I was out with a friend the other night, and we got on the topic of what I do. He asked me a simple question: “why do I need a financial advisor?” He really did not get why anyone would want—let alone need—someone to help manage their financial lives.
As an introduction, my friend and his family invest their own money by buying stocks. Apparently, they do a good job of it. In fact, he said his daughter recently bought her first stock on her own and with her own money. Given all that, he doesn’t really see the need for an advisor, as he does not feel an advisor would add real value to his investments.
Investing is only part of the process
Investments are important. Indeed, they are the core of the financial process. I get it, and I am impressed (and somewhat envious) that they can invest as a family. I also manage my own investments, and I have been working with my son on this—but we are not yet there. Mind you, he’s only 10 and more focused on Pokémon cards. Even there, we can and do have discussions about value and price. He certainly doesn’t need an advisor on how to buy Pokémon cards!
Investing, however, is actually only a small part of what financial advisors do. My son has the Pokémon thing down, but he still needs advice and support on the bigger picture of life. Similarly, even successful investors (like my friend and certainly myself) can and do benefit from working with a financial advisor.
The comparison I would make is to a skilled carpenter who wants a house. He can build the framing himself, as well as much of the structure and finish. The foundation might be more challenging, though, as he may not have the tools. Plus, the electrical and plumbing may well require knowledge that he doesn’t have.
Could the carpenter build a house on his own? He could. Would it be a better, more livable house by bringing in experts like plumbers and electricians? Very probably.
Experts do it better
The question for the hypothetical carpenter, and for my friend, is whether you want the best possible house to live in. If so, I would argue that you need to bring in experts in different areas who can do the things you can’t. Even if you can do them, the experts will do them better.
Financial advisors can be those experts, helping you build your financial house for the future. But even beyond that, the best financial advisors can also act as architects and general contractors. You may not know you need drainage in the basement of your new home, but a good architect can spot that ahead of time—and get an engineer in to take care of it. The proper design can help you spot problems ahead of time. It’s not just about building the house. It’s also about building the right house in the most efficient, lowest-risk way possible.
Are you missing out?
Does my friend need a financial advisor? To manage his investments, maybe not. But for tax planning, estate planning, social security planning, and a myriad of other things, he could well benefit. A 529 plan for college savings, for example, can make a big difference. Which is the best? Why? An advisor can help. Should he and his wife take social security now or later? Why? Ditto. How can he best protect his assets and his daughter if something happens to him and his wife? Ditto. There are many other areas where the same reasoning applies.
So, does he need a financial advisor? Maybe not, as he is doing just fine on his own. Could he benefit from a financial advisor? I believe he could, since there are things he may be missing out on that he doesn’t even know about.
A personal decision
At the end of the day, whether you need a financial advisor is a personal decision. But let me give you one more example to think about. If you get a pain in your chest, will you go to the doctor or simply look up your symptoms and the appropriate treatment on the Internet? Me, I am going to the doctor.
Brad McMillan is the chief investment officer at Commonwealth Financial Network, the nation’s largest privately held independent broker/dealer-RIA. He is the primary spokesperson for Commonwealth’s investment divisions. This post originally appeared on The Independent Market Observer, a daily blog authored by Brad McMillan. Forward-looking statements are based on our reasonable expectations and are not guaranteed. Diversification does not assure a profit or protect against loss in declining markets. There is no guarantee that any objective or goal will be achieved. All indices are unmanaged and investors cannot actually invest directly into an index. Unlike investments, indices do not incur management fees, charges, or expenses. Past performance is not indicative of future results