Broker Check

Do I need a financial advisor?

February 12, 2014

Everyone needs to manage their own finances to some degree.  Your level of involvement should be determined by three key factors the complexity of your situation, the value of your portfolio and how much time and effort you will, not want to, put into the task.  A financial advisor has to know three key things: the client, the available financial tools and how to help the client to make the correct decisions to reach their goals.  The difficulty of these tasks is determined by the complexity, stability, and volume of your financial situation.  A child with a few dollars to their name would have no use for an advisor but a billionaire needs a team of advisors working together.  In-between you have to make some personal decisions based on your situation.

If you are not interested in being your own advisor then yes you should go talk with one.  If you are going to build your own financial house then you need to be sure you will do the job properly. 

Part 1

Know your financial situation.

You know your situation as well as anyone but it is important that you honestly examine your strengths and weaknesses which is often hard for individuals to do.

Part 2

Know about the financial tools available to you.

To do this, look at the complexity of your situation.  The more complex your situation the more knowledge and/or services you will need.  You need a reasonable amount of knowledge to figure out what to do first.  As a child receiving an allowance you didn’t need a bank account. You had a piggy bank and hopefully, your parents were teaching you about forming responsible spending and savings habits.  When you began receiving a paycheck a bank account and checkbook or debit card were very useful.  You also needed to learn how to balance the account.  Not just once but every month as long as you have it.  As your income and spending increased so did your need for services like an auto loan, mortgage, insurances, and retirement savings.  Each new product or service demands more education and time for you to keep on top of that service.  Even insurance policies (life, auto, homeowners) need to be reviewed regularly.  Larger and more dynamic items require more education and regular maintenance.  A life insurance policy may only need to be reviewed every few years while some investment portfolios need daily attention.  (To see how much you know about different investments see Test your investment knowledge.)

Part 3

Know how to make the correct decisions to reach your goals.

Knowing how to help yourself is difficult.  Regular rebalancing and reviews of individual investments are the most basic functions of this part of the job.  You need to devise a plan to achieve your goals while avoiding pitfalls and mistakes often made by professionals.  You need to consider your risk tolerance as well as your objectives.  The plan needs to be tailored to fit your situation and to address your personal weaknesses.  You need to review your plan regularly.  Update it each time your situation or the financial landscape changes.  Most importantly, you must follow the plan.  The most important times to follow the plan are when you will want to abandon it.  Find ways to hold yourself to it.  That is part of the advisor's job.

When asked, Robert Miller Jr. of College Park, MD said “I need a financial advisor to basically protect myself from my own worst enemy, me. I have a Riverboat gambler or going for the home run mentality.”

You should also talk with an advisor if any of the following applies to you:

  • You want to reduce the amount of time you have to spend reviewing your investments each week.
  • You are not sure how to pick investments based on your risk tolerance and income needs in retirement.
  • You are going to receive a large amount of money at one time through inheritance, lotto winnings or the sale of a business or property.
  • You do not use a system to separate your investing decisions and your emotions.

It is difficult for many self-confident people to delegate tasks.  Having trouble with delegating is often caused by an emotional attachment.  An emotional attachment to your investments causes you to make poor investment decisions.  (See why in Emotion and investing)  As an advisor, I have managed money for other advisors not because I knew more about investing than they did.  I did it for them because we all know you can be more successful when you remove emotion from the decision-making process and it is difficult to do with your own investments.  If you have any problems with separating the two, talk to an advisor. 

As your situation changes over time you should check back to see if you’re making the right choices and when you may want to take the next step and get a professional. The more you have, make and/or spend the more you’ll need to know and the more support you’ll need.

No matter what level of engagement you currently have some things you just don’t know.  The question should be, does having an advisor matter to your situation.  If you have a simple situation, being your own advisor is possible for a dedicated enthusiast.  As your income sources and investment portfolio become more sophisticated only someone with a professional level of commitment to knowing the available financial tools and how to best use them on your behalf can achieve the results you desire.