This debate is getting more and more appeal. There is no shortage of different perspectives on the issue of looking after your own money versus using a financial advisor. Here's my perspectives on this debate.
Doing it on your own
When I first started in this business 20 years ago, I could read a couple of newspapers and a few industry publications a day and I typically had more information than most investors.
Today, we live in a world of information overload and most of that information is free. With the development of the internet, investors and readers have access to the exact same information that any financial advisor might have. There are more publications you can subscribe to appealing to the investor who wants to do-it-yourself.
However, this “free world of information” has created it's own problems in that there is now too much information – just like there are too many mutual funds. As someone in the financial industry, even I find it incredibly difficult to keep up with all the information. And really, who can keep up?
This has made the world of investing confusing and complex. So what's my point. Investing requires five basic requirements:
- Access to information. So we all should agree that the average investor has access to this information. Today, if you have a computer and an internet subscription, you have access to the information. Google investing and you will find incredible amounts of information on taxes, stocks, mutual funds and investing. If you are a regular visitor of about 3 to 5 websites, you will have access to more than enough information to do-it-yourself.
- Desire to seek that information. Here is the reality . . . some people love investing as much as I love to garden . . . and I hate gardening. And if you are a gardener, please do not take offense by that. It is just not my thing. I love personal finance and investing but I know many people who have no desire, motivation or passion for this topic. In order to invest on your own, you must ‘want' to learn more and keep abreast of new information. The fact is that not all people will share this ‘want' and they are likely the people who should seek the help of a financial advisor.
- Time to find that information. The problem is no longer having access to information. Rather it is two-fold: Firstly, you must find the time to be able to research and seek the right information. For those of you who are do-it-yourselfers already, you probably devote a reasonable amount of your free time to reading books, magazines or surfing the internet. You may not do it regularly but there are points in time, like RRSP season, where you will devote more time to the subject. Secondly, you must filter the information. This will be a very challenging aspect too. With free access to endless amount of information, there is also a lot of ‘bad' information out there. The scam artists are more abundant than ever and you must be able to filter out the good from the bad.
- Resources to the information. While there is a lot of free information out there, there is also some software and subscriptions that make researching that much easier. Some financial advisors can have significant resources into software and publications on financial planning, investment planning and retirement planning. Sometimes this information is catered to professionals only. If you are going to do-it-yourself, I would suggest investing not only time but also some money into books, software, and subscription services.
- People to bounce ideas off of. I find the most successful investors not only read and research but they have networks of people to bounce ideas off of. If you are going to do it on your own, try to find some other do-it-yourselfers to discuss ideas and information. There are more ‘non-professional investors that have created wonderful blogs to hep the do-it-yourself investor.
Finding the right financial advisor
If these requirements do not suit your needs, you will now have to try to find the right person to help you out. Unfortunately, this search can be as challenging as trying to find the best investment.
My criticism of the financial industry is that it is still too easy to become a financial advisor. Take a couple of exams and you are now qualified to sell investment products.
Related article: Financial Advisor or Salesperson
Just like there are good investments and there are bad investments, the same applies to financial advisors. There are good advisors and there are bad advisors. So what makes a good advisor? It is a tough question to answer but the tougher aspect is to try to find that person to work with.
In my travels, I speak to many investors about how to make better financial and investment decisions. In the last couple of years, I have spent more time speaking to financial advisors about how to be better financial advisors. I've thought long and hard about this issue and I offer you some of my thoughts:
- Possess the 5 qualities. If those qualities are necessary to become a good investor, then that also must exist for a good advisor. I have met many advisors who lack these qualities and they give my industry a bad name. To review, a good advisor has the time, expertise, knowledge, resources and passion to invest.
- Good advice goes far beyond investing. Most people go to financial advisors to help them invest money. The reality is good financial planning and good tax planning goes much farther than good investment planning. A good financial advisor will recognize this truth. In my opinion, good financial planning can benefit you by 10% to 50%. Good investment planning can benefit you by 1% to 5%. Which has more value?
- Product vs advice. A good financial advisor will recognize that advice is the distinguishing characteristic. Product is simply a tool but you must know where those tools fit and when to use them. Far too many advisors focus on the tools because they focus too much on how they are going to get paid. The best financial advisors across the country focus more on giving good advice and the products are simply an extension of that advice. If you are concerned about objectivity of advice, recognize that there are more and more financial advisors (even full service) who offer mutual funds on a no load basis. In the future there will also be a greater number of fee-for-service brokers who will charge for advice and not product.
In the end, it boils down to two key issues: trust and competence. You must find a financial advisor who is competent in his or her field. Some objective qualities to look for are education, experience, industry association membership, and references. You must also trust this person. A financial advisor handles one of the most important tangible assets in your life. Ask yourself if you can see yourself working with this person for a long period of time. Unfortunately, finding this financial advisor is not easy.
Related article: Online Guide to working with Financial Advisors
Whether you invest on your own or you have a good relationship with your advisor, I wish you much satisfaction and prosperity in your investing future.