gives me unique insight into the pros and cons of hiring one. You know what that insight tells me? You guessed it: most people are better off with an advisor than they would be without one.

You could certainly choose not to hire an advisor. Having a financial advisor isn’t a requirement to building a strong  portfolio or reaching your financial goals. But I would argue that the benefit of having someone in your corner who has the roadmap, understands the terrain, and is looking out for you, is extremely valuable. 

It comes down to weighing those benefits against the cost. So, let’s do that. Then, you’ll be in a position to make a realistic, logical decision about whether an advisor is the right choice for you and your specific situation.

The Downside of Advisors

Let’s address the biggest reason people usually resist hiring an advisor first: the cost. It’s a completely valid concern, too, because traditional brokerage firm advice is expensive. 

Like anything, it all adds up fast. It’s important to think about your costs in terms of the portion of your return they eat up. Portfolios that are performing well give you long-term returns of around 8 percent annually.

When you consider the fact that many traditional investment recommendations (such as actively managed mutual funds) charge fees as high as 2 or 3 percent, you can see how significantly costs can impact your investment return equation. Add in tax drag—which, depending on various factors, can take as much as 39.8 percent of your profits—and things just get worse.  

So yes, the cost should make someone think twice about hiring an advisor. Even given the cost factor, though, hiring an advisor will be beneficial in the long run. And here’s why: a proper advisor will coach you off the ledge when you need that, and make you stick to your knitting when the going gets tough.  

You just need to make sure that the advisor you hire is cost-sensitive. Look for one who will keep your best interests in mind above their own at all times and won’t load you down with financial products with hidden fees.

An Advisor’s Role

So, what benefits do advisors offer that justify the cost? The un-advised investor takes on an incredible amount of responsibility. Yet, our selective memories (which are gentle with our egos), our inadequate ability to interpret the tax code, our insufficient understanding of the ways costs get allocated and layered, and our blindness to the time value of money, virtually assure we’re going to make mistakes. 

People struggle to interpret new information; they’re iffy on the proper way to execute strategy. Not only that, but people who manage their own money have all kinds of emotional baggage from having too much at stake, too much perceived control over the outcome, too many past failures, and all kinds of creative ways to justify their poor choices to themselves. 

Often, investors all lose their heads at the same time. In the midst of a frenzy, it’s natural to think clear weather will never return, and in the midst of the calm, it’s natural to think the seas will never get choppy. Both are wrong. As a matter of fact, the final crescendo of the selloff on March 23, 2020, amidst the COVID-19 crisis, sparked a buying frenzy the next day that drove the Dow Jones Industrial Average (DJIA) up more than 15 percent, or 3,000 points in just 31 hours. Sellers participated in all the downside and gave away their chance at a swift recovery.

That’s really where an advisor comes in. Their job is to save you from yourself. They keep you out of trouble. They watch out for the fine print and keep you from falling into fee and tax traps. Above all, they are the ones responsible for thinking about what you should do next, and doing so impartially, and in your best interest. 

Find an Advocate

In the end, it’s all about getting the right advisor. You need one who will be your advocate and look out for your best interests above their own. The best way to get someone like that in this business is to hire a fiduciary advisor. 

There’s no question you’re going to get more unbiased advice from any fiduciary advisor (over a non-fiduciary advisor) since their business model does not allow any double-dipping of clients, like the brokerage firm model does. A good fiduciary advisor knows where costs reside and has a duty to help clients avoid them. It’s just like how Waze monitors for traffic updates and reroutes you to avoid jams. Imagine if Waze earned commissions to keep you on the road longer. It would not be nearly as efficient. 

That being said, Waze isn’t perfect, and hiring a fiduciary advisor won’t solve all of your problems. It’s just that you will get fleeced the least. The fiduciary standard disallows factors that don’t help portfolio performance but line the pockets of brokers and firms. 

So, do your homework and look into a potential advisor’s registrations, compensation model, credentials, and legal history before you hire them. That way, you can ensure your advisor becomes your advocate. That’s worth its weight in gold.

It’s (Likely) Worth It

In my opinion, the benefits far outweigh the costs for the average investor. However, if you’re prepared to learn about the tax code, fees and costs, market cycles, and you can detach from your emotions and make decisions that aren’t based on market fluctuations, then perhaps an advisor isn’t for you. 

At the end of the day, only you can decide whether a financial advisor is the right call. However, if I had to put money on it, I’d bet on the advisor being a smart choice.

For more advice on the costs and benefits of financial advisors, you can find FOOLISH on Amazon.

Gil Baumgarten, one of the nation’s top financial advisors, is the Founder and President of Segment Wealth Management, an RIA financial advisory firm. Since its inception in 2010, Segment Wealth Management has grown to a top-ten firm in Houston, as recognized by the Houston Business Journal, with over a billion dollars in client assets under advisement. Gil is also a nine-time recipient of the Top 1,200 Financial Advisors distinction and has been ranked among the thirty-five best advisors in Texas by Barron’s. Distinctions aside, Gil’s affinity for precision and detail reveals itself in his daily life as well. He is an avid outdoorsman, award-winning woodworker, and attentive family man, friend, and colleague.