Here’s a quote that I found online that really resonated with me. I don’t remember what exactly it was from, but it was a comment that perfectly encapsulated something I’d like to rant about.
This is one of my biggest peeves. That a person would spend a working life accumulating assets only to be totally disinterested in how to manage or even a basic understanding of investing, it’s totally beyond me. Accumulating into the $ix figures+ is a huge big deal! I’ve got friends who have $100K+ in 401Ks/IRAs, and they’re all the same…they all end up offloading it to target funds that operates similarly to these all-in-one’s, or alternatively have a “financial advisor” manage it……a life savings is a heck of a thing to be intentionally ignorant about.
An angry commenter on the internet
Whenever you read the financial news or something about personal finance, it always ends with “consult with your financial advisor”. This is probably for liability reasons so someone doesn’t follow their (usually bad) advice and lose money and then sue them. It’s just a way to cover themselves, but honestly, who has their own financial advisor? Do you even need one?
Who has a Personal Financial Advisor?
MagnifyMoney surveyed more than 1,500 Americans and found that only 30% of those surveyed have ever paid for a financial advisor. And in a recent CNBC survey only 1% of respondents said they currently have a financial advisor managing their money. These surveys pointed to this a fault in Americans. That only those who don’t understand what’s at stake refrain from getting “professional help”.
But what does this “professional help” get you? What will paying a financial advisor $300/hour do for you? That’s right, that’s the kind of money you’d be paying to have a financial advisor. And did you know 10 out of 10 financial advisors recommend you use a financial advisor? Crazy huh? At several hundred dollars an hour it’s not hard to see why. I don’t know about you but I don’t have several hundred dollars to spend on talking to someone about my finances. What could they possibly do to be worth that kind of money?
What does a Financial Advisor do for You?
When meeting with a financial advisor, they will first assess your current financial situation. You’ll list your assets, debts, income, and expenses. Next they’ll identify areas for improvement. They’ll ask you about your plans for the future i.e. buying a house, starting a family, saving for retirement.
Based on your current financial situation and future goals they’ll then recommend paying off debt, growing your emergency fund, or specific investments, for retirement. All of this sounds real great, but it’s 100% a scam. You can do all of it yourself, for basically no charge.
Why you don’t Need a Financial Advisor
A lot of this can seem confusing at first–especially if you haven’t been taught how to manage your own finances. But all it takes is a little research and a desire to learn. And when your future is on the line, you should have a desire to learn! We’re all motivated by different things, but probably everyone is motivated (in part) by money. That’s why we all have jobs. This is your money that you worked really hard for, and if you’re going to spend 40 years working to accumulate money I imagine you care how it’s managed. You want it taken care of properly. At least, I hope you do. As our angry commenter friend said, a life savings is a heck of a thing to be intentionally ignorant about.
A life savings is a heck of a thing to be intentionally ignorant about.
So let’s look at what a financial planner does and how you can do it better, for less money, and actually know what’s going on.
They assess your current financial situation: assets, debts, income, and expenses.
According to common financial terms, assets are anything that increases in value. This means that a house is an asset, and stocks and bonds are assets. Debts are self-explanatory. They can be seen as negative assets. Net worth is then calculated by subtracting your debts from your assets. For example, a house is an asset and a mortgage is a debt. If your house is valued at $300,000 and you have $200,000 mortgage the net worth is $300,000 – $200,000 = $100,000
Your income is what you bring in and your expenses are what you spend. If your monthly income is $4,000 and your monthly expenses are $5,000, you net income is negative $1,000/month. You don’t need a financial advisor to tell you that’s not good. They’ll then give you advice on what to do to improve your situation like go out to eat less. Again, who needs to pay a “professional” for advice like that?
They ask about your plans for the future. When you plan on retiring, how much you’ll need etc.
Most people plan on retiring at 65 and if you are a younger person, a financial advisor will probably just recommend that. If you are closer to retirement age they will look at your financial situation (as seen above) and try to determine how much you’ll need in retirement and based on that how far away you are for retirement.
If this sounds familiar, good! This is basically what FIRE calculators do. The idea of FIRE is based on using the 4% rule to find out how much you will need in retirement. Greatly simplified, if you spend $4,000/month you will need $1,200,000 in retirement. And based on your net income you can calculate how long it will take to reach that goal.
Using the retirement calculator at networthify.com you can input your annual income and expenses and it will tell you how long it will take you to retire. It will also tell you your required nest egg. If you make $5,000/month and spend $4,000/month. It will take you 31 years to save enough money to retire (assuming you have zero net worth currently). And this tool, unlike a financial advisor, is completely free.
They make recommendations as to what to do to grow your net worth.
After doing this a financial advisor will give you recommendations on how to grow your money. They’ll likely recommend paying off any debts you owe (no-brainer) or growing your emergency fund (literally every financial advice article will tell you that). They’ll also recommend specific investments that will help you grow your nest egg.
This is where the scam really plays out. They’ll almost always recommend you invest in their investment fund or use them as your investment manager. While the hourly rate for a financial advisor is several hundred dollars an hour, the fee to use one to help you invest your retirement savings is usually around 1% of your investments yearly.
If you are saving up to retire with a million dollars, you would eventually be paying this advisor about $10,000/year! That’s a lot of money considering most fund managers actually underperform the general market. So you’re usually paying a financial advisor to perform worse than you would by yourself. All you have to do is buy three index funds and you will outperform any fancy financial manager and do it for free.
So as you can see hiring a financial advisor is rarely worth it because they won’t tell you anything you can’t already easily calculate on your own. And worse, they’ll charge you money to do it worse. More importantly, you should know what is going on when it comes to your life savings. Even if you trust someone else to manage it for you, it’s just good to know how it’s being managed.
An Example
Let’s look at a hypothetical family. And see what we can learn about their finances. And let’s see if they need a financial advisor.
| Assets | Debts |
|---|---|
| House: $300,000 | Mortgage: $200,000 |
| Savings account: $4,000 | Car loans: $20,000 |
| Checking account: $1,000 | Credit card: $2,000 |
| Retirement account: $40,000 | Student loans: $30,000 |
| Total Assets: $345,000 | Total Debts: $252,000 |
This family’s net worth can easily be calculated by subtracting $252,000 from $345,000. This comes out to be $93,000.
| Income | Expenses |
|---|---|
| $50,000 | Mortgage: $15,000 |
| Debt Repayment: $10,000 | |
| Food: $5,000 | |
| Entertainment: $5,000 | |
| Popup Expenses: $5,000 | |
| Total Income: $50,000 | Total Expenses: $40,000 |
Their income is $50,000 and their expenses are $40,000. Using the 4% rule, that makes their required nest egg to be $40,000/0.04 = $1,000,000. We can see under assets that the retirement account has $40,000 in it. If we plug these numbers into networthify.com we calculate that this family will need $1,000,000 to retire and it will take those 27 years to save up that much.
Super Easy, Barely an Inconvenience
Look at that! We just assessed their financial situation. It looks pretty good with a positive net worth of about $100,000. We also saw that their income exceeded their expenses by $10,000/year. Our advice is to keep saving money for retirement. (They may want to save money for other things too like, say, college for the kids. I’d recommend not putting that into a retirement account so they have access to it before they turn 59 ½.)The amount they’ll need to fund a retirement with current expenses is $1,000,000 and if they do put all their savings into retirement nest egg it will take them 27 years to reach that amount!
If they want to reach $1,000,000 dollars in 27 years they’ll need to invest it in the stock market. Instead of some fancy investment fun with a fancy fund manager, I recommend they put their savings into a three fund portfolio. A good starting point is 30% US Total Stock Market, 30% International Stock Market, and 40% Total Bond Market. That will gain them about 7% gains per year.
There! I just did 90% of what a professional financial advisor would do in less than a page of text! So do you need a financial advisor to manage your money for you? The answer is probably not. Unless you have lots of money from multiple different income sources that are subject to tricky tax codes, you probably can manage all your finances on your own. And if you stick to the tried and true method of investing in index funds (like Warren Buffet advises us all to do) it’s super simple to figure it out yourself.
When Should You Hire a Financial Advisor?
This isn’t to say that you should never hire someone to help you with your finances. There are certain times that it may be prudent to consult with an advisor. Maybe you’ve come into a large inheritance and you want to find the best way to minimize taxes. Or you are about to retire and you want someone to look over your finances and double check that you calculated everything correctly. There are times where it may be wise to consult with a financial advisor, but those are specific events that once are done so is your need for that advisor. Very few people need a personal financial advisor on call.
This is why I’m always annoyed when I read something about finances that ends with, “as always consult with your financial advisor.” Very few people have a financial advisor and even fewer people need one. And if you are taking the initiative to learn and control your finances, you definitely don’t need your own financial advisor!
What do you think? Have you paid someone to help manage your money or do you like to do it all yourself? Let us know in the comments below! And as always consult with your financial advisor… lol