I am asked this question often. Friends, family, colleagues, new acquaintances I meet at school functions — they all ask the same thing. Wealthy people, tech people, young people, old people, the list goes on. Sometimes folks ask and then I learn they already have a financial advisor!? Yikes!
“Should I hire a financial advisor?” they ask.
The answer is never “No.” But sometimes the answer is “Maybe.”
Here’s the thing. Whether you are inquiring about hiring a financial advisor, plumber, electrician or any other provider of a specific service, you are signaling that you believe you could benefit from someone with specialized knowledge and training. Trust your gut.
Why would you not hire someone that could help you navigate the complexity and dangers of a particular field? Especially when they can help you save money and make money in support of your financial goals.
Without hesitation we hire plumbers and electricians to keep our homes safe and performing as they should. It gives us peace of mind and allows us to focus on other priorities — our jobs, families, hobbies, etc. Why would you not want the same for your finances?
Advisors on Advisors
At the 2024 Schwab IMPACT conference in beautiful-but-rainy San Francisco, I spent an afternoon asking financial advisors and others attending how they would answer the question. For obvious and biased reasons, all responded with an overwhelming “Yes!”
However, their rationale was often unique and very thoughtful.
One advisor said, “We all need professional coaches. Even Tiger Woods has a coach.” I agree: Surrounding yourself with people dedicated to making you better is a good thing.
Another advisor compared wealth to health and the merits of working with a financial advisor to a personal trainer. She then explained how a lot of folks think they can lose weight by only focusing on cardio and not diet or strength training. “You need all three as part of a holistic approach to get the job done,” she noted. She then shared her views on taking a holistic approach with financial planning that goes beyond investing and includes tax planning, risk management, cash flow analysis, and more.
An often cited 2019 Vanguard study titled “Assessing the value of advice” digs even deeper into this topic. It provides an interesting framework on the types of value you should receive from someone providing financial advice — portfolio value, financial value, and emotional value.
Like other pieces of similar research, it too concludes that the value in hiring a financial advisor is more than just money management. Financial advisors often function as a behavioral coach for their clients. I like to think they keep your financial train on the right track, avoiding obstacles, knee jerk reactions, and noisy headlines that do not help your portfolio.
How Much Is an Advisor’s Help Worth?
While at Schwab’s IMPACT conference, another financial advisor spoke of the dangers of today’s headlines and news cycles. She said, “Most days are spent educating my clients on why a company they read about in the news is not a good investment.” She also mentioned that a lot of times clients forget “they already have exposure to companies like Nvidia,” and she re-educates them on the holdings in the funds in their portfolio — keeping their financial train on the tracks.
But what about making money? Isn’t that the whole point? Don’t we expect financial advice to help boost our finances? The Vanguard Study addresses that as well. Below is an excerpt that was cited by Forbes and illustrates how a financial advisor could help you boost your retirement savings.
It illustrates the power of a $500K portfolio compounding at different growth rates over 25 years. See my article “How I Taught My Kids About Compounding” if compounding is foreign to you.
Vanguard compares a 5% annual return to an 8% annual return. Their hypothetical scenario assumes you can achieve a 5% annual return without an Advisor and an 8% annual return with an Advisor. After 25 years, that 3% difference in your annual return makes a big difference. Without an Advisor your $500K portfolio would grow to $1.69M. With an Advisor your portfolio would grow to $3.4M. Again, that 3% difference in an annual return makes a big difference — especially with compounding!
Consider Your Needs & Your Strengths
While I believe everyone can benefit from a financial advisor, I don’t believe everyone needs a financial advisor — especially since it’s an additional cost.
No two people have the same goals, knowledge, portfolio, DIY instincts, risk tolerance, or spare time when it comes to personal finances. Some of you reading this may love finance, have studied finance, and are just getting started with a portfolio of $10,000. If that sounds like you, partnering with a financial advisor may not be needed.
Today you can find copious resources online to support your financial journey. This includes a lot of great reading and tools you can use for free. Today you also have access to a lot of great funds at a very low cost, all designed to support your financial goals.
If you are grappling with this question, I recommend you also ask yourself:
- What problem are you trying to solve? Is it complex?
- How important is it to solve the problem?
- Do you have the knowledge to solve it yourself?
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Do you have the time?
I would also suggest doing a little research to get familiar with the lexicon used by financial advisors and increase your understanding of what to expect. As mentioned above, the 2019 Vanguard Study is a great place to start.
And if you are leaning towards hiring a financial advisor, certainly take the time to understand the different types that exist and the various approaches they use. I would also recommend you interview a few and check their credentials.
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