When I run financial education workshops, the one question I’m guaranteed to be asked is this: Does it make sense to work with a financial advisor or should women try to manage their personal finances themselves?
How you handle your finances is a significant and personal decision, and there are some pros and cons to engaging with an advisor.
Here are some considerations:
A professional financial advisor and planner have taken the necessary courses and earned certain credentials to manage your finances. They will have years of experience dealing with different clients and situations, and the training and tools to offer you appropriate advice for your needs.
What you need to ask yourself is how your experience and knowledge measures up and if your circumstances warrant that level of experience. Read more below.
The risk in managing your finances by yourself is you may misallocate your assets within your investment portfolio, take on too much risk, and be underprepared for your financial situation. These can all add up to be costly mistakes.
Note that advisors will vary in the level of experience they have and the credentials they’ve earned. This will determine what advice and services they actually can provide. For example, some are strictly investment professionals and won’t look at your goals and overall financial circumstances; some are licensed only to sell specific products so may not meet your entire investment needs (and won’t necessarily tell you there’s a gap), some work within a fiduciary capacity (where your interests come first) while others do not.
It will be important to ask questions and have written confirmation on what they can do. This could be a key deciding factor towards what you decide.
Money is personal and because it’s personal, it’s easy to be attached to events and outcomes. Handing over the investment decisions to a professional advisor reduces the chances you’ll take an excessive amount of risk (by chasing returns) or you’ll panic (and sell your holdings) when things turn ugly. Advisors who’ve been in the game long enough will be unbiased and will be more disciplined in sticking to a well thought out financial and/or investment plan.
Advisor & Investment Fees
No doubt that paying advisor fees to manage your portfolio or financial plan is more costly than doing it yourself – which also means there is less money available to leverage the impact of compounding growth.
For example, suppose your advisor charges a 1% management fee on your portfolio value. There will usually be some type of transaction fee and platform costs on top of this so let’s assume the total costs are 2% of your portfolio. If you have a US$200,000 portfolio you would be paying $4,000 each year just in fees. Now consider if you were to invest that annual $4,000 fee and earn 6% over 20 years. You’d make US$160,000. That’s a lot of money and a lost investment opportunity.
On the flip side, as mentioned before there’s a cost to not managing your money well or not managing it at all. If you’re an emotional investor and make a bad investment or trade – you could lose a lot of money. And consider this – many investors have the best intention to manage their money, only to find themselves overwhelmed with all the decisions and not do anything at all. That’s an opportunity cost as well.
Time for Financial Planning
People are busier than ever, and an area that tends to be put off is finances. If you can honestly tell yourself you will take the time to set up a diversified portfolio, review its holdings on a quarterly to an annual basis, and keep abreast of financial issues that could affect your overall financial plan, go ahead and do it on your own.
Remember though, a professional advisor does the above for a living and is more likely to keep on top of matters affecting your financial situation. They should be reviewing your portfolio on at least an annual basis if not more frequently.
But also keep in mind that you need to find a good advisor that in itself can be time-consuming. You’ll want to interview a number of advisors and meet them a few times before deciding whether they’re competent, and are capable of providing you with service you need at a good value.
Complexity of Financial Situation
A qualified financial advisor can help you in two key areas: financial planning and investment management.
If you’re debating handling your finances yourself as yourself these questions:
Do you know how to structure your investments to meet your various goals? Do you have a fairly complex financial situation? Do you require estate planning? Setting up a trust? Do you have a business? Do you need tax advice? Are you dealing with or expected to deal with the birth of a child, a divorce or illness?
If your needs are more simple, you may want to consider managing your financial situation on your own. If they are complex, a professional will help you navigate through the various elements.
Investment Portfolio Size
If you have a small portfolio, the fees a professional advisor will charge you may not warrant going down that path. And besides, they may only take a minimum portfolio amount. With some homework, you can create a simple diversified investment portfolio by using low-cost ETFs or funds that will save you money. And if you’re in need of some financial planning support, there are outfits that do fee-based planning that you can consider so you cover all the bases.
Choosing to self-manage your finances or getting an advisor to handle it is an individual choice. Know that it doesn’t have to be all or nothing or permanent for that matter. You can start with an advisor until your comfortable with your ability to manage it and move to a DIY strategy. You can outsource some of your needs and handle some parts yourself.
The most important advice I can give you is stay engaged with your financial situation. Why? Because it’s your hard-earned money and your life goals matter.