With the advent of online trading platforms and information available for free on the Internet, many investors have decided to take a do-it-yourself approach to manage their money. Managing your portfolio is perfectly fine, especially those who are just starting, have little money, or have less complicated financial situations.
However, once investors begin accumulating wealth and add to their financial complexities by purchasing homes or running their businesses, it’s often a good idea to hire an advisor. There are several reasons people in these situations benefit from hiring an advisor to help them with their investment needs.
You don’t know what you don’t know
The world of finance is complex and ever-changing. If you have a full-time job that does not involve investments, it’s unlikely that you have the time, much less the inclination, to keep up with the continual adjustments in the space.
You may have a solid grasp of the fundamentals of stocks, bonds, and mutual funds. But do you know what the rules are on employer-sponsored retirement plans and Roth/IRAs and when you qualify for each? Do you understand the difference between HSAs and FSAs, and how to use them as an investment vehicle? Are you clear on whether you should pay down your mortgage, increase your savings, or do something else with your raise?
A financial advisor is required to keep up with changes in the marketplace. They understand how things like the CARES and SECURE Acts might affect your finances. They also know what they don’t know when it comes to finance, and will pull in other experts when necessary.
- Help you determine your goals
Most investors understand that they need to save for retirement, given the lack of pensions and the uncertainty around Social Security. But what other goals do you have when it comes to money? Many people have goals that will impact their finances, but they might not know how sizeable it could be.
- Provide a sounding board
Just as business owners have an advisory board to help them get unstuck when facing issues and provide advice to help them grow, your advisor can provide commentary and guidance when it comes to your money.
There are many financial decisions for which there is no objectively correct answer. Whether to invest in a traditional IRA versus a Roth is one example. There are circumstances that better fit one than the other, but because they rely on assumptions about future taxes and earnings, there’s no right answer.
Similarly, people often need help thinking through the wisdom of buying into a retirement community or continuing care retirement community. Or even deciding whether to pay down the mortgage or invest some extra funds. Again, there are no objectively correct answers. Bouncing your questions off a third-party who’s knowledgeable about the issues can help you reach a satisfying decision for you and your family.
- Help you stick to your plan
Emotions often get caught up in finances. When tech stocks prices go through the roof or housing finance options are attainable for everyone, it’s easy to be carried away by exuberance. No matter how irrational it might be.
The financial press will cover these types of booms in breathless detail, adding to the perception that everybody’s doing it, and you’ll miss out if you don’t.
Similarly, during market volatility, watching your portfolio value decrease every time you look is painful. Many investors soothe the pain by selling out. It’s not a rational response, because it locks in the losses that would otherwise only be on paper.
But at least when all the money is in cash, there are no fluctuations. Of course, leaving it too long exposes the capital to inflation, which eats away at spending power.
When other people are selling out, it seems like the smart thing to do to avoid being the last one left holding the bag. The stock market doesn’t work like that, but it’s persuasive messaging since the financial press will have been covering the bust in breathless detail.
Having someone who can talk you off the ledge and prevent you from doing long-term damage to your portfolio is priceless.
- Work with your tax & estate planning needs
Once your finances start getting complex, so does your tax situation. Your accountant focuses on reducing this year’s taxes, but that may not be the right thing to do for the portfolio overall. You need someone who understands investments from a taxation point of view.
Similarly, as you increase wealth or develop a blended family, your estate planning needs increase too. In California, most people who have accumulated assets need a trust.
If you have children from a previous marriage, you’ll need to protect their inheritance, no matter what happens with your current spouse. Most of these issues are too complicated for people to do it themselves, even though there are plenty of forms online of the unwary.
While your advisor probably doesn’t do estate planning, they’re aware of the different kinds of asset ownership implications. They can often recommend an estate planning professional who will take care of you.
No professional wants to recommend someone who isn’t competent, because it reflects poorly on them. A good advisor will only want to recommend the best estate planning attorney and tax professional too.
- Understand your risk tolerance so you can sleep at night
What do the words “aggressive” and “conservative” mean? It depends on the person. For someone very comfortable with investment risk, “conservative” might mean having 20% of the portfolio in cash and bonds. Others with a lower risk tolerance would consider that aggressive.
A financial advisor will tailor the risk of your portfolio to the point where you can sleep at night. A portfolio invested entirely in small company assets and international stocks, particularly emerging markets, has demonstrated high performance. But very few investors can stomach the roller coaster ride it takes to get there.
For investors who are very afraid of risk or not very knowledgeable about the market, the advisor may coax them into taking on a little more risk or else the portfolio won’t grow.
Still, a good advisor wants you to be comfortable and able to sleep at night. They’ll try to find the sweet spot where you are relatively comfortable and yet earn some return on your money.
- Objective advice
Have you ever noticed that when your friends come to you for help, you can easily see the problem? You have no problem explaining the consequences and pros and cons of their decision. Yet when it comes to your own life, you don’t even know where to start when a problem arises.
Your financial advisor has that objective viewpoint that you need. They see the market as a whole, not just the parts of it that concern you. They can widen out and look at the bigger picture, which is hard for individual investors to do when faced with a decision.
Need some objective advice or want a second opinion on your investment portfolio? Feel free to give us a call at 619.255.9554 or email us.