There’s no denying the fact that this post contains some bias. After all, I am a financial advisor. However, when I talk to people about their financial and life goals, the one response I frequently hear is “I wish I had one of you earlier”.
To clarify one thing, there is a difference between a “financial advisor” and someone merely trying to sell you a product (e.g. 403(b) vendor or insurance agent). Anyone that’s had a conversation with me understands my passion about this, but when you hire an advisor they should be working in YOUR best interest and not concerned with selling you a product from their company. A quick way to determine whether a “financial advisor” must work in YOUR best interest is to ask “Are you a fiduciary?” A “no” response to this question should raise a red flag in your mind.
So why do I think almost everyone, regardless of their stage of life, needs a financial advisor?
Mistakes cost money
I recently came across a situation where someone needed money for an unexpected expense. Unfortunately, he didn’t have someone to discuss the situation with, so he took money out of his IRA to pay for the expense. He thought his situation qualified as an exception to the tax on early distributions, however, it didn’t.
Not only did this withdrawal incur a 10% penalty because he was under age 59½, but the total amount was added to his annual income and subject to income tax.
If he was working with a knowledgeable financial advisor, he may have been able to avoid this situation by having a conversation about all of his options and selecting the one that minimized the income tax consequences.
Opportunity costs are also expensive
What is an opportunity cost? Simply put, an opportunity cost is a loss of potential gain from one decision as a result of choosing an alternative. Some decisions may not seem as expensive as the mistake I mentioned above. In fact, some decisions may not seem to hurt you at all. However, what if there were a better option? What if, after reviewing and fully understanding all options, you selected the one that would put you in the best position 10 or 20 years from now? Making a decision without fully understanding all options may lead to opportunity costs.
For example, if saving for future college expenses is a goal, you may have opened a 529 account. Perhaps your “financial advisor” recommended you invest in the advisor-sold, Ohio 529 plan without also telling you a direct plan existed. What’s the difference between the two Ohio 529 plans? For one thing, expenses! It’s possible you would invest the same amount in the advisor-sold plan that you would the direct plan and, over time, the direct plan may leave you with a higher account balance simply due to it’s lower expenses. Both options may seem like good ways to save for college, but there may be an opportunity cost associated with investing in one versus the other.
Another example is the plan election decision each new member of STRS Ohio must make. While the majority of STRS Ohio members choose the defined benefit plan, this may or may not be the best decision for you, given your long-term financial and life goals. As a result, you may elect a plan that results in a lower benefit than you otherwise may have accrued.
The bottom line is there are no “one size fits all” solutions when it comes to financial decisions. Be sure to understand the current and long-term impact each option may have so that you minimize opportunity costs.
Your time and energy is limited
If I’m being honest, I have to admit many answers to financial planning questions are available online or in various publications. A quick Google search will likely yield an answer or at least point you in the right direction. So why then is it necessary to work with a financial advisor?
Let me put it this way…Some teachers I come across are knowledgeable about financial topics. They understand their STRS Ohio benefits and what accounts work well with a pension in retirement. They understand insurance, basic estate planning documents, and a host of other financial topics.
But first and foremost, they’re teachers. They are experts at educating children, providing differentiation of content to various students, and explaining complex situations with ease. While they could manage their financial lives adequately, should they be? How much time would it take, and how accurate would it be?
I think the same thing when any type of outlet or pipe breaks in my house. I can do some things in the house, but when it comes to anything plumbing or electrical, I know enough to hurt myself and spend hours getting to that point. It makes sense to pay a professional who can do it in a fraction of the time, completely fix the problem, and keep me from harm. I’m happy to pay them for their expertise.
A financial advisor should enable you to focus your time and energy on the things in your life that matter the most.
That’s what a good financial advisor does.
They understand many options when it comes to product selection, investment philosophies, and insurance and income tax management. They remain up-to-date on recent industry changes. They help you design a comprehensive plan that can change your future. They know the danger areas to look out for. They know the questions you should ask, but haven’t thought to.
Yes, a financial advisor will cost you money. But, as previously mentioned, how much would a mistake or opportunity cost really cost you versus paying the bill of a professional?
Regardless of your stage of life, take some time to find an advisor to help you manage life events. Unsure where to start? Check out NAPFA, the XY Planning Network, or the Finance for Teachers Network for a list of advisors committed to serving you with YOUR best interests in mind.