Before answering these questions, let me first state the obvious. We’re biased. We wouldn’t be in business if we didn’t believe we could add value for you and our other clients. We also acknowledge that you have more options today than ever and some of the newer platforms make it easier and cheaper to make do without a traditional financial advisor. In the end, the right decision for you should be based on your unique circumstances and preferences. The following are some questions that might help you decide if working with a financial advisor is the best strategy for you:
How much time and interest do you have in personal finance and investing?
Here’s a dirty little secret. Wealth management isn’t rocket science. Most smart, successful people can learn a lot of what they need to know simply by reading up on the topic. Discount broker and other technology-enabled trading platforms have also made it easier to build a nicely diversified portfolio at a low cost. However, as with any do-it-yourself project, it requires you to invest a significant amount of your own time. This may not be a burden for someone with an abundance of free time who enjoys reading personal finance blogs and investment news. Too often, though, I run into folks with crazy work schedules and busy family lives who, while quite knowledgeable about finance, just never get around to opening up that new account or rebalancing their portfolio. As a result, their portfolio ends up like the kitchen remodel that gets started but never finished. The only difference is that an unkempt portfolio can be a lot more expensive.
Can you keep a cool head when markets get a little out of control?
This one is huge. One of the biggest mistakes investors make is selling out at a market bottom. Many people who panicked and sold stocks during the 2008–2009 financial crisis didn’t get back into the market for many years. Missing out on the recovery ended up costing them a lot in terms of foregone investment gains. Because it’s notoriously difficult to time market swings, you’re better off picking an allocation and sticking with it through good and bad markets. Of course, that’s easier said than done. While most investors can weather moderate market corrections, deep bear markets are scary and the tendency to panic is common and quite normal. Advisors can help with fastening your seat belt when the ride gets bumpy if you’re the type to get overly exuberant during good times or scared during bad times. Behavioral coaching is a big part of what we do.
Are you disciplined about executing a plan?
I have a friend who knows almost as much as I do about financial markets. He’s spent most of his career in finance and certainly has the discipline and knowledge to effectively manage his own portfolio. As we were having dinner together a couple months ago, he sheepishly turned to me and confessed he had not been investing in years. He received a big cash payout in 2016 from the sale of the company he worked for. He knew he should begin investing it and even put together a plan to do so. But with a contentious election on the horizon, he hesitated. He figured he would wait a few months until the dust settled. Now, two years later and with the market up over 30% since the election, he still hasn’t started. I’m not sure if the delay was due to inertia or analysis paralysis or a little of both, but it’s easy to put off making a decision when the stakes are high and you’re unsure. This is another way advisors can help. They have fewer inhibitions and can help you stay on track with your financial goals.
How complex is your financial situation? And what is your appetite for complexity?
If all you want to do is invest cash for the long-term in a brokerage account, a simple automated platform will do the trick. As the complexity of your assets and goals increases, though, automated platforms become less appropriate. Here are some examples of complexities that might encourage you to consider an advisor:
- Owning stocks with big unrealized gains
- Owning a number of equity awards of various types (incentive stock options, non-qualified stock options, founders’ shares, and so forth)
- Having assets north of $11M, which might result in costly estate taxes in the future
- Owning your own business or investment real estate
- Having a major life event, such as a death or birth in the family or an approaching retirement date, etc.
While wealth certainly alleviates many worries, it also introduces some new, complex decisions and an advisor might be helpful in sorting it all out.
Do you have a good, proactive CPA?
What some people may really just need is a good CPA. Even with the soundest investment philosophy, there is no guarantee an investment advisor will outperform the market in any given year. Markets are just too unpredictable. Tax rules, on the other hand, are a little more straightforward. The IRS code is reasonably clear and good tax planning can result in savings that are both dependable and quantifiable. The problem is that some CPAs are too often backward-looking. If you tell them what happened last year, they will competently file your tax return and tell you whether you owe taxes or are due to receive a refund. But, while this is undoubtedly an important part of their job, CPAs that aren’t as proactive may miss opportunities to help save their clients on taxes by not getting ahead and doing more planning earlier in the year. If your tax situation is relatively simple and your CPA is good about helping you think through your tax picture toward the beginning of each year, you may not need a financial advisor on top of that.
With all of the innovation and disruption in the financial advice space, your options have increased dramatically over the recent years. But simpler and cheaper is not always better. If you needed surgery, would you choose the cheapest doctor with the simplest solution? With the rise of index investing and algorithm-powered online brokers, you may wonder why anyone would hire a wealth manager or financial planner. Yet, many people still do and remain loyal consumers of the service year after year. Our view is that innovation has raised the bar for everyone and that the “winners” won’t completely be computer- or human-driven, but some combination of the two. The best solution for you depends on your unique situation.