Financial advisors can smooth the path to financial independence for many people because they often calm people's nerves when markets are in panic mode. Still, I suggest that everyone give managing their own portfolio a try first, as it can be one of the most beneficial DIY projects to tackle. Here are some of the many reasons learning to manage your own wealth makes sense.
Seeing wealth building first-hand will help you spend less. You may realize just how much your investments can earn over long stretches of time, which will motivate you to contribute more to your stash as early as possible. You may also realize that reducing spending just a bit can shave off years of slaving away at the work desk. It's much easier to understand the dynamics of saving and spending and how it affects your retirement if you are more in tune with your wealth.
You should learn at least the basics before you let someone else touch your hard-earned money. Financial advisors can be helpful, but only if you are able to find a good one. Without knowing the theories of good money management and investing principles, you may allow a financial advisor to legally siphon your hard-earned money into his or her own pockets without you even knowing. Even if you were lucky enough to find a good financial advisor, having sound investment principles will allow you to challenge the status quo enough for the advisor to pay more attention. All this will translate to your money fitting your needs more appropriately.
You may have it in you to do it yourself. For those who have the passion to learn more than the basics and have the emotional control to stay the course during pessimistic times, doing it yourself means you can save all the extra costs of dealing with a financial advisor. After all, managing your own money can be simple to carry out, even though making the right moves may not be easy to do on a consistent basis.
And speaking of fees, the costs extend beyond a yearly fee. Whether you find an advisor who will take a percentage of your portfolio each year as compensation or one who takes a fixed amount per visit, there may be other costs associated with having someone else manage your portfolio. For example, you'll be paying full capital gains taxes on everything that's sold every time an advisor changes your holdings regardless of whether it's in your best interest to do so on an individual level. That's not to say advisors won't take your specific circumstances into consideration, but they often work with many clients and will buy and sell funds/equities in bulk that seem like a good idea for most people. You can always ask him or her to hold onto investments as long as you want them in your portfolio, but the calculations in figuring out what's most efficient to you specifically will often fall on your own shoulders.
There are non-financial costs as well. All the time spent communicating, driving to appointments, the interview process when you select a financial advisor, and so on are all costs that can be avoided if you do it yourself.
Many advisors don't touch your retirement account, so you have to manage part of your wealth on your own anyway. Due to regulation, not every advisor will manage your retirement accounts, which defeats the purpose somewhat since you end up spending just as much time, but only managing part of your money.
In fact, you might be spending even more time because all the time communicating with your advisor will be added on top of the time spent managing your retirement accounts.
Your asset allocation can better reflect your circumstances if you do it yourself. An advisor will tweak your plan based on what the advisor believes are your circumstances. But it is up to you to be articulate and patient enough to relay all your needs and wants to the financial advisor in the few meetings you have with him or her. Plus, many employ basic groups of portfolios to maximize economies of scale. This may end up fitting your circumstances perfectly, or it may not. How much are you willing to bet that what someone else is interpreting as your situation based on a few meetings will actually be the reality?
You'll be able to make adjustments to your plan easily to better accommodate changing needs. There are lots of moving parts when you need to change your plan. The percentage needed to allocate to each investment, and whether it makes sense with all the tax laws affecting the after-tax benefit are just two details that need to be researched. Most financial advisors simply don't have the capability to deal with this for every client. What ends up happening is that many sub-optimal choices are made, with you bearing all the financial consequences. When you are managing the pot yourself, you will have the required knowledge to look further to see if any change makes sense, minimizing costs.
Like I said, financial advisors can be a powerful aid in your path to a comfortable retirement. But for some, doing it yourself is the best route, bar none.
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