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Do You Really Need a Financial Advisor To Secure Your Financial Future?

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Matters of personal finance are intimidating for many Americans and it’s no mystery why. There are so many aspects of personal finance. Emergency funds, mutual funds, estate planning, retirement accounts, life insurance, tax planning. And that’s just the beginning.

Another factor is the lack of personal finance education. Many schools don’t cover the topic and because money is still a taboo subject, many families don’t discuss it either.

Only 17 states require high school students to take a class in personal finance — a number that hasn’t budged in the past four years.

More than half of states still don’t require high school students to take an economics course.

And since 2014, the number of states that require students to be tested on economics concepts has stayed flat at 16.

So if we don’t learn how to manage our financial life in school or at home, what can we do to meet our financial goals? The obvious answer for a lot of people is to turn to a financial advisor. And why not? These financial professionals have the knowledge we lack. They can tell us what to do in order to secure our financial future.

But can they? And do they? And how much does it cost? If you think you need a financial advisor, read this before making a decision.

What Does a Financial Advisor Actually Do?

A financial advisor helps clients create a financial plan to build wealth and meet financial goals including long-term retirement planning. They can also help with tax planning and estate planning and advise clients on the various types of insurance that will fit the client’s needs.

Most advisors will give clients a questionnaire to fill out in order to get a complete picture of their financial situation. Clients will indicate things like:

  • A list of assets
  • A list of liabilities
  • Net worth
  • Cash flow
  • Short, medium, and long term goals
  • Risk tolerance
  • Current insurance
  • Tax situation
  • Estate plan (if there is one)

Based on the answers, the financial advisor will draw up a comprehensive financial plan designed to help you meet your financial goals, fund your retirement, and provide for your family after your death.

Once the plan has been implemented, clients get regular statements showing how their investment portfolio is performing. Regular meetings are scheduled to monitor progress and to make any changes to the plan which needs to be adjusted when there are major life changes like marriage, children, a job loss, starting a new business, etc.

This all sounds great, right? Where do you sign up? Not so fast.

Money Over Clients

There are three ways financial advisors make money.

Commissions: Some financial advisors work in part or entirely on commission. They make money selling you certain financial products like mutual funds, annuities or insurance products.

When a broker works on commission and recommends a certain financial product, there’s a sales charge that can range from 3% to 6% that the client pays out of pocket. Sometimes the company whose products are recommended pays a commission which is more or less a kick-back.

This is the reason stockbrokers at a traditional brokerage firm are really just highly compensated salespeople. If you do use a commission-based financial advisor, make sure you hire a fiduciary, someone legally obligated to put a client’s interests above their own.

Fee-Only: A fee-only registered investment advisor doesn’t sell financial products, doesn’t accept commissions and operates under a fiduciary standard. These advisors are paid per hour, by a fixed yearly retainer, or a percentage of assets under management.

Fee-Based: Fee-based advisors combine the commission only and fee-only models of compensation. They can sell financial products and earn a commission or charge a fee based on the percentage of assets under management.

You can see the problem. When a financial advisor is working on commission or is fee-based, they have a financial incentive to sell products that may not be in a client’s best interests.

Well, why not use a fee-only advisor? We’ll get to that.

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They Don’t Beat the Market

In the world of personal finance, you hear the term “beat the market” frequently but what does it mean? Beating the market means creating a portfolio that outperforms the S&P 500 Index. Well, surely investment professionals can do that right? Picking stocks is their job.

But they can’t.

The S&P 500 outperformed more than 92% of large-cap funds over the last 15 years. Mid- and small-cap funds fared no better over the time period, with their benchmarks besting them 95.4% and 93.2% of the time, respectively. Overall, 82.2% of all active funds were outperformed over the 15-year period.

But we don’t need to beat the market in order to be successful investors. Anyone can simply invest their own money in a low-cost S&P 500 index fund.

Even if your financial advisor could outperform the S&P 500, once you deduct the fees they charge your returns will almost certainly be less than if you had just put your money in that index fund. More on fees coming up.

Either Way, You Pay

The fees a financial advisor charges aren’t based on the returns they deliver to their clients but based on the amount of money clients invest. What that means for you is that even if your advisor gives you financial advice that loses you money, you still pay.

One percent doesn’t seem like much. If you got a 1% raise, you’d feel rather insulted. And you probably have credit cards in your wallet that give you more than 1% back.

So if your financial advisor were to charge you a 1% fee, you might think you’re getting a pretty good deal. You’d be wrong. And plenty of advisors charge more than 1%.

This is what these fees can look like over time.

investment fees

No One Cares More About Your Money Than You

If you’ve ever had a conventional job working for someone else and worked for yourself, you know in which scenario you worked harder. It was your money, your livelihood on the line when you worked for yourself so of course, you worked harder.

I’ve done both and when I worked in an office, I spent a fair amount of my day reading Reddit. Now that I work for myself, Reddit has been relegated to the hour I spend drinking coffee in the morning before starting my work day.

No matter how smart or talented or well paid, no one is going to care about your money more than you.

DIY Financial Planning

Okay, we’re going to go a little more in-depth than this but investing (which is the aspect of personal finance that intimidates people the most and the reason most people turn to a financial advisor) is not rocket surgery.

Here’s the TL: DR version of successful investing. It’s just two steps:

  1. Determine your risk tolerance.
  2. Divide your money between stocks and bonds depending on that tolerance.

That’s really all there is to it.

You can do this in an index fund. Vanguard’s Total Stock Market Index Fund (VTSMX) for stocks and Vanguard’s Total Bond Market Index (VBFMX) for bonds.

Step 1: Get a Complete Picture

Just as a financial advisor would, we want to get a complete picture of your finances.

Assets: Your assets are your physical belongings like your house, car, valuable jewelry and artwork. Assets also include the cash in your bank accounts and retirement accounts.

Liabilities: This includes your debts like credit cards, student loans, mortgage, etc.

Net Worth: Subtract the value of your liabilities from the total value of your assets to determine your net worth. Your net worth may be negative. Personal Capital will track your net worth for free.


Cash Flow: Cash flow is how much you spend versus how much you earn. If you use Mint to budget, this is easy.

Ideally, you’re spending less money than you earn. If not, you need a budget. Again, Mint is a free and easy way to create a budget. You can use Trim to eliminate unnecessary expenses and Truebill to reduce some (semi)-essential expenses.

If you need to make more money, we’ve written plenty of ways to do that.

Step 2: List Your Goals

Well, LezBeReal. Saving money sucks but it sucks less if you know what you’re saving for. Create a list of short term, medium term, and long term goals.

  • Short term goals are things you want to do in five years or less. They can be things like getting married, taking a vacation, or doing home renovations.
  • Medium term goals are things you want to do in five to ten years. They can include buying a home, having a baby, or starting a business.
  • Long term goals are things you want to do in ten years or more. They can include buying one or more rental properties, putting children through college, and retirement.

Determine how much money you need for each of your goals and divide each amount by the amount of time you have before needing the money. This is a little harder for long term goals like retirement as it’s hard to predict things so far out but there are online calculators that can help.

Step 3: Determine Your Risk Tolerance

Before you can choose your investments, you have to determine your risk tolerance. Risk tolerance is the amount of market risk, ie market ups and downs, you can live with. Of course, we would all like to invest with zero risks but there is no such thing.

And the more risk you’re willing to take, the better your returns over the long-term will be. In a nutshell, stocks are risky and bonds are safe.

The three levels of risk are typically categorized as aggressive, moderate, and conservative. If you don’t know what your risk tolerance is, Betterment will help you figure it out.

The biggest factor in your asset allocation shouldn’t be your own risk tolerance. You may be afraid of any risk. In that case, you may not invest aggressively enough to fund your goals. If you’re too reckless, you may lose money at a time you can’t afford to lose money, ie retirement.

The biggest factor in your asset allocation should be your time horizon. The sooner you need the money, the less risk you can take with it. Short term money is invested very differently than long term money.

The longer your money is invested, the more time it has to weather the natural ups and downs of the stock market.

Step 4: Investing for Your Goals

Now we’re getting into the weeds and this is the point where a lot of people throw up their hands and decide to bite the (very expensive) bullet and pay for investment advice. There is no need. You got this.

Short term money should be kept liquid, meaning you can easily withdraw the money when you need it but you want to make a little something on that money. Keeping this money in a Betterment Smart Saver account will pay 2.19%. CDs and money market accounts are other options.

Medium-term money doesn’t need to be quite so liquid so you can be a little riskier with it than short term money. An ETF like Betterment can be a good place for medium-term money.

You can set your asset allocation and for medium-term money, you want to err on the side of caution meaning you’re more heavily weighted towards bonds than stocks.

How much more depends on your risk tolerance and how firm your time horizon is. Would you absolutely have to have this money within that five to ten-year time frame or could you let it ride a little longer if the market was in a downturn?

The one place you definitely don’t want to park this money (or short term money) is in a tax-sheltered retirement account. Those accounts have penalties for withdrawing before a certain age, usually 59 ½.

Long term money is the money you can afford to take the most risk with. This means weighing heavily towards stocks. There is a rough rule of thumb you can use to determine allocation.

This is the money you can invest in a 529 account (college savings), a 401k (beware of fees), and an IRA.

Step 5: Insurance

Health insurance is the obvious one and non-negotiable. People go broke with health insurance so imagine the consequences of not having it. If you have a car, you have auto insurance. If you have a mortgage, your bank requires homeowners insurance.

A big personal finance mistake many renters make it not having renters insurance. Your landlord’s policy likely won’t cover your possessions and renters insurance covers a lot more than just loss or damage to your belongings. It’s really inexpensive too. You can get renters insurance through Lemonade for less than you probably spend on coffee each month.

If you’re single and don’t have children, you can probably skip life insurance. The exception being if your parents co-signed your student loans. If they did and you died, they would be on the hook. But if you do have dependents, life insurance is essential.

Disability insurance is also something to consider. It pays out if you were unable to work. Even if you don’t have dependents unless you are independently wealthy, disability insurance is a good investment and like renter’s insurance, pretty inexpensive.

You can get a free insurance checkup at Policygenius to see if you have gaps that need to be covered and if the insurance you currently have is sufficient.

Step 6: Tax Situation

Investing isn’t complicated but taxes are. If you’re going to pay for professional advice, this is where you want to spend your money. If you work a regular 9-5 and get a W2, your taxes aren’t too complicated to do yourself or just drop off at the nearest H&R Block. But there are some situations where it can pay to hire a tax professional:

  • You’re a business owner. Not only can they show you deductions you are eligible for but not aware of but they can help you plan for the following year too.
  • You bought or sold property. Real estate transactions can have major tax implications. If you bought a home, you may be eligible for mortgage interest and property tax deductions.
  • You have a lot of investments. Different investment accounts have different tax implications. It’s too much for the average investor to keep up with.
  • You had a big change. If you got married, divorced, or had a baby, those things can have tax implications.
  • You itemize deductions. There are so many possible expenses you can itemize and you’re probably not aware of all of them. A tax expert will be.

Step 7: Estate Plan

Estate planning sounds really fancy and something only rich people do but there are basic parts of estate planning that everyone needs like a will and for some a trust. Luckily, you don’t have to hire an expensive professional to do this for you.

Trust&Will can provide you with a range of estate planning products faster and much less expensively than ever before. Trust&Will has created software that can help you create a plan in about 15 minutes. Once your plan is completed, you can print (or have them shipped) the documents, sign them and have them notarized.

Trust&Will offers a range of products including revocable living trusts, medical power of attorney, living wills, last will and testament, and nomination of guardian. It’s kind of like LegalZoom for estate planning. You can go to the site, answer a few questions, and get recommendations on the products that best fit your situation.

See? That Wasn’t So Hard!

We don’t mean to suggest that financial advisors can’t help people manage their finances and give sound investment advice. Nor are we suggesting that people who provide these services should work for free.

All we’re saying is that you can do what they do and by taking a DIY approach, you can save yourself money, potentially a lot of money. And you don’t have to read every investment book under the sun or read the Wall Street Journal cover to cover every day.

If you want something done for free, do it yourself.

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You could spend a few hours reading these articles and show notes and listening to the podcast episodes and do a bang-up job of managing your own money. And as ever, all of the resources on LMM are 100% commission and fee free!

Candice Elliott - Senior Editor
Candice Elliott is a substantial contributor to Listen Money Matters. She has been a personal finance writer since 2013 and has written extensively on student loan debt, investing, and credit. She has successfully navigated these areas in her own life and knows how to help others do the same. Candice has answered thousands of questions from the LMM community and spent countless hours doing research for hundreds of personal finance articles. She happily calls New Orleans, Louisiana home-the most fun city in the world.
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