The Informed Investor
Advancements in financial technology, availability of information, and, most recently, zero-commission trading have made it easier than ever to manage your own money.
But should you?
Many people give it a shot and may experience initial success. Many of those same people, however, may end up giving back a portion of their gains at a later time, when the market enters a different phase. It is only after the fact that some of them realize it would have been better to use a financial advisor. But of course, everyone’s experience will be different.
What is critical is making the decision thoughtfully, since there is a lot at stake when you are dealing with your life’s savings. So if you are trying to decide whether to go it alone or enlist an advisor, here is some information that may help you make a balanced decision.
Avoid Mistakes That Can Harm Your Future Quality of Life
First of all, having a quality financial advisor on your side helps put a buffer between you and big financial mistakes. Because after all, your future quality of life could be impacted.
We have all likely met people who were doing well financially, then made a bad investment or financial decision that hurt their future. And because they were not properly prepared to lose a portion of their retirement funds, that one bad decision meant a downgrade in quality of life or a delay in their retirement while they kept working to recover those losses.
Sometimes those people did not use a financial advisor because they were concerned about fees. Yes, most platforms that let you manage investments directly have lower fees than a financial advisor will charge. A single big mistake, however, could more than wipe out any savings on fees.
If a financial advisor keeps you from making even one major mistake, they will more than cover the cost of their services. More importantly, you will have a better chance of achieving your financial goals and maintaining your desired quality of life with professional investment guidance.
Maintain Objectivity During Market Swings
Second, a financial advisor can help you avoid mistakes when the stock market becomes volatile.
Investing is a deeply emotional activity for most of us, simply because our money is on the line. The elations of gains and despairs of losses can cloud even an experienced investor’s judgment. Having an impartial professional beside you during times of market volatility can help ensure you manage your investments objectively.
We have seen extreme volatility in early 2020, but this is hardly the first year the markets have been rocked with uncertainty. During these tentative times, it is far too common for people to second-guess their long term investment strategy. That is when you want someone with skills and training to help you avoid emotional decisions or panic selling.
Mitigate Personal Investment Biases
Third, a financial advisor can also help mitigate your personal investment biases. These are natural tendencies we are all faced with, but rarely aware of, which make them especially dangerous. Here are four common investment biases:[i]
- Overconfidence, which includes overconfidence in both the information you are relying on and your decision-making ability
- Reducing Regret, which is the tendency to naturally take actions aimed at minimizing the amount of regret you will feel, even if it also minimizes the potential for gains
- Limited Attention Span, which refers to everyone’s finite ability to analyze investments and potential strategies
- Chasing Trends, which is likely the strongest investing bias and has many people going after whatever investment is currently hot, leaving them over invested in a particular asset class when risk is usually at its highest (or underinvested when opportunities are at their greatest).
Most non-financial people are unaware of these natural tendencies, creating a blind spot that can be very hazardous to your wealth. However, an experienced financial advisor knows how difficult it can be to avoid acting impulsively based on your emotions, overconfidence or the daily news (behavioral finance) and can help you avoid these traps.
Prioritize Tax-Efficient Strategies
Next, a quality financial advisor should have the expertise necessary to help you find tax-efficient investing strategies. From utilizing tax-advantaged accounts to timing trades so your tax burden is minimized, these strategies can have a significant impact on how much of your investment you ultimately keep.
As your wealth grows, tax-efficiency becomes even more important. Especially in low interest rate environments, this is one of the few ways you can generate extra return with minimum additional risk.
There Is a Catch
All these benefits can be significant, but they hinge on one thing: you need to find the right financial advisor.
Not all advisors are created equal, and neither are their business models. Many of the big brand name advisors, for example, have notoriously consumer-unfriendly business models. That means they may put the interests of their shareholders or company in front of your best interests.
For best results, you should look for a firm that agrees to act as your fiduciary 100% of the time. (You can read my previous article to learn more about why you should insist on hiring a fiduciary).
To avoid conflicts of interest, it is usually best to find a fiduciary advisor who is also independent, meaning they do not sell specific products. Their compensation comes from a fee on the assets they manage for you. They do not receive additional compensation for selling a specific fund so their objective is to choose investments best suited to meet your financial goals.
These independent fiduciaries are obligated to act in your best interest. You do not have to worry about conflicts of interest too much because these financial advisors do not promote a single company’s products. For added reassurance, though, you know that these advisors will do what is best for you because they face serious regulatory consequences if they do not.
What Is Best for You?
As you can see, there are many reasons to seek the help of a financial advisor. But if you choose not to, be sure to prioritize self-education so you can help avoid expensive mistakes that can set you back.
If you are interested in hiring a financial advisor, be sure to do your homework. Do not just rely on a friend’s recommendation. Many people do not understand the concept of a fiduciary so do not know how to hire the right kind of financial professional. Additionally, few people know how to screen for the right combination of credentials and experience to serve them best. You can also do your homework on whether the advisor has had any regulatory infractions on brokercheck.finra.org. BrokerCheck is a trusted tool that allows you to search for an advisor’s employment history, certifications, licenses and any regulatory violations. Most quality advisors will offer a free consultation; take advantage of that so you can shop around, ask questions that are important to you and make the best possible decision.
[i] Parker, Tim. 4 Behavioral Biases and How To Avoid Them. Investopedia, June 2019. https://www.investopedia.com/articles/investing/050813/4-behavioral-biases-and-how-avoid-them.asp
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