Ask most people about what they think a financial advisor does and the first thing that comes to mind is “invest your money”, or the more cynical among us might say “take your money”. However financial advice/planning actually encompasses a wide variety of topics. The purpose of a financial advisor is to help clients with their financial affairs in order to put them in the best position financially to achieve their goals.
Key areas of financial advice
The topic of financial planning contains, but is not limited to, the following topics:
- Investments
- Superannuation
- Insurance
- Tax planning
- Debt structuring
- Estate planning
As talked about earlier all of these areas link back to helping a client achieve their goals. In addition to this all of these areas require some level of specialist knowledge that a financial advisor can provide assistance with.
Can you do it yourself?
Absolutely, many people can and do. I’d say some are successful at achieving their goals and others are not. Given that the median male superannuation balance in the 60-64-year-old category in 2016-2017 was $154,453 (Clare 2019), the data seems to suggest many people will be unable to achieve their goal of having a “comfortable retirement”.
Personally I believe that the understanding of the concepts of financial planning are within the reach of most people. Further to this, for people whose main income source is a salary, a simple and effective plan can be drawn up in short period of time. I believe the hard part is actually executing the plan over the 20, 30 or even 40-year period that will often be required.
Reasons why you should consider doing it yourself
Save money on fees
Whenever you do something yourself, you’re going to have a good chance of saving some money. Let’s say an advisor is charging 0.5% p.a. assets under management (AUM) fee then mathematically this will create a huge drag on your returns over a 20-year period.
The additional cost of having a financial advisor is an intermediary
Financial advisors will often act as an intermediary between you and specialist professionals. For example, if you require specialist tax advice they may assist in finding you a tax accountant and then act as an intermediary between you and your accountant, this adds extra cost if you are willing and able to manage the relationship yourself.
Lack of confidence in the industry
According to ASIC only 11% of Australians have a “great deal of confidence” in financial advisors (ASIC 2019). I suspect this is due to the numerous, well publicized scandals that have affected the industry in recent years as well as past fee structures that encourage advisors to put earning commissions ahead of client interests. If you that you are unable to find an advisor that can help you achieve your goals or are unable to trust an external party with your finances then you have no choice other than to do it yourself.
You find these topics interesting
Most people’s hobbies are things like fishing or playing golf whereas I enjoy learning about the topics in personal finance, so I guess that makes me a bit of weirdo. If you enjoy spending your time in this way then I’d say it’s a pretty good reason consider doing it yourself. Just know to expect a blank look on peoples’ faces if you try start a water cooler conversation about market risk factors.
Reasons why you should consider hiring an advisor
Accountability
This is one area where I see advisors adding huge value to their clients. A good advisor will provide you an external set of eyes to keep you accountable and on track to achieve your goals – I liken it to a personal trainer at the gym. Let’s say your goal is to lose 10kg by the end of the year and keep it off; if you hit google there is an abundance of information (and misinformation) that can help you achieve this. Does having the all information available for free that mean we should fire our personal trainers? No, having access to the information and even knowing exactly what we need to do often does not result a successful outcome. This is because as humans, we are often unable to keep ourselves accountable.
Intermediary for discussion
Goals are rarely an individual thing, if you’re in a relationship, they will require discussion, commitment and effort from both parties. A 2015 survey by MEBank showed that only 64% of people are likely to discuss finances with their partner (MEBank 2015). A financial advisor will help to facilitate the discussion about money with your partner so that a situation can be created where you are both working together to achieve your goals.
Learning the required skills takes time, effort and energy
Managing your own finances takes time, which a lot of people simply aren’t willing to commit. After all, most people spend the majority of their waking hours at work and would benefit from spending an increased amount of time with their friends and family. There is also the consideration of needing to spend time doing tasks that can not be delegated such as exercise.
Leveraging their network
Advisors, especially ones that run their own business, tend to be well connected. The firm that my wife works for has a clientele comprising of people with a wide range of skills. Client events are often a great opportunity for the clients to network with each other to gain access to required skills and create opportunities. In our experience we’ve found that the advisors within the business are able to recommend someone that can help out with almost anything.
Allow you to use your time more effectively
Looking at your situation from an earnings growth perspective, if you are highly career driven you would be best served spending your after-work hours networking and building the required skills to make your next career move which would likely have a much higher pay off than saving on advisor fees. The same is true if you own a business, delegating this function will allow you to spend more time and effort working on business strategy to generate profit growth.
Use their business knowledge
Advisors that run their own successful business can provide business advice as well. If you have your own business, it’s likely that they have encountered similar problems to what you are encountering or will encounter in the future.
Your finances are complex
Financial advisors tend to have excellent capabilities for dealing with clients that have complex personal finances. If you have numerous financial entities that you need to look after you’ll often require specialist knowledge or a huge amount of your own time and effort to manage them in an effective way to meet your goals.
So, should you hire a financial advisor?
Everyone’s situation is different so to this question I can only really offer some considerations as to where you (and your partner) may be able to realise value when engaging a financial advisor.
Can you and your partner have a constructive conversation about your finances?
Consider whether or not you and your partner can talk about finances together. You need to consider whether or not you can talk about, and commit to goals together; keep track of your progress; and discuss making adjustments to you plans or each other’s behaviour if need be.
Can you and your partner keep yourselves accountable?
You need to consider if you and your partner are able to stick to a plan over a long period of time. Are you able keep yourselves accountable or do you need a little extra ‘push’ from an external party? You can draw on your experience with any past lifestyle changes and goal setting that you’ve attempted, have you experienced success by doing it yourself or did you get benefit from periodic ‘check ins’ with a professional?
Are you willing and able to spend the time, effort and energy to learn financial planning?
This really comes down to how you want to spend your free time. I enjoy working on this blog and learning about finance so I’m happy to give the time and effort. However, a lot of people have other hobbies and interests so the choice to delegate this function of your life will create more time for you to do those things.
Can you generate more value by investing the time saved into your revenue generating activities?
The act of delegation is using money to buy time, and the same is true for delegating financial planning. Similar to the previous consideration, but coming from a more economic point of view, you need to consider whether the time that you gain by getting an advisor to manage your finances can be spent working on your revenue generating activities. Consider whether or not you will spend the time working on your career/business in order to earn a higher income and create more excess capacity.
Do you want to deal with specialist professionals yourself?
As discussed earlier financial advisors can act as a “project manager” or intermediary between you and specialist professionals. They will also help you to identify whether or not you need these skills to assist with your financial planning. If you require these skills you need to consider if you are willing to make connections and manage the relationships yourself. This is similar to building a house using a project builder vs managing the relationship between all of the trades yourself.
How complex are your finances?
If you’re finances are too complex for you to understand then having an advisor with the required skills to understand them and provide clarity can be very valuable. Further to this, financial decision making becomes increasing complex when dealing multiple entities due to the sheer number of options available. You need to consider if you have the time and resources to model the multiple outcomes in order to make optimal choices.
What about the FFE house?
We are somewhat of a hybrid; on the one hand I enjoy doing our household financial planning as a hobby; we are able to have constructive discussions about finance and keep each other accountable so we don’t need an advisor in those respects. However, my wife is a financial planner and we utilize a lot of the knowledge that comes from the company that she works for so I can’t claim to be completely DIY. We also used an advisor to help us find our income protection insurance policies because sorting through policies isn’t really my something that interests me.
Concluding thoughts
While it is possible to do your own financial planning, the low superannuation balance data suggests that many people are not sufficiently prepared for retirement. Whether or not you need a financial advisor depends on some of following key considerations:
- Are you (and your partner) able to keep yourselves accountable in order to execute a plan that will go for tens of years?
- Are you willing to spend the time and put the effort towards learning the skills required to do your own financial planning?
- If you require specialist knowledge, would you prefer to manage the relationship directly?
- How complex are your finances?
Engineer your freedom
References
ASIC, 2019, REP 629 Financial advice: What consumers really think, ASIC, last viewed 8/3/2020, <https://asic.gov.au/regulatory-resources/find-a-document/reports/rep-627-financial-advice-what-consumers-really-think/>
Clare, R, 2019 Better Retirement Outcomes: a snapshsot of account balances in Australia, The Association of Superannuation Funds Australia, last viewed 14/3/2020, <https://www.superannuation.asn.au/ArticleDocuments/359/1907-Better-Retirement-Outcomes-a-snapshot-of-account-balances-in-Australia.pdf.aspx?Embed=Y>
MEBank, 2015, Sex and money are our top taboo subjects, Members Equity Bank Limited last viewed 15/3/2020, <https://www.mebank.com.au/news/sex-and-money-are-our-top-taboo-subjects/>