Who needs a financial advisor? If you ask most financial advisors, they will say EVERYONE! We disagree. We do believe that advisors provide an important and necessary service, but in our opinion, it becomes more important as assets grow, complexity increases, and the dollars impacted become significant. The decision is not the same for every person. Each person should ask themselves if they have the capability, time, and desire to manage their own financial affairs.
Each factor should be considered in light of their current financial situation. As finances grow and become more complex, the assessment of each factor can change. Below are considerations that should be analyzed:
1. Capability
Managing finances takes skill and ability. While people typically think of managing finances simply as personal budgeting, the advice provided by a skilled advisor will cover investment management, tax planning, estate planning, insurance planning, retirement planning, charitable giving planning, and other important areas that may arise from time to time.
Whether an individual has the capability to holistically manage their own financial affairs typically changes over time. Managing finances as a young couple starting out is different than managing finances as a family nearing retirement with a million or multi-million-dollar portfolio. In addition to the added complexity of a larger net worth, the cost of mistakes and missed opportunities also increases.
Accordingly, we often recommend that young couples who are just starting out begin by taking a personal finance course such as Dave Ramsey’s Financial Peace University. Financial Peace University will provide young families with a framework to begin making wise financial choices at a very affordable cost, and with smaller dollars involved, the benefits of implementing more advanced strategies are not worth the additional cost of an advisor.
Once families cross over the million-dollar net worth mark, they typically have sufficiently complex finances and enough dollars involved that high quality planning becomes very important. At the same time, the level of knowledge and education required to understand and take advantage of advanced strategies also increases. Families in this range need to focus specifically on whether the time it will take to appropriately manage their financial affairs going forward continues to make sense.
Key Takeaway:
2. Time
The time involved in managing finances can be separated into two categories, the educational time to learn what to do and the time to actually do it. The primary use of time for anyone effectively managing their own finances is spent studying to gain the knowledge to identify and understand the best strategies to implement. Individuals who do not commit the time to educate themselves will miss opportunities that they never knew existed.
Wealth management encompasses a wide range of issues, many of which individuals devote full careers to learning (i.e., investment management, tax planning, estate planning, etc.). To be well versed in each area in order to understand which strategies are applicable and most beneficial in a given situation takes constant attention. That is why financial advisors who offer comprehensive service devote their lives full-time to identifying the best strategies for their clients.
For the vast majority of individuals, the amount of time it takes to create the educational base that will allow them to identify and implement the best financial strategies would be better spent on their primary profession or business. Spending the additional time in their current line of work would often yield substantially more in future promotions or business profitability than spending that same time working as their own financial advisor.
Key Takeaway:
Money saved as your own financial advisor must be compared to money you could have made by using the same time to focus on your profession to increase promotions and profitability
Finally, even if an individual determines that they have the time to devote toward capably managing their own financial affairs, we have found that most individuals simply don’t want to. That leads us to the last discussion point of desire.
3. Desire
For individuals who are capable of managing their own finances and have the time to create the underlying knowledge necessary to do it effectively, the final question is whether they have the desire to do it. Regardless of how much time is available, each person must always ask themselves whether it is the best use of their time.
Key Takeaway:
Most people simply want to know their finances are being managed appropriately and their affairs are in order. Spending the time to do it on their own isn’t an enjoyable use of their free time or retirement, not to mention that there are no economies of scale when all the research and studying is being done for a single-family alone. Accordingly, most individuals discover that they lack the desire to do it themselves.
Conclusion
To determine whether you need a financial advisor, you must honestly ask yourself whether you have the capability, time, and desire to do it yourself. Our experience is that individuals who have less than a million-dollar net worth typically have a financial life that is manageable, and the cost of missed opportunities is not substantial. For these individuals, managing their finances themselves may make sense especially with the guidance of a personal finance course like Dave Ramsey’s Financial Peace University.
Individuals with over a million-dollar net worth have financial lives that are becoming more complex and have more dollars impacted by the financial choices they make. Individuals in this category who would like to manage their own finances need to understand the level of commitment that is necessary to do it right. Our experience is that the time it takes once assets reach the million-dollar mark would be better spent in their current professions and businesses thereby leading to better financial well-being through maximizing promotions and profitability.
Choosing whether to hire a financial advisor is a personal choice that each person must make. When making that choice we recommend honestly assessing whether you have the capability, time, and desire to do it alone. If you decide you would like help, we would love to connect to see if what we do is right for you.
