Should You Hire a Financial Advisor, or Do-it-Yourself?
Category: Financial and taxes in retirement
— “Beware those free dinners”—
Updated April 2023 – originally published May, 2018 —
One of several recent Member article suggestions was this one: “Is it better to hire a financial advisor or handle that financial planning yourself? And if you hire one, how should you go about it?” Thank you, that is a topic we know a lot of retired people struggle with. We should preface this article by saying that we are not financial experts. This piece summarizes recent interviews with four baby boomers who have wrestled with this topic themselves, plus some of our own experiences with financial advisors. At the end you will find links to some other great resources about how to/whether to hire a financial professional to manage your money, vs. doing it yourself. We welcome suggestions on what you have learned on this topic.
Is financial planning Important?
Yes! The worst thing that can happen to you as a retiree is to run out of money. That can happen easily, if you don’t have much to start with, make poor investment decisions or spend your assets too quickly. Another bad outcome is the opposite – being too conservative and shorting your lifestyle unnecessarily. A third result from bad planning is to be untidy about what happens after your death. Will your surviving spouse be able to manage, particularly if you were the person in charge of the finances? Are your affairs arranged so you leave assets to your children without creating unnecessary problems?
A plethora of acronyms and certifications
There are a variety of levels for financial planners. Perhaps the most vigorous of those is the Certified Financial Planners (CFP) certification. In addition to taking strenuous classes, CFPs must also pass board exams and take refresher training. At the bottom of the rung, almost anyone can claim to be a financial/investor advisor or the like, without any particular qualifications. Investment advisors registered with the SEC or a state securities regulator are fiduciaries, subject to the duty of loyalty and due care with their clients. There have been attempts to soften rules for fiduciaries recently. Whatever the outcome of that effort, in our opinion you are better off with a fiduciary, because they are obligated to keep your interests above theirs.
Beware the free dinners!
One of the first comments we got in our conversations was this one from Lewis: “Beware those free dinners”. What he meant was to be cautious about invitations to dinners or events from financial companies. On the plus side, these offers might be appealing, and you can usually learn a lot. But you might later regret opening up your financial life to them, along with the subsequent high pressure you might get down the road. Rather than having advisors find you, you might be better off doing your own research to find prospective advisors yourself.
On doing it yourself – don’t (some opinions)
Joseph, another interviewee, summed up the do-it-yourself option this way: “Most people shouldn’t manage their own money – they don’t have the discipline to do it properly”. If that seems like a harsh judgement, it does have some logic. He explained that the way many people invest is to hear about some great idea and buy without doing the due diligence. After they invest they tend to go on auto pilot. Even if they had an initial allocation plan, shifts in the market over time knock their portfolio off kilter, and they don’t adjust.
Big shocks in the market rattle people’s confidence and judgment – they tend to panic. Making emotional decisions can have drastic consequences. For example, we know a couple who reacted to the crash of 2008 by selling everything, losing half the value of their portfolio in the process. If they had been patient for a few years, they wouldn’t have lost anything.
He also made the point that most folks do not have the tools to manage their own money properly. They just do not have the financial literacy or experience. You can compare it to what happens if you design your own home: you might have a few good ideas but you lack the background to avoid big mistakes.
Finally, Joseph stressed that as we age everyone needs a backstop. We aren’t thinking as clearly as we did in our younger days. Someone whose judgement we trust should help keep watch over our financial assets.
Everyone in the panel agreed that no one should build a portfolio that consists mostly of individual stocks. That is far too risky, they say, and instead, recommend buying index funds to spread out the risk from a drop in any one or group of stocks.
Doug, another of our panelists, has struggled to find an advisor he feels comfortable with. He once used a colleague who had started an advisory business, but his investment strategy seemed to get flakier and flakier. He is currently using the advisory services of Fidelity, which is helpful but somewhat generic. So for the moment, he is directing most of the assets himself, but feeling that might not be the best move.
What makes a good advisor, or a bad one
The easy answer is that a good advisor is the one who beats the market and makes you lots of money. But as famous investor Warren Buffett posits, it’s not that easy. In 2007 he put up a $1 million bet that a hedge fund couldn’t beat a low cost S & P 500 index fund. The index fund Buffett picked won, and the money went to charity. Buffett’s advice: “Consistently buy an S&P 500 low-cost index fund”.
What to look for in a financial advisor
Here are some qualities to look for in an advisor, according to our panel:
– Willing to take time to ask about your needs and preferences
– Explains their investment approach and strategies in detail, including past performance over different time spans
– Is recommended by sources you respect.
Trouble flags
– The investment strategies do not seem clear and focused, or they can’t explain them
– Reliance on picking stocks rather than indexes. Some advisors seem to have scattershot strategies. Beware of the increased risk and volatility from too much emphasis on individual stocks and investments classes like precious metals.
– Advisor is unwilling to explain their approach or past results
– Wants to immediately liquidate your assets and put them into products/funds either related to their company or that have loads. Such a plan could expose you to hefty capital gains and might be lining their own pockets.
– Fees that seem exorbitant, or that are not explained to your satisfaction.
How to find a good advisor
This might be the most difficult challenge. How do you find someone who is effective and trustworthy, out of the blue? Here were some suggestions from the panel:
– Be wary of a recommendation from a friend or relative. Be even more leery of hiring someone who is a friend or relative. Hiring someone close to you takes away objectivity and narrows your search field
– Lindsay suggested relying on recommendations from someone you trust and respect. Better yet, if you have seen the person or firm in action professionally, you have valuable insight into how they will perform for you.
– Ask your accountant for a recommendation. They will usually have better experience in evaluating an advisor than you.
– Get a clear explanation of the fees involved. There is a range of how fees are charge – fees or percentage of assets are typical. If it is a percentage of assets, the larger your portfolio the smaller the fee should be. Some people panic when they realize how much they might have to pay – for example 1.5% of $1 million is $15,000 annually. That might be worth it if they do a better job than you could, but not if the advisor does worse than the market or the same as a basket of index funds.
– Probe about customer service. You are paying for a service and you should be able to get it fast and competently.
Where to start looking for possible advisors
One place many people start is with one of the big mutual fund companies. All of our panelists had extensive and very positive experiences with two of the biggest: Fidelity and Vanguard. They and companies like Charles Schwab and insurance companies have great tools that can help you allocate and manage your portfolio. They also have advisors who will help you build your portfolio and rebalance it. The advice is fairly basic and cookie-cutter, but it is generally sound. Ultimately, if you use one of the big outfits, a lot of the responsibility falls to you to use the tools and keep on top of your portfolio.
Edward Jones was mentioned as another reputable outfit by Lindsay. The firm has branch offices all over the country but, according to Lindsay, has a centralized investment approach that avoids the scattershot approach offered by some smaller outfits.
Organizations for various certifications have services to help you find one of their members. Certified Financial Planners has one of those.
Bottom line
It is a personal decision whether to manage your own retirement assets or hire a professional advisor. There are advantages and drawbacks to both. The main point we want to stress is that you need to make that decision consciously. If you decide to manage your own money, make sure you have the experience, temperament, and discipline to stick with it month after month, year after year. If you hire a professional, make the hiring decision using a process, rather than signing up the first person that comes along. Even then, apply common sense to make sure that your advisor is doing an effective, disciplined job of protecting this important key to a happy retirement – having enough money to enjoy life.
For further reading
3 Steps to Take Before You Hire a Financial Advisor
What Women Want in a Financial Advisor
How to Pick the Best Financial Advisor
Wikihow – How to Hire a Financial Advisor
Comments? What have you decided to do about managing your retirement assets? How did you find your advisor, if you have one? What have you learned that you might do over again? Please share your thoughts in the Comments section below.
Comments on "Should You Hire a Financial Advisor, or Do-it-Yourself?"
Doc Stickel says:
The answer might not be an either/or situation. Possible to go both ways. Apportion your assets, perhaps 50/50, or whatever your comfortable level.
YOU control some, your advisor handles the rest. In a few years, you will have your answer!
ella says:
My advisor came through TIAA. Consequently, he received no commissions based on his advice to me, but was paid by the financial company. I like that. However, i learned, the hard way, that he is way too cautious for me. When i had $300,000 i needed to invest, he had me put it in an account earning 3% annually. This was almost two years ago when the market was booming. He did this so as to not lose any of my money. Ridiculous! I never asked him to be that cautious!
I am now managing my own money and not really happy about it. What i need to do is move it all into four or five index funds or ETF's and not look at it. It's just hard choosing which ones.
RichPB says:
My friend Doc (met only here through TopRetirements) has another good approach -- most of his advise does tend to be pretty solid. I was a bit surprised not to see and item I found in another article and posted in another thread here: You shouldn't hire a financial advisor until you have learned enough about investing to protect your own interests -- and by then you probably know enough to manage your own finances. I think that is very good advice so long as you pay attention to the article above. Some people just are truly not capable of managing their own resource whether for lack of knowledge, lack of persistence, limited financial understanding or just plain poor math skills. These people are likely better off with a financial advisor, but the advice to learn all you can on your own still applies.
Jean says:
A trusted financial advisor is a good idea and if possible, set up your accounts, whether you have an advisor or not, so both you and your spouse or child need to agree to any activity. That is because we never know when our cognitive powers might start playing tricks and also there are all form of scammers and con men out here ready to convince you to turn over your savings.
Kate says:
Some additional tips:
(1) Check the licensing board to verify they are licensed and see if there are any complaints. A good place to start is by reading https://www.sec.gov/reportspubs/investor-publications/investor-brokershtm.html
(2) It is not rude to ask for a resume. Where did they go to college? Did they get a Masters? What did they major in? They just need a degree to get licensed - but that degree could be in archaeology instead of finance, accounting or economics. How long have they been an advisor with the firm? Some advisors jump from firm to firm to get signing bonuses, or because they run into problems with their firms. Accounts belong to the firm, not to the advisor. You want to know if your advisor will be around for awhile.
(3) Although it's already been mentioned, it's important to reiterate that it's important to know how they get paid? This is obviously relevant to identify potential conflicts of interest. While they may not get fees for investing your money, they MAY get bonuses for bringing in accounts, having a large number of accounts, or having a particular dollar value in their clients' accounts. Compensation might actually be all about sales and getting your money into their firm, not about performance.
(4) Verify the Morningstar ratings for any mutual funds that are recommended. If your advisor is recommending funds that are not among the highest in their category, something might be fishy. Firms may have interests in pushing particular fund families that are invisible to customers. For ex., the firm might receive incentives for having X dollars invested in a fund family. The broker can honestly say that he isn't getting paid for pushing X Fund. However, his firm might be getting something for having Y Millions of Dollars invested with X Fund's parent company. Also double check an advisor's recommended balance (percentage of bonds vs. stocks, for ex.) against the literature to see whether it is aligned with the majority of advisors. After all, there's a lot of advice from Kiplinger's, Fidelity, Schwab, Merrill Lynch and other big companies/experts online. If not, ask more questions!!!
(5) Ask if there are any restrictions to trading any particular fund that is recommended. Is the fund proprietary to that advisor's firm? Do you have to hold the fund for a particular period of time? If you move your account, do you have to sell the fund? Some "products" have restrictions, which may not be aligned with your future cash needs.
(5) If you need your money, don't go into Real Estate Investment Trusts, precious metals, coins, junk bond funds or similar aggressive investment products. Those products carry both hidden and not-so-hidden risks/costs. You ad your heirs may either lose the money completely, or find that it's impossible to access quickly when needed. If an advisor starts to recommend these type of investments to retirees, it's time to ask a LOT more questions.
In the interests of disclosure - I am not a fan of financial advisors. I self-manage my monies.
Rob says:
So Kate, In your last statement you mention " I am not a fan of financial advisors. I self-manage my monies." Now, I get that but I am curious as to how your self managed wealth is performing, on a percentage basis?
About a year ago my wife, and I, handed over our wealth to a trusted manager. The amount qualifies us for .9% administration fee, so less that 1%. I review the overall balance almost daily because I want to know. I went 'moderate' through all of last year and wish I had been more 'aggressive'. But that's my own fault and I accept that. But, what got me thinking is when my buddy told me that he has done 21% managing his own through Vanguard accounts. Holy Cow! I'm no where close to that!!
So, back to my question, how is your self managed portfolio performing and through what vehicles are you achieving it?
I, quite frankly, want to get ALL bonds out of my portfolio. It would be performing much better without them. Since I review my portfolio daily I feel that I can adjust as need be.
Kate says:
Rob: So far this year I'm at about the 4-5% total return in my 401k, so I've made enough to cover my 4% 2019 withdrawal if the markets let me keep it. That meets my budget with a cushion, and leaves my 401k intact for estate planning purposes. I also keep 2 years of my budgeted withdrawal amount in cash, just to be comfortable that I can wait out some volatility without selling funds if necessary. Since I don't need to maximize returns, I'm ok with an appropriate, index-based return without signficant risk to principal.
While it would be nice to make 21%, I don't have an interest in trading, or an appetite for risks. I also don't want to spend a lot of time managing my portfolio (I'm sure a lot of people choose managers for that reason). I don't keep much in international funds and small cap funds, and only have about 25% in bonds -- less than experts recommend but I'm more heavily weighted in stocks since I am newly retired and (hopefully) have a long way to go. I tend to choose highly rated large-cap and mid-cap funds with the major fund families, relying on the well-regarded, experienced fund managers and experts working for these funds whose job it is to continue the success of those funds. My goals & decisions are obviously not going to be for everyone - but my choices were a good fit for self-management.
HEF says:
Do you always have to PAY a Financial Advisor? I have used advice from guys that handle our life insurance and investments both from Thrivent and from Prudential. (We keep our assets split between the two) Only once - many years ago - did any of them charge for a game plan or advice. Would it be okay to ask someone at your bank or credit union? The Thrivent guys have put together a plan for us and have actively helped us alter it as we go along.
Skip P says:
Folks after going through no less than four different Financial Advisers and loosing more money than I care to mentioned I’ve decided to go it alone! I get some insight from a Fidelity Advisor I do research and make my own decision Result, much better than all fired advisors it together. With occasional assisistance from a Tax Accountant or a Fidelity Advisior this works best for me.
RichPB says:
Long but probably timely post:
HEF, As I said above, your best defense is to learn all you can about investing for yourself. No, you don't have to pay, but consider the value of any "zero fee" advice --free advice typically has it's own price. An advisor from a source such as college alumni association may have free group sessions and provide value, but generally also have some vested interest in their recommendations -- be aware. Free advisors from your employer/company almost always have vested interest (AMEX "free advisors" wanted us to give up all of my pension fund to them to invest in exclusively AMEX funds -- all with really high annual costs). Years back our bank had an on-site office for a well-known investment firm whose advice we took. That $5000 fund lost more than 80% of it's value within two years and never recovered. We did finally go with a flat fee financial advisor -- that firm's rep advised us during the second visit that we were being ripped off and (fortunately) he refunded our money. All of these things contributed to our "learning".
Rob, My recommendation would be that you learn more and stick with your advisor unless you find he is not legit. You goals strike me as unrealistic and your thought of eliminating your bond holdings is a recipe for investment disaster. If you are younger, more stock aggressiveness can be appropriate, but any reputable financial advisor will tell you to diversify.
Kate's 4-5% may well be rational for the past year. We have been retired for 15 years, did our learning while still working and have manage our own investments for about 20 years now. Since retiring, I've kept records and have also built, annually updated and stuck to a detailed 40-year outlook budget using a spreadsheet. I can verify all our results. Since retirement, our investments have near doubled "net" including the 2008 losses and an annual withdrawal in recent years to supplement Soc Sec. (RMD has now arrived.) We have done this with diversified, Moderate 401K fund investments and (more recently) comparable low fee Vanguard funds. Our annual return has generally been 7 - 12% though this past year has been more like Kate's.
Many advisors since 2000 have predicted that the markets would become flat for 10 - 20 years. Despite big gains since 2008, that has generally held true and continues. "Get rich quick" through the stock markets is not likely for most. Establish a reasonable, diversified investment path or find a good fiduciary financial advisor and stick with that plan. And take the time to learn all you can on a continuing basis. The more and longer I learn, the more strongly I resolve to "stay the course".
Jean says:
HEF, financial advisors get paid by you one way or another. Fee based advisors you pay directly and those you dont pay directly get commissions - which you pay indirectly. When selecting an advisor, it's important that she/he is a fiduciary and a member of FINRA - that assures you they work in your best interest, so ask before taking any advice!
Leonard says:
"But as famous investor Warren Buffett posits, it’s not that easy. In 2007 he put up a $1 million bet that a hedge fund could beat a low cast S & P 500 index fund. The fund he picked won, and the money went to charity. Buffett’s advice: “Consistently buy an S&P 500 low-cost index fund”."
I believe your reference to Warren Buffett's bet is incorrect. Buffett bet that a hedge fund couldn't beat a low cost S&P index fund over a ten year period. Protege Partners, an asset management firm, took the other side of the bet. The hedge funds selected (actually five funds averaged) did not beat the Vanguard S&P 500 index fund (selected by Buffett to represent his side of the bet) at the end of the ten year period. Thus Buffett won the bet and the charity of his choice received the $1 million.
Editor's Comment: Thanks for the clarification. We should have been more clear and said "couldn't" instead of could, now corrected.
Peder says:
FWIW, I have used The Value Line Investment Survey (no affiliation, just a happy customer) to buy stocks for years, as did my father and his brothers before. I used to go to the library when it was a paper only product back in the 80's. They used to offer a 13 week (I think) trial that would give me the whole paper product, which was about the size of 2 Sears catalogs and at least as many pages. Now their free trial is on-line only for 30 days. Although the subscription rate seems fairly high, it doesn't take many well-advised picks to get it back. They have recommended portfolios for aggressive, growth, growth/income, and income. Last time I renewed, I re-upped for 5 years and got them down to $300/year, a substantial discount to the annual rate. Hope this helps someone.
Rob says:
Thank you, Peder. I've been trading (online, realtime) for eighteen years and not heard of Value Line Investment Survey. I will give your recommendation consideration. I've been using the Investors Business Daily (IBD) for a few years. I've not found retirement portfolios within it but they do have a couple moderately expensive ETFs which perform well (one is FFTY and the other is LDRS). I have no position in either. Cheers
Admin says:
From Ella:
Hello again RichPB,
It’s been a while. I just had the opportunity to read the Motley Fool article on ETF’s vs. Index Funds, and my conclusion was unlike yours and that of the author of the article. It seemed to me, the article made a case for ETF’s over index funds, yet in the summary, index funds were suggested. The only area i’m not sure of is the reinvestment issue. I’ll have to look into that. In every other regard, the author’s information made ETF’s sound like the winners. I ignored the part about IRA’s and 401K’s as they no longer apply to me. Perhaps that would give a lead to the index funds. Right now, i have both!
Here’s to financial health, as well as health in all aspects of our lives!
George says:
I feel I have an advantage over some because I retired from the federal government. Much of my retirement funds are in the TSP which is run by the federal government. It has choices on how much risk you can take with your funds, and recommends programs that are less risky as you age. I choose my programs based on that logic factor. The fees are VERY minimal and I have no financial advisers in my life. I am not financially smart with stocks but I know math, and make my decisions from calculations. The TSP programs have worked for my funds and those numbers increase/decrease just as the market does. But overall, they have averaged 7-8% increase per year for many years. If I paid an advisor 1% to 1 1/2% to manage my funds, I would have to expect a better earnings rate by that much than what I already achieve. I'll stay alone on this one.
Steve says:
Interesting reading all the comments here. I manage our money and year to date return is 26.4% Over the last 2 yeas we have built significant wealth (by the grace of God) in a thriving market. We are invested in traditional IRAs, and a 401. I retired from the Army last December and prior to separating we attended an investing workshop put on by a former FA that works for the Army now. A few things he said really stuck with me; If the DOW, the S&P 500 and the NASDAQ all collapse it will not matter if you have your money hid under a rock it will be worthless, dips in the market is how we build wealth so don't pull money out when the markets dip because you never lose money until you pull it out, don't let feelings and emotion drive money decisions. Look at the history of the markets and you see flatlines and dips when technology and industry have significant transitions and changes e.g. robotics, computers, automobiles etc.
Everyone's situation is unique, use common sense and invest wisely within your means. There issue much information available on investing, web sites, magazines and blogs. If one is interested in understanding the jargon and mysteries of the financial world it can be rewarding.
SJW