Friday, October 7, 2016

Should I Hire a Financial Advisor?

A couple of years ago we decided that the answer to the question "Should I hire a financial advisor?" was yes.  I guess a more accurate way to describe the situation is that we allowed someone to sell us on the idea of hiring him as financial advisor, and if you read my prior posts on the subject, you'll learn that we fired the financial advisor, so in some ways I'm telling you here what the conclusion of this post will be--sort of--but stick around, it's not quite that cut and dried.

First, Decide Why You Want to Hire a Financial Advisor

As far as I'm concerned, there are three reasons to hire anyone to do anything:

  • I'm not able to do it.  That's why the electrician was here installing a ceiling fan, and why the dentist pulled my tooth.
  • I don't want to do it.  That's why my son cuts my grass.
  • I could do it, but you'll do a better job.  I could have painted the house, but the painter did a much nice job than I would have, and I don't have to think very hard to come up with a way I'd rather spend my weekend.
I think that if you are going to hire a financial advisor, you first need to decide which of those reasons applies.  Maybe you really know nothing about finances.  On the other  hand, you may know enough to know you hate fooling with it and gladly outsource the job.  Of course you may think that a professional will get better results that you would.  

Secondly, Decide What You Want from the Financial Advisor

Yes, I know, you want the financial advisor to take your dimes and turn them into dollars overnight--but you and I both know that's not going to happen.  The key to being happy in any professional relationship is having clear expectations and having those expectations met. You may love your doctor because he gets you in and out of the office promptly and always gives you a prescription for something (who knows or cares what) that fixes the problem.  I may hate the same doctor because he always rushes through the appointment and doesn't take time to explain the various options for treating my symptoms and he always just tried to stick a prescription in my hand without explaining what it is, how it works or what the alternatives are.  Our expectations are different.  The fact that I don't like him doesn't mean your doctor does a bad job; it means he isn't the doctor for me.

Back to the finanical advisor.  What do you want from him or her?  Part of this ties back to the reason you chose to hire one.  Do you see yourself offloading a chore that you could do, but choose not to?  Are you trying to find someone who knows more about at least some aspects of finance than you do?  Here are some things people want financial advisors to do:
  • Help them minimize taxes
  • Help them set out a savings and investing plan
  • Select investments, monitor their performance and move in and out of them at the proper time
  • Help them set up their finances  to account for long-term goals like retirement or the care of a special-needs child
In our case, what we really wanted was help developing a long-term plan to invest my inheritance and to decide how much to save for the rest of our working lives so as to fund our retirement and the long term costs of providing for my autistic son.  We also were in favor of minimizing taxes.  At the time we hired the advisor, we  had not been keeping up with the investments we had and really weren't up on what mutual funds were considered the best at that time, so having someone pick a portfolio for us didn't seem like a bad idea, but it was pretty low on the list.  Mostly what we wanted was a plan.  

The advisor we hired was our CPA--the guy we go to when I run into issues with our tax return.  If I don't run into issues, I do our taxes.  Like any good businessman, once we used him for one thing, he tried to sell us another and since we knew we were about to get a nice-sized pot of money, we bit.  For us, hiring this advisor was the wrong choice.   

We should have asked more questions up front and made it clear that we were looking for a plan, particularly a plan to deal with my son.  Unfortunately, it became clear after we were working with him that he had little knowlege about the programs for and laws about finances and the disabled.  That was strike one.

We wanted to minimize our taxes (doesn't everyone?). We had money in IRAs and money that wasn't in IRAs and both pots of money were invested in the same way.  I don't claim to be a tax expert, but it seemed to me that taxable accounts should invest in things expected to grow over time, but which do not throw off a lot of current income, and that if you are going to invest in something that throws off current income, an IRA is the place for it.  The only tax advise we got was to consider a Roth conversion but he wouldn't endorse any calculator we found that showed the likely results of doing so because he couldn't guarantee investment results.  Strike two.

Before You Shop for an Advisor, Consider What You'd Consider a Reasonable Fee for the Services You Want

Eveyone has to eat, and everyone deserves to be paid for their work.  However, all of us have to consider how much we are willing to pay for any service, and the best time to do that is before you start to shop.  You may have to change your number once you look around, but have one in mind.  I would gladly have paid someone $200/hour to develop the plan we were looking for and the same to yearly review our investments and savings and to advise us if we were on track.  I would expect this person to be up-to-date on the laws and programs regarding the disabled.  

Financial advisors charge in a lot of different ways, but it seems hourly is not a popular choice.  A percent of assets under managment is popular and with the size of our account, over about two years we paid over $6,700.00 for a computer to put us into that company's model portfolio for people of our age and risk tolerance.  We got little to no plan, just a projection like you could find on the website of just about any mutual fund company.  And no, they didn't earn their commission by the outsized returns--the money we managed ourselves did better.  Strike 3.  

If You Are Considering a Financial Advisor

If you are considering hiring a finanical advisor because you want to dump this problem in someone else's lap, and you understand the fee structure and consider it worth it, go for it.  Make sure the person you hire is competent and honest but maintain enough knowledge of the markets and finances to monitor what is happening.  

If you think a financial advisor is going to make you more money than a diversified portfolio of index mutual funds, ask the advisor to show you past performance.  Few mutual fund managers can beat the market on a regular basis; when you add the fees of a finanical advisor, out performing the market becomes very difficult.  

If you are looking for particular services, make sure the advisor offers them, and how.  I wish I had.


  1. Also when considering a financial advisor, determine what your main use would be: financial planning, investment strategy, wealth management, set up with insurances, etc. All of these can determine who you pick and if you want them specialized. Most people who want to do it in house might just need the financial planner because they need some direction for example.

  2. These are important pointers when considering a financial advisor. Sometimes it's difficult to know what questions to ask up front, but making sure the advisor has experience in the areas you're seeking help is key. Thanks for sharing your experience.