I became a DIY investor and financial planner several years ago. I began writing about my experiences to be an educator and consumer advocate. Naively, I thought everyone could and should be a DIYer when I started writing about these topics. I was wrong.
Since I’ve started writing and sharing my story publicly, I’ve received many questions from readers. I’ve also become the de facto expert among family members, friends, and former co-workers to answer investment, tax and retirement-planning questions.
These interactions made me realize my ignorance in assuming anyone could and should be a DIY investor and planner. Many people need individualized advice. Here are five reasons why.
An investment plan is easy; a financial plan is notWhen it comes to investing, simpler is often better and more profitable. Every investor should have a written investment plan. Write it when you’re thinking rationally to guide behavior when you’re not.
My investment plan easily fits on one typewritten page. It’s probably more complex than necessary. Investment planning is easy.
But developing an overall financial plan isn’t easy. Your financial plan should also consider retirement planning, asset protection, estate planning, tax planning, developing a strategy for claiming Social Security, educational planning, and insurance planning.
Tying together all the variables of a good financial plan can be challenging. A coherent strategy can drastically alter the amount of taxes you will pay, the wealth you accumulate in your lifetime, financial risks you’re exposed to, and income available in retirement.
These factors will substantially alter the quality of your life. A good retirement calculator can demonstrate the impact of even small changes when compounded over many years.
I say that I am a DIY investor and financial planner. Full disclosure: I have a lot of help. My wife is an engaged partner. I share my thoughts publicly and receive feedback from this knowledgeable audience. I’m part of a mastermind group with four other couples with similar financial and personal goals. We meet once a month to exchange ideas and vet one another’s plans. I still pay a CPA for tax advice and an attorney for help with asset protection and estate planning as needed.
Read: How to reduce financial anxiety in a single afternoon
Most people don’t take the time to develop the social support group I have. A good financial adviser who can help tie together all the variables required to develop a comprehensive plan can add tremendous value, far in excess of what they may cost. Having a knowledgeable person to vet your plan and offer a detached unemotional perspective is valuable. Being dogmatic against paying for financial advice can cause you to be penny wise and pound-foolish.
You need an adviser because you had an adviserYou may be contemplating becoming a DIY investor because you had a bad experience with a financial adviser. Ironically, the fact that you had a financial adviser could be a reason you now need another one.
“Advisors” frequently sell investment products that lack transparency and are difficult to understand. These include variable annuities, equity-indexed annuities and whole-life insurance. These products may require paying surrender charges or other penalties if you choose to sell.
Holding investments in a taxable account is another potential problem. You may want to sell funds because they are more expensive than you would like. Ignoring tax consequences and selling off these investments may cause you to lose more in taxes than you save in fees. It’s vital to understand the tax consequences of selling off investments and compare it to the cost of holding the investment before you make any hasty decision.
Technical details of investment products and tax consequences of switching investments can be complicated. Errors can be expensive. You must develop a comprehensive plan.
A bad financial adviser may be the reason you have this predicament. A good adviser may be the person with the expertise you need to help you out of it.
You’re focused on the wrong thingsMany people think investing is about figuring out the magical asset allocation, doing Roth IRA conversions and other technical wizardry. But they underestimate their behavior.
The rise of robo advisers demonstrates this point. Robo advisers’ selling point is providing the services that a traditional adviser can at a fraction of the cost. Apparently people are buying. According to Barron’s, both Betterment and Wealthfront have accumulated over $10 billion in assets under management.
Each robo adviser touts a different computer algorithm to design, in theory, the optimal investment portfolio. None have been around long enough to know if they will do any better than, or even match, an S&P 500 index fund or any of the simple Bogleheads’ lazy portfolios.
Robo advisers tout rebalancing your portfolio, though there is little good evidence how much value this adds. Rebalancing may actually be harmful in taxable accounts where it can create capital-gains taxes.
Robo advisers also promote automatic tax-loss harvesting. While this one-size-fits-all service will benefit some, it is counterproductive for others who would benefit from tax-gain harvesting. It can also create problems with the IRS if it triggers a “wash sale” when not coordinated with other investments like a 401(k).
Robo advisers emphasize the importance of technical help they provide, but they neglect behavior modification, the area where an adviser can add the most value.
Many investors underestimate the importance and overestimate their ability to control behavior. The websites of Betterment and Wealthfront both crashed on the same day in early February when the S&P 500 SPX, +0.90% dropped 4.1%, presumably because panic caused a rush to the websites.
Read: How to find the right balance of stocks and bonds for your portfolio
Your behavior is the most important factor in your ultimate success or failure as an investor. If you can’t control it, an adviser to guide you adds tremendous value.
Times changeMost people can be DIY investors through most of their accumulation phase. Adding advisory fees while you’re following a set plan of contributing to your investments regularly can create a major drag on investment performance. If you are able to control your behavior and have a simple tax situation, an adviser adds cost while adding little to no value.
But times change. We get married. Sometimes, we get divorced. Babies are born. Those babies grow up and go off to college. We get new jobs. We quit or get fired from old ones. We start businesses. Businesses fail or are sold. Loved ones die.
Ultimately, we have to decide when to retire. This comes with more decisions like buying health insurance, developing withdrawal strategies and claiming Social Security.
These life events have major financial implications. They may invoke emotional responses not conducive to making ideal financial decisions.
Read: These are the birthdays when you’re most likely to make real change in your life
We also can’t be an expert on every situation. When I quit my job in December 2017, I spent hours researching whether to roll over my 401(k) to an IRA, determining whether it made sense for our family to switch to a high-deductible health plan and contribute to an HSA, and then deciding which HSA is the best for investors.
My decisions saved me over $1,000 on my 2017 taxes and will save many thousands more in taxes and fees in future years. If you’re not willing to put in time and effort necessary to research these decisions, it may be worth it to pay a financial adviser to help you through them.
Read: All the ways you can mess up your 401(k) — even if you max out your contributions
You’re not getting any youngerIn most relationships, one person has more interest in household finances and investments. This can work fine, provided the interested partner is able and willing to take on the task. Consider others who are dependent on you, including your spouse or significant other, children and other relatives when deciding who will handle this important task when you can’t.
According to the Alzheimer’s Association, one in 10 people age 65 and older has Alzheimer’s disease and one in three seniors dies with Alzheimer’s or other dementia. Even if you avoid this fate, we will all die at some point.
If you are the person who controls the finances in your household, ensure that your loved ones will be taken care of when you are no longer able to fulfill this role.
Simplifying financial strategies, organizing financial documents and having a will make it easier for a partner or other family member, who may be cast into having to take over, to navigate. Another solution may be to establish a relationship with appropriate financial professionals.
Read: How to talk to your family about your estate plan
You may not need a financial adviser, but your dependents may. If so, it is better to initiate the process now when you can be part of it, rather than leaving your loved ones, who might be taken advantage of, to have to go it alone in the future.
Being proactive can assure that your loved ones don’t have to try to wade through murky financial waters while dealing with circumstances that left you unable to fulfill your role as your household’s money manager.
One size doesn’t fit allPersonal finance is full of oversimplifications and one size fits all rules. Unfortunately, these rules don’t always work.
I am as committed as ever to shining a light on the conflicts of interest inherent in the financial industry and helping as many people as possible become financially literate.
But the reality is that many people either can’t or won’t manage their money competently. If you fit that description, you still need to have enough education to be part of the process, ask the right questions, and protect your interests.
Even many who are engaged, intelligent, and interested hit roadblocks. That’s normal. You shouldn’t be shamed if you need help.
When you need help, your best bet is to find a fee-only adviser. One with Certified Financial Planner (CFP) credentials who works under the fiduciary standard shift the odds of getting good advice further in your favor. A good place to start is the National Association of Personal Financial Advisors.
Being a consumer advocate doesn’t mean giving an oversimplification and telling someone what they want to hear. It means telling the whole truth. The truth is, you may need a financial adviser.
Chris Mamula used principles of traditional retirement planning, combined with creative lifestyle design, to retire from a career as a physical therapist at age 41. This is adapted from a post on blog site Can I Retire Yet?
