Financial Advisors: Do You Really Need One?

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Every individual has different strengths and weaknesses.  When deciding on whether or not to use a financial advisor for advice, a person must know their own personality.  With a plethora of financial firms and even more financial advisors, it may be tempting to hand over one’s personal finances and let someone else do the heavy lifting.  However, with a little research and wise decisions, anyone can usually manage their money without paying fees and related costs.

Start at the Beginning

This may sound simple, but so many people neglect their financial investments at a hefty cost.  The number one rule in managing your finances is to actually manage your finances.  Do not leave any assets unattended for years, when they could be hard at work.  Manage your own finances.  After all, they are most important to you and only you.

While financial advisors are smart, aggressive people who get paid well for taking risks with your money, the results are never guaranteed.  For people who have a modicum of interest in investing, there really is no need for a full-time advisor.  However, advice for properly managing money and guidance from others is needed.  It is both foolish and risky to just jump into the pool of financial investments without looking first into how deep or dangerous the waters really are.  

Learning from those with experience and who have already accomplished similar financial goals, such as retiring early, is necessary and prudent.  Also, finding a financial institution to hold these assets and execute certain instructions in the market is needed.  Finding a good balance between a person’s own will to do the research, knowing when to get good advice from a trusted advisor, and trusting a financial institution to invest that money is the key to reaching any retirement goal.    

Financial Advisors

Many financial advisors are experts in their field.  However, if their field is how to sell financial products instead of knowing technical aspects of retirement finance, then they are not the experts a person needs when planning their retirement.  In addition, if a financial advisor makes a mistake or error in judgment, a person can end up working longer before retirement, all the while paying the advisor for managing their assets.

Also, be aware of unbiased opinions on retirement.  Rarely are they unbiased.  If a financial advisor is commission-based, they may have particular products that they want to sell, such as an annuity.  If they are fee-based, they may benefit from a person working longer and accumulating more assets that need to be managed.

This doesn’t mean that all financial advisors are bad people and should be avoided at all costs.  This simply means that a person shouldn’t rush to hire a financial advisor before doing a bit of research themselves.  Such topics as Social Security, integrating annuities with other assets, and the sequencing and taxation of withdrawals from retirement are all areas where a person can benefit from authoritative advice.

So, where can a person turn if they need financial retirement advice?  Begin with the trusted companies such as Vanguard or USAA.  Directories such as NAPFA or Garrett Planning Network also list local advisors.

Just remember that sound financial planning should begin with up-to-date information retrieved from an analysis tool and a mindset of determination and enjoyment in planning the trip to retirement rather than trying to predict or control how the market will react.

Financial Services Firms

Even if a person is diligent in their own research and determined to manage their account, they will still need a firm to hold their assets.  There are a few companies that stand out in the field due to their unique client-owned business structures.  They are:

  • Vanguard – The nation’s largest mutual fund company is actually owned by Vanguard’s mutual funds, which means that the shareholders pay only what it costs to operate the funds.  This type of structure eliminates the conflict of interest in investors and owners because they are one in the same.  
  • USAA – As with Vanguard, USAA’s clients are the owners.  Profits made are returned to members.  There is a military connection for eligibility.  USAA is known for two areas:  superior customer service and conservative investment policies.

Avoid large banks that are identified with Wall Street.  These institutions are often expensive, rigid, overly conservative with choices, and overly risky with a client’s money.

Costs and Consequences

The cost of “expert” advice can be expensive.  The Wall Street Journal reported that in 2010, the average advisor’s fee was anywhere from 1.3% to 2.1% annually.  This may sound like a small percentage and worth the cost, but when looking at these fees over a person’s career and retirement savings amount, those small percentages can add up to tens of thousands of dollars.  In addition to the obvious costs, there are also hidden costs such as the costs connected to the funds being recommended.

Advisor costs come in three distinct areas:

  • Sales commissions
  • Hourly fees
  • Percentage based assets under management (AUM) fees

If it is absolutely necessary to hire a financial advisor, finding one that is hourly or AUM based is the best, especially if the advice needed is only for a short time.  There are times when it is actually best to use a financial advisor on an hourly basis.  These areas include:

  • Preparing a financial plan
  • Choosing an asset allocation
  • Deciding when to take Social Security
  • Evaluating an annuity purchase option

If a person is disciplined with a do-it-yourself investing approach, using ETFs will be less costly and make more money than using an advisor in most cases.  Therefore, take some time, research a little bit, and have confidence in your ability to manage your own money.  After all, you are the one who sacrificed for it and will benefit from it during your retirement.

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