Do I Need A Financial Advisor?

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  • Do I Need A Financial Advisor?
Author: Joseph Reinke, CFA

These are three of the top questions I’ve gotten from Young Professionals over the past 10 years:

  1. Do I need a financial advisor or can I do it myself?
  2. How much do I have to make before getting an advisor or how much money do I need to hire a wealth manager?
  3. Its frustrating… I want help. Why can’t a financial advisor help me?

I cringe when I hear these question because in my opinion most advisors have:

  1. Massive biases;
  2. Many have a lack of knowledge across various financial products; and
  3. Most aren’t very tech savvy.

Therefore, my short answer to the question “Do I need a financial advisor?” is “no” for most people.

In this article I detail:

  1. Why I say no, especially for young professionals;  
  2. Answer all three of the questions listed above; and
  3. I will introduce you to a new technology that makes it possible for you to build a comprehensive financial plan without paying a ridiculous fee for a financial planner.

How Much Money Do I Need To Hire A Wealth Manager?

In this part of the article, I’m going to focus on your investments.  In further sections, I’ll focus on financial planning.

Many ask the question do I need a financial advisor because they believe they have a lot of money.  Therefore, they believe paying and advisor is going to make a big difference with their investments.

My short answer to the question “How much money you need before hiring one?” is no.  You probably don’t have enough for it to make sense.

I’m going to provide you with an investment solution but before I do I’ll explain the answer above.

Most advisors are not going to hand-pick an investment portfolio for you. Most likely, they are going to use an algorithm their company uses to decide your allocation.  This is known as a robo-advisor.  Therefore you’re likely to get an cookie cutter recommendation, not a truly customized approach.

When I tell young professionals this, they turn around and say:

“Advisors are paid well…should I not get more for my money?”

Well, most advisors charge around 1% of the assets they manage (an Asset Under Management (AUM) fee).  For instance, if you have $100,000 they collect $1,000 a year in commission.

However, they will split that with their company.  When it’s all said and done, they may net $200 – $300 a year for managing $100,000. That’s no where near enough to get personalized advice.

But what if I have a lot of money?  That has to change how much time they are willing to spend on my account right?  WRONG.

Below is an example to illustrate this.

Example Of How You Overpay For Investment Advice

A family friend came to me one day asking if I’d review her investments.  She had a financial advisor for 15 years so I asked her why she wanted me to review it.  She said she talks to the advisor for about 15 minutes a year and that is it.

Some background, this family friend was 68 at the time and had $3.5 million invested primarily in retirement accounts.  She was paying 1% per year which was approximately $35,000 in fees to the advisor! 

As I mentioned, she’d been working with the person for 15 years.  That means she had paid this advisor about $400,000 in fees!

Most would think she was getting some great service for that money right?  Something like investing in handpicked stocks such as investing in Facebook when it IPO’d or buying Apple 15 years ago.  However, based on my experiences, I knew that probably wasn’t true.

She sent me the statements and I was correct.  All her assets were invested in what is called Index ETFs. An index fund is a type of mutual fund or exchange-traded fund (ETF) with a portfolio constructed to match or track the components of a financial market index, such as the Standard & Poor’s 500 Index (S&P 500). Not what one would call customized financial advising.

Now, there is nothing wrong with Index ETF investing.  In fact we do it and our technology recommends your allocation based on the risk you have the ability to take.  

However, this is where the story gets good.

For $35k the financial advisor should have been giving her more than investment advice.  In reality she wasn’t doing anything.  She provided no services in regards to how she should withdraw her money for retirement, start gifting it to grand children to help save on tax, nothing!

I had my family friend transfer her account to FitBUX’s investment service. We dropped her fee more than 50% because that is what technology is supposed to do.  Its more efficient than a person. 

Her old advisor was using technology (albeit really bad technology) but still charging her the way financial advisors charged clients 25 years ago before the advent of technology!

When the previous advisor found out the money was being transferred she called my family friend immediately and asked why.  My family friend told her that she was going somewhere for half the cost.

Did her advisor try to convince her not to move the money because of the service she was receiving?  Absolutely not! 

Instead her previous advisor’s response was, “If you wanted to pay less all you had to do was let me know.  I can drop it down to .50% also.” 

The reason she was so willing to drop the fee was that she was only spending about 15 minutes a year with my family friend.  It did not matter if she was getting paid $100 per year or $35,000 a year.  Legally, all she had to do is touch base for 15 minutes a year and do nothing else afterwards.

And this is how most investment advisors work nowadays.  And… this is for someone with $3.5 million dollars in liquid assets! 

Obviously, most young professionals don’t have that much money.  Most young professionals would be doing well if they had $50k or more.  

What Should I Do With My Investments Then?

You have 3 options with your money:

  1. Go to an financial advisor (which we’ve already seen is not worth it in most cases);
  2. Use a robo investment advisor; or
  3. Do it yourself.

The good thing about robo-advisors is they are a lot cheaper than investment advisors.  The issue is that most do a horrible job at analyzing how much risk you have the ability to take.  Therefore, they recommend horrible allocations. 

Also, most will only manage the financial assets you have at their firm.  They don’t know enough about you to asses your level of risk and only take into account a segment of your overall financial picture.

This is one reason why I’m so excited about FitBUX’s new investment technology. It shows you exactly how much risk you have the ability to take.  Then, the assets you have invested with FitBUX are automatically invested and adjusted overtime as your ability to take risk changes.

You can also use the new technology even if you don’t have financial assets invested at FitBUX. For example, if you have a 401k or you are a “Do It Yourselfer,” you can still use the technology to analyze your ability to take risk and then manage your portfolio yourself .

Doing it yourself is great for some people because, well, you do it yourself and is the cheapest way to go. Of course, doing it yourself takes work, sometimes a lot of work.

Do I Need A Financial Advisor To Build A Financial Plan?

Again, in my opinion the answer is no.  Below I’m going to detail the reasons often stated by those saying you need a financial planner and why they are no longer good reasons.

  • You don’t have the time, skill, or want to put in the effort: First, as I illustrated above, most advisors aren’t going to put the time in because they don’t earn enough from you.  Second, most of the time, the effort the advisor puts in isn’t worth the amount you pay. Third, you might not have the skill but either do most financial advisors!  In the past, a good financial advisor helped elevate these issues but good luck finding a good one.  Now days you don’t have to find one because of technology.  For example, FitBUX’s technology reduces the time you need to spend thinking about money, it explains things in plain language to help you develop the skills you need to make choices, and you have to do so with minimal effort.
  • Most people are disorganized and don’t know where they stand: Financial professionals use this as a reason to pay them a lot of money. However, their solution doesn’t help.  For example, a financial planner randomly emailed me the other day with an example of how he could organize my financial life.  The example was a .pdf with six pages of information!  How does six pages of numbers, projections, etc… make me more organized and tell me where I stand?  This was one major problem I saw when I was in wealth management.  Instead of helping people’s confusion, these “plans” actually make them more confused.  Again, technology does a much better job at this than an advisor.  For example, at FitBUX, we use our FitBUX Score to tell you where you stand.  The FitBUX Score combines all your financial information and puts it into one easy to understand number.  It makes it very easy to see if you bad, good, where you need to improve, etc…
  • A financial planner answers your big questions, can show you the side effects of choices, alternative paths, and simulate options: First off, most don’t have the technology to do this. Second, most can’t answer your big questions such as which student loan plan should I use or how much home can I afford because they know next to nothing about debt.  Third, technologies do all of this much better and cheaper.  For example, FitBUX’s technology combined with our FitBUX Coaches can do this all for about 1% of what it would cost you to work with a financial planner.

Should I Do It Myself Then?

I wish everyone would do it themselves and I believe they can especially with the right tools.  I’m obviously bias about FitBUX and our technology because I’m the founder of the company. 

However, I’ve seen firsthand why people use financial advisors, what advisor’s flaws are, and the ridiculous amount that is paid to them.  FitBUX and the technology is my cost effective solution to solve those flaws.

Don’t get me wrong, there may be times when a good financial planner is still needed such as if you are making $250k plus a year, investing $100k, trying to shelter for taxes, etc… but most in that income bracket still don’t invest $100k when you factor in student loans, mortgages, cost of living, taxes….

By Joseph Reinke, CFA

Joseph Reinke, CFA

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About the Author

Joseph Reinke is a Chartered Financial Analyst (CFA) Charter Holder and founder of FitBUX which has helped over 14,000 young professionals on their journey to financial freedom. Joseph has been personally investing since he was 12 years old.

In addition, he has experience in student loans, mortgages, wealth management, investment banking, valuation, stock trading, and option trading. He has been on 100s of podcast and has been invited to 100s of universities to discuss financial planning with their soon to be graduates.

  • So true. I have a few friends the are financial advisors. They don’t know anything about money especially student loans. In fact all of them are doing horribly with their own personal funds.

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