Is It Worth It to Hire a Financial Advisor?
When people think financial planning, their focus is on saving money and planning for the future, which is great. But it gets them to thinking, “Do I really need a financial advisor? Why pay for a financial advisor when I can get free advice online?”
Honestly, I get it. Financial advice typically costs somewhere around 1 percent a year1. How do you know if it’s worth it? But let me ask you: Why would you hire a CPA to do your taxes or a plumber to fix your pipes when there’s plenty of information online to show you how to do it yourself?
The answer is simple: You either don’t have the time to do it, or you know a professional will do a better job.
The same can be said when it comes to your finances.
You get what you pay for in life. And if free, generalized advice is what you’re after, that’s what you’ll get. If you want a custom roadmap that outlines each step you should take to achieve your unique financial dreams, then that’s where a financial advisor comes in.
What’s the difference between custom allocation and a cookie-cutter plan? Read our recent blog post. There are a thousand little decisions in life that make your financial needs unique.
- Where will you retire?
- What type of retirement account do you have? A 401(k)? A Thrift Savings Plan (TSP)? A 403(b)? An IRA? A pension?
- What are your goals for retirement?
- What is your family makeup?
- What are your financial needs and responsibilities?
- What does your debt look like?
The list is long!
And each answer changes your financial picture slightly. Rules of thumb focus on a generalized situation. So, right off the bat, you can see how a financial advisor can bring something to the table. But personalized guidance isn’t a financial advisor’s only value.
The Value of an Advisor
Vanguard estimates that the average investor who works with a financial advisor can potentially see a higher net return on investments than those who don’t.
This isn’t because a financial advisor is better at timing the market – they’re not! It’s because a financial advisor brings the following benefits to the table:
1. A Financial Advisor Can Help Develop the Right Investment Strategy For You
The financial advisors at Scarborough Capital Management have spent years studying finance and honing their craft. They can recommend specific strategies to help minimize taxes, structure withdrawals and balance an investment portfolio. They pass this knowledge onto their clients by creating a personalized investment strategy designed to ensure that they aren’t taking too much or too little risk.
2. A Financial Advisor Can Help You Avoid Making Emotional Decisions With 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 turbulent 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.
3. A Financial Advisor Can Help You Reach Your Goals in a More Efficient Way
Trying to accomplish your financial goals without a financial advisor can be like trying to get from Los Angeles to New York without a map. You may eventually get there, but you’ll likely make a few wrong turns along the way – and you’ll likely want to pull your hair out when you finally arrive.
On the other hand, a financial advisor can save you time (and headache and frustration) by mapping everything out for you. If you make a mistake, no sweat. Your financial advisor can help you course-correct and get back on track. In the end, you arrive at your destination having enjoyed the journey that brought you there.
Common Mistakes DIYers Make When Managing Their Finances
A lot of people think taking a DIY approach to their finances is the most cost-effective option, but you can end up losing more in the long-run if you make these common mistakes:
1. You Put Retirement Planning on the Back Burner
Is retirement planning on your to-do list? If you’re like a lot of people, you intend on getting around to it, but right now, you’re focused on matters that need your immediate attention, like saving for a down payment on a house or your child’s private school tuition.
You say retirement planning is on the back burner until a later date. But as you know, “later” sometimes never comes.
2. You Make Investment Decisions Based on “Gut” Feelings or the Latest News
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 is critical to your overall success. 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 objective decisions about your money.
3. You Don’t Focus on Your Entire Financial Picture
Some parts of managing your finances can be fun – such as saving up for a Tesla or that trip to Cabo. But other parts – like tax planning, estate planning and insurance – can be overwhelming if you don’t know enough about them.
If you’re taking a DIY approach to your finances and not focusing on these areas, a lot of money could be left on the table.
A financial advisor can work with you to create a holistic plan that protects you and your family from the unexpected.
The Problem with Free Online Information
There’s no shortage of free financial information online. One quick Google search will tell you:
- 4 percent is a safe withdrawal rate
- Expect to need 80 percent of your salary in retirement
- Save 15 percent of your income every month
This information is free and readily available online, but that doesn’t mean you should follow it.
Your financial situation is one of the most unique parts about you. Your money mindset, your financial baggage, your hopes, dreams, and goals – they’re all uniquely yours. Generalized financial advice doesn’t take any of that into account.
For example, the Internet will tell you to withdraw 4 percent a year from your investments and you’ll never run out of money. But this isn’t always true.
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, you shouldn’t plan your financial future based on what Alexa tells you. She’s not a financial expert!
To help you figure out the best course of action for your unique situation, talk with an experienced financial advisor. At Scarborough Capital Management, we’re dedicated to helping people like you achieve financial security. Even if you feel like you have a good grip on your finances, we 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. Schedule a complimentary consultation to see how we can help you too.