As financial advisors, we often have people ask us, “How do I know if I need an advisor?” or “I’m not sure if I need an advisor”. These are great questions and ones we like to help people address. Our goal is to work with clients that need and want our help rather than be everything to everybody, so we like to discuss these questions in our initial meeting. It is only natural for people to question purchasing a product or service, especially one that can cost thousands of dollars. As consumers, we ask ourselves these same questions when we buy other products and services. We think there are primarily 2 questions that need to be addressed when determining if hiring an advisor is right for you.
- “Can I do it?”
- “Do I want to do it?”
These questions can be used when deciding to purchase any product or service. It comes down to our ability to do something, and prioritization. If you do not have the skill to remodel a bathroom, you would likely hire someone to do it. Lacking the skill or desire to do it yourself, could end up costing you more than hiring someone else.
If you don’t want to or don’t have the time to file your taxes, you will likely outsource that to an accountant.
Let’s take a deeper dive into each of those questions.
The first question asks, “can you do it?”. You know yourself better than anyone. Ask yourself an honest question, “Do I really have the ability to do this?”. It helps to have an interest and a bit of an aptitude for finance and economics to effectively manage your wealth yourself. If you are not following changes in tax/estate laws, markets, the allocation of your accounts, and spending patterns, you probably will not be good at managing your own wealth. Most importantly, when managing your investments, your emotions can play a big part in decision making. This is not a good thing. You want your emotions to stay out of the equation!
We often hear people say “I do not need an advisor. I just need to own a few index funds and that will be good enough.” While we agree that certain index funds can have a use in a portfolio, we do not agree that just focusing on the investment side of your wealth is comprehensive enough. There are other factors that one might overlook.
Managing your own wealth requires focusing (mainly) on 4 components: Investments (Assets), Taxes, Insurance, and Estate. Some people may find the investment side interesting or enjoy managing their own money. That is great, but keep in mind you are not giving yourself comprehensive wealth management advice by just focusing on your investments. Remember, all 4 components matter to a successful financial plan. Below is a breakdown of the 4 components of wealth management.
- Asset Allocation
- Asset Location
- Due diligence
- Accumulation/Distribution Strategies
- Cash Flow Projections
- Tax Loss (Gain) Harvesting
- Roth Conversions
- Backdoor Roth IRAs
- Charitable Gifting/Qualified charitable distributions/Donor Advised Funds
- Life insurance
- Disability insurance
- Long Term Care
- Account titling
- Beneficiary designations
- Succession planning/gifting
You may look at this list and think most of these things do not apply to you. That could be the case in your current situation, but we find that nearly all these topics apply to every client, albeit at different times in their lives. Look at the list and ask yourself “can I do it?”
The second question is a more straightforward. Do you want to manage your own wealth? This question centers around time and prioritization. We are only given about 16 hours a day to dedicate to life, work, family, fun, and health (among many others). What do you want to spend your time focusing on?
Some clients have the time to devote to managing their wealth, but they prefer to focus their time towards other areas of their life, which is the prioritization aspect of the question. There is a great deal of time and energy that goes into keeping track of your personal wealth. Most people that engage advisors are at or near retirement, so focusing on family, leisure, or themselves is usually a bigger priority. The clients that engage us that are still working are usually busy with work and family and do not have the time to devote to personal finance. There are still some people that prefer to manage their own wealth regardless of where they are at in life. It comes down to, what do you want to spend your life focusing on.
Not everyone needs an advisor, but we find most people do not know if they need an advisor, so they end up putting the decision off for longer periods of time. This is not a good approach with financial planning, since so much of the success depends on your time frame. Make the decision now! We suggest first determining if you are the type of person that needs an advisor. Discuss these 2 questions amongst yourself and your loved ones, then make the decision to do it yourself, or outsource an advisor. The sooner, the better!