Wealth Building and DIY Financial Planning: Being Your Own Financial Advisor, A Good Idea?
For too long, too many people have handed over responsibility for their investment decisions almost entirely to their financial advisors. This is a bad idea. No one is going to manage your own money as well as potentially you could. The way I see it, anything you can do to create a better life for yourself and your dependents is fair game. So, becoming financially literate and reducing any over-dependency on financial advisors is part of this over-arching objective.
Becoming financially literate not only empowers you and your finances but sets a really good, much-needed example for those around you. In my view, "Becoming 100% financially literate" is something that warrants being on everybody's list of top lifetime goals.
No Such Thing as a Free Lunch
Have you ever wondered how your financial advisor was getting paid? You probably had a suspicion some financial institution was greasing his palm. Well, as the saying goes, there really is no such thing as a free lunch. Beneath the pin-striped suit lies the thinly-disguised commissions and fees structure that has rotten the financial services industry to the core.
Even now, with financial institutions heavily regulated and the onus on your financial advisor to disclose to you the commissions and fees they get paid for a transaction, this can still result in you feeling uncomfortable and wary, and leave you with a distinct bad taste in your mouth.
After the recent global financial meltdown there is a huge question mark about the validity, integrity and systemic over-reliance on the financial services industry. Instead of being obligated to put your financial interests ahead of their own and create the best financial plan for you, financial advisors are only required by law not to sell you something that's utterly unsuitable. This combined with the need to make a buck can sometimes mean your best interests aren't always at heart. As this article will show, there has never been a more apt time to become financially literate and undertake the process of becoming your own financial advisor.
Many financial service providers are either focused on a) commissions or b) service fees. In turn they impart some so-so financial advice and deliver middling returns on investment. Commission-based "financial advisors" are working for commissions paid to them by a brokerage firm, mutual fund company, insurance company etc. Fee-based financial advisors are selling their skills and time for hourly or à la carte rate.
Of the two distinct approaches, fee-based financial advice is the lesser of two evils so to speak. However, commissioned-based services may very well be the most suitable for a small investor. This is particularly true in the case of a smaller investment portfolio where less active management is required. In this instance, paying the occasional commission is probably not going to be the ruin of the portfolio's returns over the long-term.
Many financial advisors are now what they call "fee based" (i.e. they earn their crust from both fees paid by you and commissions). True fee-only financial planners are still a rare breed. Regrettably a very high percentage of financial planners are not working for you but are essentially sales people for financial institutions flogging financial products for commission. They consciously or unconsciously will tend to sell you a product that pays them the highest commission. So, oftentimes their agenda and yours are completely different.
One Trick Product Ponies
Oftentimes, the only product(s) a financial advisor understands is the one he/she is selling. An insurance agent will promote insurance products enthusiastically whilst your stockbroker will push individual stocks or a basket of shares. In both instances, neither may be aware of your complete financial situation and hence are incapable of giving you advice. The best use of your money at that moment could be to reduce your debts or build up an emergency fund.
Good financial planning is not so much about trying to beat the market or multiplying your wealth. It's really about making sure your portfolio is well-diversified and that other aspects of your finances - budgets, credit ratings, insurance cover, tax planning, estate planning and retirement accounts - are in the best possible shape. So proper financial planning encompasses more than investments. It should also allow you to protect your assets, minimize your taxes, and take care of your dependents etc., all the while growing your wealth over time.
Your average commission-based financial advisor isn't likely to think about the big financial picture. On the other hand, fee-only financial advisors are likely to be more objective at analysing entire portfolios.
When to Get Professional Advice
If are you are going to do some DIY financial planning than you will need time, education, experience, objectivity and the inclination to achieve the same level of competence offered by many professionals. To be frank, very few average-joe investors have it in them to become their own financial advisors. They simply aren't that way inclined and are too busy getting on with their day-to-day lives. So, you need to be brutally honest with yourself about the level of financial literacy you have as you create and implement your financial plans. You can't afford to punch above your weight, make costly mistakes and possibly suffer a financial knock-out!
So, whilst I think it's a great idea to strive to become your own financial advisor I do think it's important to point out that I also believe it's crucial to have a team of Grade A financial professionals (financial/tax/legal experts) in place whom you can turn to for critical advice.
There are times that you will need a second, more experienced opinion than your DIY Financial Advisory skills may be capable of. Here are a just a few examples of when it's useful to get professional advice:
- When you're transitioning from one stage of life into another (getting married, having kids, retiring, getting divorced, etc)
- Any major financial transaction such as the purchase of a property, buying or selling a business, receiving an inheritance, etc.
- When you are at a financial impasse or suffering from inertia and unclear about what to do next.
- When you're looking for the best way to protect your family in the event of an accident, illness or death;
- In times of huge economic and market change.
Conclusion:
To become financially literate will require you to become knowledgeable on the financial requirements/constraints you have and the strategies, tools and techniques you will need to achieve your goals. As you delve into the complexity of DIY financial planning and building wealth, you will quickly realize why it is a full-time occupation for even an average financial planner. The question is whether you want to become an expert or whether you prefer to hand-off this financial responsibility to someone else...someone else that may or may not have your best interest entirely in mind. Either which way, this is a decision not to be taken lightly.
