It is tempting to think that you need a financial advisor. After all, many people hire others to fix their car, deliver food, or mow their lawn.
But a financial advisor is unique in that most people don’t need an advisor and some financial advisors hide their fees.
Who Should Use a Financial Advisor?
If you don’t meet these criteria, you probably don’t need a consultant! Money can be intimidating, which is why I wrote my book. Here is an excerpt:
Some of you may say, “But Ramit, I don’t have time to invest! Why can’t I just call in a financial advisor? ”Ah, yes, the old outsourcing argument. We outsource our car cleaning, laundry and housekeeping. So why not manage our money?
Most people don’t need a financial advisor. Our needs are so simple that with a little time (a few hours a week over, say, six weeks) we can set up an automated personal finance infrastructure.
Also, many financial advisers don’t always pay attention to your interests. They are designed to help you make the right decisions about your money, but remember that they are actually under no obligation to do what is best for you. Some of them will give you very good advice, but a lot of them are pretty much useless. When paid on commission, they usually direct you to expensive, bloated funds to earn their commissions.
However, there are a few key reasons you might want a financial advisor:
- Consultants can be helpful when you have a large portfolio or a particularly complex situation. Sometimes you may just want to take a second look at your plan (this is why I recently hired a consultant).
- You want to temporarily put a second focus on a time-sensitive situation like paying kids tuition, social security withdrawals, or making sure you can afford a home.
- You want a behavior trainer because you’ve found yourself too nervous when the market falls or because you are afraid of investing.
Types of financial advisors
To make things easier, there are two:
- Consultant on a commission basis. They are salespeople. Avoid them. They use terms like “AUM” (assets under management, this is a percentage of your assets). There is no reason to pay a percentage of your assets to someone for advice. You do not get a performance boost from paying a percentage of your wealth, as I explain in Chapter 6 of my book.
- Fee consultants only. These consultants charge an hourly or project-related fee. You can find it through the National Association of Personal Financial Advisors (napfa.org).
Remember, you should ask them if they are a trustee, which means they are legally required to put your interests first (crazy that you even have to ask that). Also, remember to beware of the human tendency to be happier with tons of invisible fees than a transparent upfront fee.
How to choose a financial advisor
If you really want to hire a financial advisor, first search http://www.napfa.org. You are looking for a paid financial advisor (not one who calculates AUM).
Here is an introductory email that you can customize and send:
I’m looking for a paid financial planner and found it on napfa.org. A little bit about myself: I have roughly $ 10,000 total net worth – $ 3,000 in a Roth IRA (uninvested), $ 3,000 in a 401 (k), and $ 4,000 in cash. I look for investments that maximize long-term returns while minimizing costs.
If you think you can help me, I would like to meet for half an hour and ask you some specific questions. I would also love to hear how you worked with similar people with similar goals. Would work next Friday, 2/6, at 2pm? Alternatively, Monday, February 9th, is wide open to me.
Remember – get a “paid only” advisor. That means you are paying them an hourly or project rate, NOT a percentage of your assets.
You should reach at least 10 and establish calls with 5. You will quickly find out who is right for you. I’ve found that around 30% don’t respond to inquiries, 50% just don’t fit (haven’t worked with people in my situation, are too technical or condescending), and around 10-20% are possible fits. When you talk to at least 5 it becomes very clear who is a good fit.
Make sure to interview them using the questions in my book on page 201.
Why commission-based financial advisors aren’t worth it
Effects of the fees:
When you invest $ 10,000 per year for 40 Years, a commission-based financial advisor could cost you $ 439,386.20.
When you invest $ 25,000 per year for 40 years, a commission-based financial advisor could cost you dearly $ 1 million.
A 1% fee can cut your returns by 28% – and that money goes straight into the pocket of a commission-based advisor!
I have no problem paying premium pricing for a good price. However, there is no reason to pay a percentage of your assets to an advisor. Ever.
Why You Probably Don’t Need a Financial Advisor
Remember, the IWT philosophy is to take control of your money. This is not the same as hiring someone to mow your lawn or change your oil.
The most important takeaway is that most people don’t need a financial advisor – you can do it all on your own and move forward. But if you have a choice between hiring a financial advisor or not investing at all, then make sure you hire one. People with really complex financial situations, those who have inherited or amassed significant amounts of money (i.e. over $ 1 million), and those who are really too busy to learn about investing for yourself should also consider the help of a counselor. Better to pay a little and start investing than not to start at all.
But remember, many people use financial advisors as a crutch and pay tens of thousands of dollars over the course of their lives simply because they haven’t spent a few hours researching investing. If you don’t learn how to manage your money in your twenties, you’ll be costing yourself a ton of money one way or another – whether you’re doing nothing or paying someone exorbitant fees to «manage» your money.
Money is a small but important part of a rich life. Most of us don’t have to delegate the critical things in life.
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