When Should You Leap From Financial DIY to Financial Advisor?
Are you a financial do-it-yourselfer?
Well, chances are, if you're reading this letter, you are. That's not a guess—that's a statement based on the relative popularity of our self-help articles, and where Weekend Tea readers tend to sign up on the site.
So, we wouldn't be surprised if you scratched your head a little at today's topic:
Why it (sometimes) makes sense not to DIY.
The Tea
We're firm believers in the virtues of tackling your own finances. Virtually everyone who works for or contributes to the site is a DIYer in one way or another—some of us manage our own investments, some of us do all (or at least part of) our own taxes, and some of us even have experience dealing with business finances.
That said, for many people, there's a strong case to be made to consider a financial advisor.
WealthUp Tip: Wondering whether you've saved enough money for retirement? We break down how much you need depending on your age.
If you're about to click away because you don't think you've got the assets to justify an advisor, you just don't like the idea, or you're worried that this is just a sales pitch, let us put your mind at ease:
- We're not selling anything here.
- The amount of money you need to justify an advisor might be a lot less than you expect.
- Even if you don't currently have the funds to justify an advisor, our discussion below will help you make a more informed decision when that day comes.
If you're still with us, let's start out by explaining what a financial advisor even does.
While people most closely associate the profession with investment advice—which they do provide!—they offer oh so much more. In reality, financial advisors can do as little or as much as you'd like, up to helping you create a holistic financial plan that can help you achieve all of your various financial goals throughout every stage of your life.
They can help you save for retirement, sure. But they can also help you understand the most tax-efficient way to save for your kid's education, navigate the ins and outs of Social Security, deal with unexpected financial changes like a parent needing elder care, determine how prepared you are to open a new business, or just save up enough to finally buy that boat you've always wanted.
To be clear: Some people can DIY all of this and more on their own. But some can't. Some can only handle parts of it. And some people's eyes glaze over just thinking about any of it.
That's where a financial advisor comes in.
The Take
So, when is a financial advisor right for you, or anyone else, for that matter? Where are they most useful? Why not just ask AI to fix your financial life for you? To help you answer these questions and more, we turned to one of our favorite WealthUp guests—Jan Blakeley Holman, Director of Advisor Education at asset management firm Thornburg Investment Management.
Who Will Get the Most Out of a Financial Advisor?
"I believe they are for everyone," Holman says. "The reason financial advisors are beneficial for wealthy folks is the complexity of their financial situation. For people who are just beginning to work, advisors help them learn the behaviors that will make them successful financially—putting money away regularly, having an emergency fund, planning for expenditures in the future. Unfortunately, those behaviors typically aren't being taught in school (that's changing as more states add financial literacy programs), but adopting those behaviors is critical for people who weren't blessed with an $800 million trust fund."
How Much Money Do You Need to Hire a Financial Advisor?
Every financial advisor typically will have a different financial threshold that they need their clients to meet, but very broadly speaking, $50,000 in assets—that's not just what's in your bank account, but across your 401(k), IRA, and other accounts—is considered to be the floor.
That said, even if you don't meet that threshold, you're not necessarily out of luck—especially if what you're trying to get out of an advisor is education.
"Go to community education programs that are offered about financial topics," Holman says. "Typically, they're taught by someone who's in the business—an advisor, an insurance agent—and it's a way to acquire clients. But you don't have to be a client in the first place. So go to these classes and learn the necessary financial behaviors to build wealth that reaches or exceeds any threshold that or any other advisor might have to take you on."
Also, money isn't the only thing advisors look at; some have other characteristics they consider when they're evaluating clients. "It's not just current financial wherewithal," Holman says. "For instance, it could be demographics. Their practice might focus on working with women. So if a middle-aged man comes and has a lot of money, that might take the advisor off their goal or their target client, and so they might not work with that person."
Why Not Just Have AI Crunch the Numbers for You?
The financial advisor industry is one of the best examples of "a science and an art." The science is the numbers—building portfolios with a certain risk/reward tradeoff, maximizing tax advantages, understanding how to get the most out of Social Security. But the art is in understanding people's needs, building trust, and understanding that finance isn't just a numbers game—it's a mental game, too.
And even Holman admits that the numbers part of the profession will increasingly be handled by computers. "The science and the repeatable tasks, those are going to be taken over with AI, with machine learning," she says. "So financial advisors' work will more and more be about relationships, empathy, emotional intelligence."
"When building a portfolio becomes a commodity, there is no differentiation between Kyle the human and some machine learning program that can tell us what to do. But if I have a child that has disabilities, or if I have a parent I have to support, I don't want the machine giving me numbers. I want Kyle looking at me and Kyle's eyes tearing up because he gets it, because he gets the emotions I'm under, and he's there to hold my hand and help me be courageous and succeed."
When Should You Discuss Social Security With Your Financial Advisor?
Social Security should be one of the first topics you cover.
"If you're putting money into something [like Social Security], especially when you don't have much choice in whether you contribute anyways, you should figure out what it's all about and why it's beneficial to you," says Holman, who says the time to discuss Social Security is "right away."
What Do You Need to Think About When It Comes to Planning for Old Age?
As mentioned above, Holman says Social Security is one of the most important things to plan around. As uncomfortable as it sounds, that's not just so you understand what Social Security can do for you—but also so you know what it won't be able to do.
"The first thing you have to know is: What are you going to do to have earned income if you're healthy later in life? Because believe it or not, you might not be able to retire," she says. That's not because Social Security won't be around—despite conjecture over the program's future, "it's not going to go away," she says—it's because Social Security simply wasn't designed around people living as long as they currently do.
"If you have people in your family who have lived into their 80s or 90s, there's a greater potential for longevity. And when they designed Social Security, we never imagined this kind of longevity," Holman says. "When I first got into the business in 1977, we ran insurance proposals for people to live to age 80. So the fact that Social Security is still dealing with age 62, 65, 67 … it's crazy. Look at the age of the two guys running for president!"
Naturally, then, you need to build an asset base to generate income when you're not getting a paycheck from work—something other than Social Security that will pay you in retirement. And Holman notes that the taxation of money from those different sources is really critical: "You might have a million-dollar 401(k), but remember: roughly 30% of that is going to be gone with taxes; think of what you have in there, less 30%." Holman suggests putting at least some of your money into a Roth IRA, where contributions are made with post-tax money but retirement withdrawals aren't taxed.
Even if you live a long life and you're reasonably healthy, you might need to hire someone to help you with long-term care. You might need someone else to share in the cost of your healthcare. And it's not cheap. But it's also a critical decision, and some people don't understand the ramifications of not having someone else share the cost.
Riley & Kyle
WealthUp (Young and the Invested is now WealthUp)
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.