Do You Need a Financial Advisor?

Let's start at the beginning.  Financial Advisors, Financial Planners, and other financial professionals are no different than other professionals.  Their services are necessary for some people, some times.  However, there is always a do it yourself options for the easier things in your life.

Look at an electrician.  Electricity is nothing to be trifled with, and the experience and knowledge a good electrician has is worth every penny, when you need it.

If you want to install a ceiling light fixture in a room in your house, and you are reasonably handy, have good access to the location, and have solid normal electrical wiring in your house, there is not reason you can't install it yourself.  You can get instructions off of dozens of websites, or maybe buy a book, or even have a friend who has done it before walk you through it.  In the process you'll save yourself as much as a couple hundred dollars.

On the other hand, if you aren't handy, or if the idea of electricity just seems too complicated, or too risky, then a professional electrician is the way to go.  After all, isn't a couple hundred bucks worth having what you need in your own home?

Then there is the issue of complexity.  If your home is old and the breaker box is overloaded, and you have aluminum wiring, it wouldn't be smart to try and rewire your house without some form of professional guidance no matter how much money you could save.

Which brings us back to professional financial advisors and professional financial planners.  Are there thousands of books, magazines, websites, and talk shows out there about finance.  Of course.  Can you do some of your finances yourself if you are somewhat savvy and willing to educate yourself?  Sure.  But, are there some things are a little too complicated, or maybe a little bit too important to just jump in and do yourself.  You bet.  Just where that line is determines whether or not you need a financial planner or financial advisor.

Financial Advisors - Experience, Knowledge, and More

As a financial planner, I tell people that my job is half about the math, and half about the emotions. I'm of course referring to the client's emotions. Money is an emotional subject. What is the one subject in our society that it isn't polite to talk about? You said sex, and you are right. But, what subject is next on that list? Money. Is it polite to ask someone how much money they make?  How much money they have in the bank?  What they paid for their car?  How much they spend on eating out or going to movies?  No.  That would be rude.

It's one thing to calmly read that book or website while you sit detached from your money on your couch.  It is easy to nod along at the thought that you have years to go until retirement and that with proper diversification, just annual rebalancing is all you need to reach your goal.  But, when every article in the Money section of your local newspaper is talking about recession, then things are different.

Right now, I'm getting calls from clients who sat and nodded along with me when I explained (in more detail than any book or website) how the long-term markets would work with our carefully crafted allocation.  I may have even talked them down from too high of a risk tolerance (clients almost always say they have a higher risk tolerance than they actually do.)  And, now, my phone rings and the voice on the other end says:  "Should we be doing something with my money since the economy might be heading for a recession?"

Have you thought the same thing?  Are you now looking for articles about what to do?  What happened to understanding the long term buy and hold?

The psychology of investing is the biggest part of my job.  It is bigger than any math, any plan, any investment, or any training.  And, quite frankly, it is my biggest value to the client.

You'll hear over and over again that if you had two exact same portfolios and did the exact same thing in both, that an advisor will cost you $X over the next several years and you a dummy for paying it.  Of course, the key is that you must do the EXACT SAME THING.  Think that is realistic? 

Did you move some or all of your 401(k) to the Stable Value fund during 2000, 2001, 2002, and 2003?  Tons of people did.  I meet people today who are STILL in the stable value fund because they aren't sure about the markets.  It isn't surprising.  Not if you read the business section.  Repeated stories about housing bubble, sub-prime mortgage problems, foreclosures, and so on.

With the markets that shaky, who would want to be invested right now.  But, here is the thing.  The S&P 500 was up 28.86% in 2003.  It was up 10.88% in 2004 and 4.91% in 2005.  2006?  Up 15.79%.  Did you notice that we've been in a four-year bull market? 

If you missed the +30% or so returns of 2003, it cost you roughly your nest egg value times 30%.  For someone with $250,000 that is $70,000!  If having a trusted professional advisor who gently walked you through everything and kept you invested charged you 1.0% per year, how much is that?  1% times $250,000 is $2,500.  How many years worth of advisory fees does just that one piece of calming advice cover?  Well, let's just say that it's like getting his advice for free for the rest of your life.

Like I tell my clients.  You can read and analyze everything you want, but just remember one thing.  You don't live your life on a spreadsheet.

If you want to know what to do now because of the recession, you need an advisor.  If you want to know (or wanted to know last year) what to do because of the housing market and the sub-prime mortgage problems, you need an advisor.  If you want to know what you should do now that the Fed has cut interest rates and might cut them even more, you need an advisor.  If you changed your 401(k) contributions or allocations in the past year because of the economy, the recession, or the housing market, you need an advisor.

If you haven't read one article about what to do to "protect" your portfolio, you might not need an advisor.  If you haven't changed your 401(k) plan except to rebalance it, you might not need an advisor.  If you are confident that your current allocation is properly diversified based on your risk tolerance (and obviously that you know what that sentence just meant) you might not need an advisor.

Part 4 - Experience Matters