5 Times You Don’t Need a Financial Advisor and 2 When You Actually Might

Insight from the inside

from the “Talk to Chuck” campaign

I just wrapped a couple of years on the fringes of the wealth management industry, doing research on it for different large wealth firms and tracking trends across the industry. It was a fun experience that taught me a lot, and following the Billfold at the same time has been great macro/micro look at personal finance. I’m not a financial advisor, and this isn’t specific financial advice, but broadly, from what I learned, these are the situations where you probably don’t need an advisor.

1. You Are Your Advisor’s Smallest Client

This really isn’t a good situation. No matter how good your financial advisor might be, they still need to make money, and that means that the time they spend with you has to be justified by the fee revenue they create. With the exclusion of the smaller fraction of fee-only advisors, who will still charge you an upfront fee between $150 and $400 per hour, the money they generate will come from the investments they steer you towards, with charges like mutual fund load fees and high expense ratios becoming commission revenue for them.

Simply put, time is expensive, and with a very small account, it’s difficult for even a totally well-meaning financial advisor to provide enough benefit to you while still making money.

Fun subclause: if you don’t actually know how your advisor is making money off of you, they’re probably making much more than you think.

2. Your Financial Advisor Gives Bad Financial Advice

This one is particularly important given that today you can go to Fidelity, Vanguard, or Schwab’s website, give them your bank account number and e-sign a few forms, and purchase an index fund that gives you ownership of a teeny tiny sliver of thousands of companies, and it will cost you roughly $2 in yearly fees for every $1000 you invest.

Your advisor almost certainly isn’t going to outperform the market on his own. If he could, he’d run a hedge fund. So remember, if your advisor is steering you to expensive mutual funds which cost 1% or more in fees each year, trying to talk you into whole life insurance or an annuity — I’ll get to those in more detail later — or trying to convince you to transfer money from your IRA or 401k into a taxable account that he’ll manage for you, be very suspicious.

If you don’t quite understand his answer, that’s on him, not you. A good financial advisor should be able to explain, in simple English, why what he wants you to do makes sense for your long-term financial goals.

3. Your Main Goal is Retirement, And That’s a Looong Way Off

My favorite financial journalist, Matt Levine, likes to say in reference to financial advice that “every investor is in more or less the same circumstances — she has some money, wants more, and doesn’t want to lose any — and the rest is details.”

I think this is very true. If you’re primarily focused on not eating cat food in your old age, you need to save up a big hunk of money to supplement whatever Social Security/your regional equivalent is, and worry later on about how exactly to cash it out. Given a century or so of data, the best way grow your money appears to be investing it in a bunch of different companies. So if you can keep socking away a bunch of money into a well diversified 401k or IRA all by yourself and there’s nothing else particularly urgent on your life horizon, a financial advisor will probably cost more than the benefit of keeping that money invested for 30–40 more years.

4. Your Financial Advisor Is Actually an Insurance Agent

There are a bunch of insurance agents in the world who are also licensed to sell investment products. Many of them will try to sell you whole life insurance, annuities, and other vaguely investment-like products, touting a variety of different benefits they could potentially have. This almost certainly will not be a good idea.

Buying insurance is about placing a bet that you hopefully lose — you hopefully won’t crash a car and die young — but in the unlikely event that you do, your emergency fund or loved ones will be protected. You should expect to lose money when you buy insurance, and most investment-like products offered by insurers aren’t nearly as cost-effective or flexible as simply investing your money directly. Whatever specific benefits are offered, like guaranteed income or cash value of a policy, you’re overpaying for that specific feature. Unless you really, really need it — because, for example, you’re an 80 year old widow who needs a fixed level of income for the rest of her life — politely say, “Thanks but no thanks!”

5. You Have a Real, Substantial Pension Benefit

As employers transitioned from defined benefit retirement plans like pensions to defined contribution plans like a 401k, the financial advice and management has ballooned to take control of these individual retirement accounts. If you’re one of the lucky few that still has a significant pension coming your way, that stream of income will probably account for most of your retirement income, making it less likely you’ll need a financial advisor to allocate and manage your assets, since one of your largest assets (that continual stream of pension payments) can’t be influenced by an advisor. However, if you have a spouse who might be depending on that pension as well, and won’t inherit it if you pass away, it might be worth getting back in touch with the insurance agent from the last point, and making sure your insurance coverage will protect them if you pass away in early retirement…

Now this is not to say that financial advisors aren’t invaluable, but in most case you’re best suited to their services if you fall into one of these groups:

1. You Really Are Quite Rich

Here’s a good rule of thumb: if retirement savings really aren’t a concern for you anymore, and you have significant assets available beyond that, a good financial advisor may be worth your time. After all, at this point sitting down with an advisor and taking a few hours to talk through your plans won’t do much damage to your pocketbook.

Financial planning gets a lot more complicated when your goals extend beyond retiring comfortably, and an advisor who can help your children learn how to manage money responsibly, structure your investments to avoid paying inheritance taxes, and even just connect you with other professionals like trust and estate attorneys, specialized tax accountants, etc., who can make your life easier might be worth it. And you can afford it.

2. Your Income/Debt Situation Is Complicated

Let’s say you’re a med student about to start a residency, a lawyer planning to sell your soul to a big law firm for a couple years and then save the rainforest, or a self-employed contractor making a ton of money but with an uncertain future. Your income brackets may go up, then way up, then down, then who knows? If you’ve got a significant amount of debt to factor in as well, your situation can get pretty complicated. Making sure that you’re taking advantage of different tax brackets, paying down interest and maximizing access to tax credits can more than make up for the fees an advisor charges.

But again, this all depends on talking to the right advisor, so still, make sure you’re dealing with an advisor with significant knowledge of both your particular industry and your career path within it.

There are bound to be exceptions to these rules, but for the vast majority of the population, this should broadly cover when you might need financial advice from an advisor. If you have an advisor, and the first half of this article sounded familiar to you, maybe take another look at your relationship, and make sure you understand what they’re doing for you, how much they’re charging for it, and how it helps you achieve your goals.

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