October 4, 2021

LeadershipMarkets & Free Enterprise

You May Not Need a Financial Advisor – How to Manage Your Money On Your Own

By: Daniel Huizinga

Personal finance can seem overwhelming, and many people initially think they need a financial advisor to navigate key decisions around budgeting, retirement saving, and investing. In some specific situations, an advisor can certainly be helpful, especially if you need to navigate complex decisions about  taxes or significant sums of wealth. However, many young professionals can simplify and manage their finances effectively on their own. Before paying a third party advisor, it’s critically important to do your research and avoid losing much of your wealth to unnecessary management fees.

First, recognize that there are no licenses or certifications required to use the generic term “financial advisor.” There are a lot of people who call themselves “financial advisors” but really are focused on selling you life insurance or financial products that you don’t need. When college acquaintances (or even complete strangers) reach out to you on LinkedIn because they want to talk to you about your financial life (as many did to me), the best response is a polite, “No thanks, I’m not interested.” 

Most of these agents are focused on selling you expensive, complex life insurance policies that include high fees for them to “invest” your premiums for the rest of your life. Popular financial guru Dave Ramsey says it best: “Insurance is a lousy investment strategy. A life insurance policy shouldn’t be a money-making scheme.” Instead of paying massive commissions to insurance salesmen masquerading as financial advisors, keep your insurance and investments separate. When you decide you need life insurance (for example, when you have a dependent), consider a term policy with considerably lower premiums and use a site like PolicyGenius to easily compare quotes without the pushy salesmen.

One way to make sure your financial advisor truly has your best interests at heart is to search for someone who is a “fiduciary.” According to NerdWallet, “If your financial advisor doesn’t have a fiduciary duty to you, they may be able to recommend investments or products that pay them a bigger commission over ones that would be the best fit for you, which could cost you more.” A helpful identifier is looking for advisors that are Certified Financial Planners (CFPs), which is the most rigorous financial advisor certification and ensures advisors are fiduciaries.

Many of these advisors are listed as “fee-only” as well, which means they only make money from a set fee you pay them (e.g., hourly fee or % of your assets) rather than having any commissions from the products they sell. This helps to align incentives, but the fees for a personal advisor are still high, often hundreds of dollars per hour or 1-2% of your assets every year. (According to USA Today, a 2% fee each year sounds small, but could end up consuming almost half of your wealth after 30 years based on both the fees paid and lost investment returns.) But if you really want a dedicated person to talk with in your area, sites like XYPlanning are a great resource for finding fee-only advisors and comparing their pricing. 

For many young professionals though, a dedicated financial advisor is not a necessity. A great place to start if you want your investments on autopilot for the next few decades would be sites such as Betterment or Wealthfront, whose innovative “robo-advisors” will manage your money in low-cost index funds for a very small fee. (For example, Betterment charges 0.25% of your assets as a fee each year, and if you’re willing to pay 0.40%, you can have unlimited calls with Betterment’s team of CFPs.) By contrast, many financial advisors at large firms like Edward Jones charge 1-2% to manage your investments, in addition to putting you in mutual funds with 20+ times higher fees than the low-fee funds that Betterment / Wealthfront use. (When you compare the returns on these funds as I have, you’ll find they often underperform the lower-cost funds, even before the higher fees!)

If you’re also going to manage your own finances, it’s important to make things as simple as possible. I’d recommend checking out an app like Mint or Personal Capital to automate your monthly budget and make it easy for you to track trends in your spending from month to month. (Personal Capital also has a full advisory / investment management service that is still cheaper than most independent or big-company advisors.) In addition, Capitalize is an amazing new startup that does all the work for you (for free!) to combine your previous 401(k)s or employer retirement plans into an individual retirement account (IRA). They also help you compare IRA providers (including Wealthfront mentioned above, Vanguard – the industry leader in high-quality / low-cost investment management, and many others) so that you can have one easy login to view your preparedness for retirement. 

Finally, taxes are everyone’s least favorite part of financial management. NerdWallet and MoneyUnder30 have great resources on how to find an individual tax preparer if you need one, but it could still cost a few hundred dollars. Most young professionals will be fine with the automated prompts from a system like TurboTax that actually makes filing your taxes pretty easy. (TurboTax also offers a premium “live” service that costs $80-200 where you still do the work to file your taxes but can video-call an expert anytime, or pay a bit more and have them just file for you.)

The financial-management industry can be intimidating, but armed with these tools, you should be well on the way to taking control of your financial life and minimizing the fees you pay.