I was recently approached by a family member who wanted my opinion on whether they should hire a financial advisor and give that person the power to make investments on their behalf. This person is relatively young (under 40), had recently been promoted to a higher salary position and is the sole breadwinner for his small family. I asked what prompted the question and he said that some co-workers were advising him on the issue. As a self-made millionaire I definitely have my own thoughts on the topic so I was glad that he came to me for advice before making a decision to turn over his financial future to a paid advisor.
Knowing the basics of his situation, which is a lot like mine was when I was his age, I was able to point out a few things which I think are worth sharing here. First off, it’s worth it early on in your life to invest your own time and effort to understand investing. If for no other reason than there are countless horror stories from people who turned over control of their financial life to an advisor…who then screwed those people over! Bernie Madoff is an infamous name that people will probably recognize and he used a broad, worldwide network of financial advisors to propagate what turned out to be a multi-billion dollar Ponzi scheme. Most people who invested with those advisors knew nothing of Madoff, but the advisors knew. Those advisors later admitted that they didn’t really know what Madoff was investing in. That’s not to say that all financial advisors are foolish or crooks. Just to point out that if you manage your own investments then you’ll know what you’re invested in and you’ll know that you’re going to act in your own best interests.
The next thing I pointed out is that successful saving and investing need not be overly complicated. The numbers are particularly small for most people when they’re under 40 and that’s a great time to learn what works and where the pitfalls may be. I know that the money lessons I learned in my 30s set me up well to invest from age 40 and beyond. There are just four savings and investing vehicles that I think are critical to know about for most people. And those are: checking accounts, savings accounts, money market funds and mutual funds. People who understand the differences between those tools and why they are important are ahead of the vast majority of investors. It never ceases to amaze me how some people so far into their lives are clueless about these things. Many of those people have either never saved money or they’ve given others license to manage all of their money.
The final critical thing I pointed out that I’ll mention in this post follows. Whatever a person does to invest, the basis for success or failure resides within the family’s capability to budget and spend properly. Cutting a check for a few thousand a month to a financial advisor, even if they’re the best, won’t ensure a solid financial future if a family spends more than what’s left and avails themselves of the cornucopia of debt options available to the average American household. Credit cards, student loans, auto loans and home equity loans are the most popular options for people whose take home pay doesn’t make ends meet. A good number of people have been taught to invest without regard for the damage caused by overspending what’s left. So much the better for financial advisors who earn money based on the total amount they are investing for their clients. A household needs a solid accounting of what it costs to operate in a single month before deciding what can be considered disposable income. People often think that the help of a financial advisor will offset their lax approach to managing their household budgets. I certainly wouldn’t count on that as a winning money philosophy!
Issues related to an employer 401(k) retirement account are very relevant to this topic, although I didn’t get into it in the discussion with my family member. The household budget I mentioned above is the first, and most important step, in building a foundation for financial security. I recommend doing the budget two ways. First, accounting for total take home pay with no 401(k) contribution. Second, if there’s additional money remaining consider what percentage of your gross pay would make sense for a 401(k) investment every month such that take home pay covers all household expenses. If there’s no room for a 401(k) investment then I suggest considering if there are optional expenses in the budget that can be eliminated and also exploring ways to increase overall household income. Both of these issues are topics that could easily fill multiple additional posts. It’s also important to know that you need to understand mutual funds regardless of whether you use a financial advisor because most of the options in a 401(k) are mutual funds. That understanding of funds in your 401(k) can serve you well in managing your own investment account outside of retirement.
With all of the above stated I do think there are situations that warrant use of a financial advisor. These include if you’re a person running a business that yields large profits, if you come into a windfall of money over a million dollars or if your personal investments include an array of products including stocks, bonds and real estate. I still would caution anyone from falling into the trap of believing that a complicated portfolio of investments is a better portfolio. A simple approach can do a person very well and is easier to understand and manage. If you’re a financial advisor (or a committed fan of them) I suggest you take all of this with a grain of salt as I’ve done fine managing my own money. I happen to enjoy research, numbers, calculations and models. Even if a person uses a financial advisor it behooves them to understand all of their investments and know what risks go along with each investment.
Some people will gain financial knowledge via their traditional education but even if you don’t there is plenty of information on the internet that can steer you in the right direction. Morningstar is my favorite source of research on mutual funds, although if you open a brokerage account your brokerage company will have their own tool for researching funds. Still, Morningstar’s star ratings give a quick indicated of how well a mutual fund has performed. For people who want to research data and find helpful calculators DQYDJ (short for Don’t Quit Your Day Job) is a fun and informative site. There’s a ton of other sites out there that can help but be aware that many investing sites make their living selling different products so the information and opinions may be skewed to help earn revenue. I think you’ll find that the time you spend educating yourself on financial issues will be rewarding in more ways than you expect. Happy investing!
In The Midst Of A Journey 