People often ask me whether or not they should hire a financial advisor to help plan for retirement and invest their assets. I almost always say no. It’s not that there aren’t a lot of well qualified and worthy investment advisors, it’s really that it’s not that hard to do yourself.
Unless you have millions to invest and need someone to work with you full time, I’d recommend setting up retirement and investment accounts at a discount broker and doing the portfolio design and investment choices yourself. Here’s why:
First, finding an investment advisor isn’t easy. You’ll have to ask around for referrals and then interview them to see if they adequately represent your needs and are in line with your investment goals.
Second, investment advisors are expensive. They usually charge for either their time or as a percentage of assets. Either way, you are losing (usually) a percent on your returns. That is on top of the percentage that the mutual funds that you buy also charge. It can be costly considering that if you earn 8% a year and your advisor takes 1%. That is cutting your returns by 12.5%! For smaller portfolios they sometimes charge even more.
Third, investment advisors have many conflicts of interest. For example, they get paid extra to put you into certain investments. This is a huge conflict of interest that is not openly disclosed often enough. After all, they need to make money too. Also, if you are paying for advice on a percent of assets base, then they have an interest in your account growing quickly. This could result in them taking extra risk in order to boost your returns and increase their fees.
Fourth, most advisors are not independent and usually recommend stocks based on research reports from analysts in their firm. Although this isn’t always bad, most research firms specialize in one or more industries, which could reduce the diversification in your portfolio. After all, an investment advisor is not an investing expert, but often a distrubtion source for a larger bank or institution.
With all those negatives, there are still plenty of reasons to find an investment advisor. Mainly, if you are not comfortable investing for yourself or do not have the time or resources to give it adequate diligence. In many cases, once you find a good advisor, you can forget about your portfolio until your quarterly, semiannual, or annual update arrives. This way you don’t have to worry and fret during market downtrends, which are often when individuals make their biggest investing mistakes.
Instead of hiring an investment advisor, why not give it a try yourself. Start when you are young and your investing knowledge can grow with your portfolio. Invest a few hours a week into learning how to invest better by reading a book about investing and learning from all the websites. Also, subscribe to a few magazines such as Money, Smart Money and Kiplingers. They are all under $10 per year and have a lot of good investing ideas in them. If you want to learn more, our partners have written a site that teaches you how to do your own stock investment research.