Why You Should Consult With A Financial Planner - Or Not

One of the first decisions you have to make about your financial plans is whether to outsource your planning to a professional financial planner. Alternatively, you end up with a do-it-yourself (DIY) financial plan. Although my site is necessarily aimed at people interested in DIY, outside advice is probably a good idea for many people, and appears to be a necessity before undertaking big financial moves.

But even if you do seek professional help, you should understand enough about finances so that you can independently evaluate the advice your are given.

Main Reasons To Seek Professional Advice

The main reasons for seeking advice, starting with what I view as the most important.

1. You are about to make a large financial decision. Examples are buying a house or cottage, or purchasing an annuity. In the case of buying a house, you should not rely on the person lending you money to determine how much you can afford - they have an incentive to lend you as much as possible.
2. You have a complicated financial situation.  For example, you own a business or have a family cottage, and you have to decide how to set up your will.
3. A regular meeting with an advisor acts as an incentive to hit financial targets. It is psychologically easier to meet goals if you have to discuss them with an outsider. If you are the only person who knows about your finances, it is easier to overlook slippage. 
4. An advisor should have to tools for you to set a financial plan. An advisor should be able to model your financial plan, and tell you whether your it is realistic or not. 
5. An advisor should have the data to let you assess portfolio risk. Your advisor should have some means of explaining how investment portfolios behave based on their risk characteristics. For example, a 100% equity portfolio will normally be a lot more volatile than a 100% government bond portfolio. You should be able to have some way of visualising the risk trade off as you change the weightings of assets in your portfolio.
6. The advisor should have technical knowledge. An advisor should be able to explain things like the tax advantages and disadvantages of various financial products. Additionally, the advisor should understand a wide range of investment options. 

Stock Tips: Not The Reason For Outside Advice

An advisor should be able to help you avoid really bad investment decisions, but it is a mistake to expect an advisor to provide amazing investment advice that will allow you to retire in just a few years.

Although investment advice often harps about the importance of long-term compounded returns, you have to be realistic. If you are just starting to save, enhancing your portfolio returns will probably generate less money than finding a way to reduce spending.

When You Do Not Need An Advisor

• You have a sensible financial plan that you understand. You have a target savings rate that will let you hit your retirement goals, and this savings plan is relatively robust to changing conditions.
• You can hit your savings goals. Outside pressure is not needed to meet your goals. If you are married, you and your spouse can keep your joint plans on track.
• You have a simple financial situation. If you are an employee, or even self-employed, your investing and tax situation tends to be straightforward if you are a long way from retirement.
• You want to learn about finance. Learning about investing is a way of taking control of your life. Enhancing your knowledge is a better use of your time than passive entertainment.

But as a warning, if you do-it-yourself, you need to find reliable sources of information. The internet rewards specialisation and staking out extreme positions, so it is best to supplement your knowledge with other sources.

Also, whether or not you have an advisor, you should understand what you are doing. For example, exchange-traded funds (ETF's) can be a better financial product than most mutual funds. However, you need to be able to buy or the ETF's on the stock exchange. Unless you are comfortable with that, they may not be a better product for you.

What To Keep In Mind If You Have An Advisor

• You should understand how the advisor gets paid. If someone gets paid for selling you a particular product, it is not surprising that they will tell you that it is a good product. Paying for independent advice may be worth it in the long run, particularly if you intend to take care of your finances yourself later.
• Trust, but verify.  Since people rarely hand large sums of money to people whose motives they question, scam artists generally target people who trust them. If anything appears even slightly out of the ordinary, you probably should bring in external legal advice.
• Understand the non-financial incentives of your advisor. An advisor who chews out his clients for spending too much money may not get a lot of repeat business. As such, the advisor may not want to push for an adequate savings rate. Another problem is that advisors do not want their clients to run out of money in retirement, so they may have an incentive to push for an overly conservative savings target before taking retirement.

The Best Way Forward?

It is impossible to generalise and say whether DIY financial planning is right for you. But one possible mixed approach is to take on an outside advisor, while at the same time teaching yourself. The hope is that the advisor will give you the tools to allow you to start out on a good footing before you go the DIY route.

(c) Brian Romanchuk 2014