Once you have accumulated a significant amount of capital, or you have a pressing financial question you can’t answer, it’s natural to ask yourself whether or not you should hire a financial advisor or do it yourself. In this blog we’ll talk about the major decision factors to consider.
Before we get started, we are financial advisors in Davis County, Utah. We’ve written these blogs about financial planning that you might find useful:
Signs you are with the wrong financial advisor
Financial threats you didn’t see coming
Do you have the time?
When considering whether or not it makes sense to work with a financial advisor, your time is one of the biggest factors impacting the decision. It may not seem like it on face value, but the time required to take care of your own finances is enormous, if you want to do it correctly.
Here are just a few examples of what tasks would consume your time.
Investments
- Researching possible investments
- Monitoring investments
- Assessing risk and return potential of an investment
- Designing the optimal mix of different asset classes – stocks, bonds, cash, etc.
- Assessing your own personal risk tolerance
Financial planning
- Modeling out Social Security – when to take it, what your benefit amount would be, how your spouse’s benefits may impact yours, how your income may impact what amount of benefits you get, etc.
- Designing a retirement income plan
- Strategically selling investments with an eye towards tax sensitivity to avoid excess taxes
- Avoiding a Medicare IRMAA
Overwhelmed yet? We’re just getting started.
As you can see, the technical expertise required is high. If you don’t have a background in these areas or a certain level of experience, it would require quite a bit of time to gain the necessary skill and knowledge to be able to counsel yourself to make proper financial decisions.
It’s not just a matter of having the time. There is mental energy that goes with that. You can’t be half paying attention to these important matters. If you are going to be taking responsibility for you and someone else’s finances, you should make sure that in the time you allocate, you are able to provide your undivided attention and that you are mentally up for the task. Otherwise, you may be compromising the quality of the work you are doing.
What skills and knowledge does a financial advisor have?
And this brings us to the next point – what knowledge does an advisor have, that makes him or her worth paying for? The skill set varies from one to the next. Some advisors have specialties that others don’t.
Financial advisors, in general, possess these types of knowledge sets:
- Managing investments in accordance with risk tolerance guidelines
- Statistical modeling and simulations
- Interpreting highly complex data sets and time series data
- Understanding the federal, state, and local tax codes and how to comply with them
- Operating portfolio, trading, rebalancing, and financial planning software modules
- Forecasting tax liability
- Trading stocks, bonds, and other market instruments
- Communicating during times of high pressure and stress
- Managing interests of multiple generations of a family
- Understanding behavioral bias and preventing it from compromising results
- How to sell a business
- How to buy a house
- How to save for college
- Analyzing estate and legal documentation
- Opening, closing, and transferring brokerage accounts
- Analyzing company benefits such as 401(k) and company stock options
- Navigating Medicare, Social Security, and other governmental benefit systems
If you are trying to figure out whether or not to hire a financial advisor, it is useful to consider that every financial advisor has his or her own strengths and weaknesses but this is a list of the basic skills that all of them must possess, to some degree.
The mental challenge and discipline required
Even if you feel you have the skills and knowledge to take care of your own finances, you still may need a financial advisor. There is a mental edge that is required in order to do this the right way.
- Financial advisors must have the discipline to stay grounded in objectivity when the market does down. Often people sell low because they get nervous when the market dips, locking in losses. Resisting this temptation and adhering to a long term plan is a lot harder than most realize.
- They must make rational and shrewd assessments of investment potential. It’s easy to get caught up in the smoke-and-mirrors presentations of those offering the investment.
- There are several behavioral biases that must be overcome to manage finances properly. This article explains several of them, from anchoring bias to overconfidence bias, and more.
All of these are ways that a good financial advisor can provide value to you.
Is your spouse a DIYer? You may still need a financial advisor.
If you’ve read our blog and choose to remain a do-it-yourselfer, so be it. We wanted to take a moment to discuss how this dynamic plays out for a married couple. We say this because it is very common for the spouse of a DIY-er to have minimal involvement (if any) in the financial processes.
I recently came across a case where the husband had been the primary earner their entire marriage. He went to work and came home. His wife made the budget, paid the bills, and did everything. By the end of his career, I don’t think he could even tell you what his salary was. When she passed away unexpectedly last year, he didn’t even know how to log in to his bank account to see how much money was there.
If you are a married DIYer, know this…
The death of a loved one is difficult enough, but then adding on a complex financial plan with little knowledge of the DIYer’s process becomes overwhelming and can lead to large, unnecessary expenses. Having a financial advisor can help you rest easy knowing that your significant other is taken care of by a trusted professional that knows the lay of the land. In some cases, the couple will appoint an advisor on a contingent basis so that if and when the DIY spouse were to pass, there is a professional at the ready who can step in and help the surviving spouse.
Are you still going to DIY it or did we convince you to hire a financial advisor?
Of course, we’re biased. As financial advisors in Davis County, Utah, we help our clients with tax planning, financial planning, and saving for retirement.
If you’d like to talk, please set up a time below.
Sources
Seager-Scott, Ben. (2022, 5 November). Evelyn Partners. Are behavioural biases affecting your investment decisions? https://www.evelyn.com/insights-and-events/insights/are-behavioural-biases-affecting-your-investment-decisions/
Disclaimers
The opinions expressed herein are those of the firm and are subject to change without notice. The opinions referenced are as of the date of publication and are subject to change due to changes in the market or economic conditions and may not necessarily come to pass. Any opinions, projections, or forward-looking statements expressed herein are solely those of author, may differ from the views or opinions expressed by other areas of the firm, and are only for general informational purposes as of the date indicated.
Case studies presented are based on actual clients, however, the information has been changed or altered for anonymity. These studies are provided for educational purposes only. Similar, or even positive results, cannot be guaranteed. Each client has their own unique set of circumstances so products and strategies may not by suitable for all people. Please consult with a qualified professional before implementing any strategy discussed herein.
No portion of these case studies is to be interpreted as a testimonial or endorsement of the firms’ investment advisory services.
