Managing your own finances is daunting. It feels like there are an infinite number of expenses and a finite amount of resources. A common solution to this problem is to use a financial advisor to help you with your finances and/or investments. For many people in previous generations, this was the default choice if you had a complicated financial situation.
In today’s society, there are so many online resources to learn to manage your own finances. This exact blog is one of those. There is never any shame in getting help through life, but a financial advisor may not be necessary.
Note: This post focuses on people decades away from retirement. If you are nearing your goal of retirement, a financial advisor may be more helpful than earlier on. You likely have more wealth and a more complicated future financial situation.
What is a Financial Advisor?
A financial advisor is a broad term that can cover several different positions. For the sake of simplicity, we can simplify the options to an advisor that helps:
- Manage your finances
- Manage your investments
A financial advisor who helps manage your finances may help you reduce your expenses or utilize your income as effectively as possible. This type of financial advisor is most useful for those with very high or diverse incomes, complicated expenses, or a massive amount of wealth. I wish I had this sort of problem, but sadly I don’t. If you don’t either, I feel the second type is more useful.
The kind of financial advisor that helps manage your investments will most likely be focusing on real estate and/or stock market investments. The idea is that these investors have far more experience and knowledge than the average Evan, so they must be able to earn you more money. The hope is that the increased gains from using a financial advisor will outweigh any fees that must be paid to the advisor.
This post will cover 5 reasons not to use a financial advisor
1. Accessibility
I harp a lot on the socially-perceived difficulty of investing on this blog. Though this may have been true decades ago before digital brokerages were invented, it certainly isn’t true now. You can sign up for a new brokerage account just as easily as signing up for a new Gmail account.
Stock market investing is something that can be scaled in difficulty. Meaning you can dive as deep or as shallow as you want, and make it as complicated or as simple as you want. Yes, deep technical analysis, tracking market trends, and following company perceptions is a lot of work. But that isn’t what stock market investing has to be.
Let me tell you a secret that’s not so much of a secret. The vast majority of actively managed funds don’t beat the overall market. The exact number tends to hover between 80–90%. But regardless, even the professionals at companies with hundreds of millions of dollars to throw around and decades of experience and multi-six-figure salaries don’t beat the market.
This, to me, is the single biggest indicator to manage your own investments. If the professionals can’t do it, it’s nearly certain that a hobby investor spending 10 hours a week on their portfolio can’t.
The solution to this is to invest in a fund that tracks the overall market, such as ticker VOO. That way, you can stick with the market and beat 80-90% of other investors. The kicker? It takes little to no effort.
Simply open a brokerage account, set up a recurring investment in VOO, and ensure dividend reinvestment is active and done. You are now tracking the market. I won’t speak for you. But I would rather do that than pay a financial advisor for lower returns.
If you want to learn more about the stock market than the very surface, check out my posts on stock market investing.
2. Management Fees
Of course, none of this financial advice and management comes for free. In general, financial advisors charge a fee of around 1% of the total value of the portfolio annually. This means if you have a $100,000 portfolio, a financial advisor may charge approximately $1,000 / year to manage it.
You may be reading this thinking I’ve gone off the rails for insinuating that such a small fee is not worth it. But remember that this fee scales up with your portfolio since it is a percentage and that you are going to be earning 7-10% returns annually on average.
Let’s run through an example. Let’s say your portfolio starts at zero, you deposit $400 / month, and invest for 30 years. After 30 years, you would have around $790,000. If you paid 1% of your portfolio to a financial advisor each year, you would instead end up with around $650,000. Meaning you paid an advisor $140,000 to manage your portfolio.
But remember, as I spoke about above, an advisor has a very slim chance of beating the market. If instead, you threw all of your money into a fund to track the market, you would keep that $140,000 in your pocket, and possibly even outperform the advisor.
Another way to think about the fee is with your gains that year. For example in a year where you earned 7% on your investments, a 1% fee would take 1/7 of your gains, or 14%. 14% of your gains are given to someone else. This perspective makes that 1% seem noticeably larger.
The stock market is all about probabilities. So to me, it is outrageous to pay someone $140,000 to have a 10% chance of beating the market. When you could guarantee your ability to track the market for free and keep that $140,000 in your hands.
The purpose of this is not to chastise advisors for charging a fee. They are people with jobs who need to make money to survive. I am simply presenting an alternative based on the historical results of the market and the success of advisors.
3. Control Over Investments
Part of the enjoyment of investing in the stock market is picking which companies to invest in. There are so many companies out there, many with promising futures. It is exciting to buy a company and see that company succeed in the “real world”.
I remember when I first bought shares of Target (ticker TGT). Soon after, I went there with my girlfriend and saw how busy it was from a completely different point of view. Now, all of those hundreds of shoppers were giving money to a company that I owned a portion of. Owning stocks changes the way that you see the world and the companies that are a part of it.
A financial advisor takes away a lot of the fun and control you enjoy as an individual investor. Investment options are more limited and much more difficult to manage. As an individual, you can simply go to your online brokerage and buy/sell whatever you want, when you want.
With a financial advisor, there is a barrier to when they are open and available. In my experience with an advisor, which I understand may not reflect everyone’s experience, this process can take weeks from contacting them to the trade occurring. They have to receive your message, often schedule a time to discuss the direction of your portfolio, and finally place the trade.
One caveat to this is that in my experience at Edward Jones, you can select certain sectors to invest in. For example, you could ask your advisor to invest in solar energy if you believe in its future. Though this isn’t as narrow as an individual company, the upside is that it gives you diversification. Granted, you could always invest in a solar fund yourself without the help of an advisor.
4. Paying Attention to Your Investments
Financial advisors likely have dozens of clients at any given time. Though this means they are trusted by many people, it also means they don’t have time to pour over your portfolio. They won’t spend hours and hours tweaking your investments to perfectly maximize your returns as we like to think. Instead, they will be spending most of their time meeting with patients and placing trades.
There is nothing wrong with this hands-off approach, except that as I’ve said, you could do it yourself. You could be just as hands-off for free and keep all of your returns for yourself.
If you decide not to play it totally hands-off, you will know that the decisions lie on you. I would wager that this will push you to become more knowledgeable about investing as a whole. Soon enough, you will know more about investing than you ever thought possible.
Developing a continued passion for learning is one of the best things you can do for yourself. Learning to invest and grow your own wealth independently of anyone else is invaluable. That is a skill that you will be able to carry with you for the rest of your life.
Paying attention to your investments has another benefit as well. You will gain a better understanding of how the world works.
Before learning to invest, I thought of companies and wealthy people as existing in a world all their own. I’ll admit, in a lot of ways, this is true. But not completely. When it comes to investments, any person can choose to become an individual investor with any amount of money down to $1. Allowing that person to gain access to the wealth-building potential of the stock market.
Then, in the future, if you ever decide to build your brand or start your own business, you will be far more versed in the financial workings of a company than someone who has never invested. Stock market investments can be a fantastic introduction to a part of the world most people think to be inaccessible to them. Never underestimate the power of gaining knowledge that most people don’t have.
5. Liquidity
Liquidity is determined by how available the funds in an investment are. For example, cash is extremely liquid as they are immediately available for use. In contrast, stock market investments are semi-liquid, as they can take a few days to access. First, you need to sell your shares, which usually happens quite quickly (within a few hours at most). Then, the money needs to be transferred out of your brokerage and into your bank account, which can take anywhere from 1 to 5 business days, depending on the transfer method.
Withdrawing money from an advisor-managed portfolio can be significantly longer. The main addition to the process is the waiting time to meet with the advisor to tell them your decision. With dozens of clients, this meeting may not be able to happen right away.
If you are withdrawing money for a large purchase such as a house downpayment, you may not need the funds immediately. Chances are you knew months ahead of time and could plan accordingly (Read this article from Charles Schwab on making large portfolio withdrawals). However, if you are withdrawing funds for an emergency and need them rather quickly, this could be a game changer.
Money exists to eventually be spent on something. It feels much better to have those funds available sooner rather than later.
Note: The factor of liquidity only applies to stock market investments. Things like real estate investments, even crowdfunding ones like Fundrise, can be locked in for years. With or without an advisor.
Closing Thoughts
How to manage your personal investments is a very individual decision. Your financial situation, age, and current investments may make a financial advisor a useful tool. However, for the vast majority of people with one source of income and simple investments, or those just starting out with investing, the cons of financial advisors outweigh the pros.
If you have experience with a financial advisor, let me know in the comments why you decided to continue with their services or manage your investments yourself.
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