Do I Really Need a Financial Advisor?
As a financial advisor, there’s a question I hear a lot, especially in the age of the Internet: Why should I pay for financial advice when I can get it for free online? Do I really need a financial advisor?
That’s a good question. And here’s the answer:
First off, yes, you can get free financial advice online. A lot of it! In fact, you can find information on just about anything these days. But here are two questions I have for you:
- How do you know if the advice you find online is right for your situation?
- If you found information on, say, how to patch your leaky roof, online, would you attempt to fix your roof yourself, or would you hire a professional?
When it comes to financial planning, there is a lot of advice out there, and it may seem simple enough to follow. However, in my experience as a financial advisor for many years, no two financial situations are exactly the same. Everyone’s retirement goals, concerns and commitments are different. Their family structure is different. Their needs are different. Their dreams are different. With that in mind, how does it make sense for everyone to use the same strategy? Following general advice may not be in your best interest. Why plan for a retirement lifestyle you don’t want to live?
A financial advisor can help you customize your financial plan to fit your goals. The more money you have, the more complicated your financial planning can be.
Sure, financial advice typically costs somewhere around 1 percent a year. But keep in mind, you get what you pay for in life. If free, generalized advice is what you’re after, that’s what you’ll get. If you want a custom roadmap that outlines suggested steps, specific to your unique financial dreams, then that’s where a financial advisor can help.
Certain advice may have worked for your coworker, your sister or your neighbor, so why wouldn’t it work for you? Do you really need custom allocation?
There are so many little decisions in life that make your financial needs unique.
- Where will you retire?
- When will you retire?
- What type of retirement accounts do you have?
- When did you start saving?
- What are your goals for retirement?
- What is your family makeup?
- What are your financial needs and responsibilities?
- What does your debt look like?
- Are you a business owner? A federal employee?
- Do you hope to leave a legacy to the next generation?
The list is long! And each answer changes your financial picture slightly. Rules of thumb focus on a generalized situation. Right off the bat, you can see how a financial advisor could bring something to the table.
But personalized guidance isn’t a financial advisor’s only value.
Unfortunately, so many people get a late start on their retirement planning. Often times it’s because “I don’t have time,” or “I’ll do it later,” (though many times, “later,” never happens). Some people put off their financial planning because it’s overwhelming or confusing.
But remember, time is money. You can’t benefit from the power of compounding growth if you keep your financial planning on the back burner.
Working with a financial advisor, understanding your options and having a professional identify strategies that put your best interest first is the push that many people need to jumpstart their plans.
Vanguard estimates that the average investor who works with a financial advisor sees a higher net return on investments than those who don’t (when certain conditions are met).
This isn’t because a financial advisor is better at timing the market – they’re not! It’s because a financial advisor brings a lot to the table.
For example, a financial advisor can help develop the right investment strategy for your situation. If doing it yourself, are you aware of the latest tax rules, estate laws and, in the year of COVID-19, retirement withdrawal exceptions? Do you know what your true financial risk tolerance is? This may be different than your risk tolerance in life. Just because you may like to skydive, doesn’t necessarily mean you want to take a lot of risk with your hard-earned money.
The financial advisors at Scarborough Capital Management have spent years honing their craft. They can recommend specific strategies to help balance your investment portfolio, structure withdrawals and review changes to your plan. They pass this knowledge onto their clients by creating a personalized investment strategy designed to ensure their clients aren’t taking too much or too little risk for their situation.
Trying to accomplish your financial goals without a financial advisor can be like trying to get from California to Maryland without directions. Hopefully, you’ll get there, eventually, but you’ll likely make a few wrong turns along the way – and you may want to pull your hair out when you finally arrive.
A financial advisor can save you time (and headache and frustration) by mapping everything out for you. If you make a mistake, your financial advisor can help you course-correct and get back on track.
Taking the Emotion Out of Financial Decisions
A lot of people think that taking a DIY approach to your finances is the most cost-effective option, but it can actually be the opposite. A common pitfall DIY investors fall victim to is fear. When the market dips or an investment depreciates, DIY investors often want to react. These gut reactions, like panic-selling, can end up losing money in the long-run. A financial advisor can address the situation with knowledge and specialized tools to review your portfolio. Taking the emotion out of the equation.
It’s difficult to stay objective when you’re managing your own money. The second the market starts to sour, it’s natural for you to react, and your knee-jerk reaction may be to do whatever it takes to protect your nest egg.
However, staying the course and sticking to your long-term plan could be the more prudent plan in many circumstances. It’s important to be aware of the common biases you hold as an investor and work with a financial advisor to help you make more objective decisions about your money.
As humans, our gut reactions are to buy what’s popular and sell what seems to be circling the drain (even though our minds may know to do the opposite).
A financial advisor can be critical in helping you navigate volatile markets and avoid making costly mistakes over the long-run. This is perhaps the biggest benefit of working with a financial advisor.
In a Vanguard study, more than 58,000 self-directed IRAs were examined during a five-year period from 2008 to 2012 (following the Great Recession). The study found that investors who made even one change to their investment strategy during this time lost an average of 1.5 percent in returns while those who stayed the course only saw a dip of 0.19 percent.
Why Rules of Thumb Don’t Always Work
You’ve likely heard the following information:
- You can withdraw 4 percent from your retirement plan and not run out of money.
- You’ll need 80 percent of your salary in retirement.
- You should save 15 percent of your income every month.
But what if you need to withdraw more than 4 percent? What if your lifestyle in retirement costs more because of extensive travel plans or a relocation to be close to family? What if you find you haven’t been saving enough and it’s time to retire? What happens then?
Two people can retire (no longer contributing) with the same $1 million stock portfolios, withdraw the same amount every year, and one could still end up running out of money if retiring in a down market as opposed to an up market when gains could have offset withdrawals. We call this sequence of returns risk, and it’s often not covered in free financial advice online.
Get the Financial Advice You Deserve
Just as you wouldn’t diagnose chest pains based on what WebMD tells you, it’s not wise to plan your financial future based on what Google tells you. Google is not a financial professional!
To help you figure out the best course of action for your unique situation, talk with an experienced financial advisor. Even if you feel like you have a good grip on your finances, a financial advisor can help you spot blind spots you may be overlooking.
Scarborough Capital Management is a financial services firm based in Annapolis, MD that serves clients nationwide. For more than 30 years, our financial advisors have been helping busy families make smarter financial decisions.