Pay For Advice Or Do It All Yourself?

Many investors these days have become disenchanted with their investment advisors who don’t keep in contact, sell a pre-determined model of products, and give abysmal service, not to mention their poor returns.  They are deciding they can do a better job themselves.  But how do you know you have the right skills to manage your own money?

Related: Why I Became A DIY Investor

A “Couch Potato” strategy is a non-complicated plan appropriate for many investors, especially those just starting out.  Do you have the discipline to stay the course over a long term?

To build a portfolio of individual stocks you need to take the time to do your research.  There is also the risk of lack of diversification and buying “hot” investment products or the latest fad.  It’s hard to find the right mix and overeager investors may take on too much risk in their search for yields.

Of course, managing your money isn’t just about building an investment portfolio.  You need to take some time to identify specific goals you want to attain – paying your mortgage quickly, saving for a large purchase, staying home to raise your children, having X amount of income to enjoy in retirement, and so on.  Then comes the plan for reaching these goals.

Some people can develop a financial plan on their own, especially if their goals are simple.  There are many good books and other resources dedicated to this subject.  But what if you can’t relate the ideas to your specific situation?  What if you don’t know how to begin?  Do you have the discipline to follow it through?

Related: 5 Challenges DIY Investors Face

For complicated situations and more financial expertise, working with a financial advisor can help you take this first important step.

A Fee-Only Financial Planner or Money Coach

Making financial decisions, especially with your own money, is a very emotional process.  It can be comforting to work with someone who is able to see the big picture, point you in the right direction, and clarify how to proceed.  Their objective, unbiased advice helps develop a workable budget, reduce taxes, and give financial strategies that you may not have thought of, to better reach your goals.

These types of advisors charge you a flat-fee, either by the hour or by project.  They offer support to help you implement various action steps and track your progress, reassessing as required.  Usually, they are not licensed to sell investments, or make specific recommendations for different products.  Their services involve offering advice, planning and coaching.

Related: A New Fee-Only Financial Planning Service

This service is appropriate for people who will purchase and manage their own portfolio.

Portfolio (Wealth) Managers and Investment Advisers

Investment advisors are paid primarily by an agreed upon fixed percentage of the assets they manage.  They can also include various planning services, if desired.  They are paid directly by you rather than receiving commissions from the products they sell or other transactions.

This service can be costly, and often requires a stated minimum investment portfolio, but it could be just the ticket for those who want good results without being directly involved in the trading and management of their investments.

Related: When To Fire Your Investment Manager

Make sure you’re not paying for services you don’t need, or are not actually receiving.

Bottom line: Should You Pay For Advice?

If I want to develop my basement, I could buy a manual to find out how to do the electrical work myself.  Or, I could hire an electrician to do the work for me.  For a higher initial cost, I could avoid potential future problems that might be disastrous.

Canadian investors hate to pay fees.  It’s easy to reduce fund costs and trading fees, but all fees are not equal.  Those occupied with only reducing fees often make other costly mistakes.  They don’t manage their income effectively, are not diversified, and are tax inefficient.  They procrastinate and try to time the market and let their emotions dictate their behavior.  Then they wonder why they are not as financially successful as they would like to be.

It could be worth your while to pay someone a one-time fee for planning advice.

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14 Comments

  1. Dan @ Our Big Fat Wallet on February 4, 2014 at 10:16 pm

    Great post, I manage my own portfolio but sometimes wonder if a second set of eyes would miss something that isn’t obvious. I can definitely see the value in paying for investment advice and as you mentioned not all costs are equal.

    A screwup on a DIY project like a basement is not a big deal and can be fixed. Retirement planning is much more high stakes though and leaves little room for error.

  2. Money Saving on February 5, 2014 at 7:31 am

    I don’t think it is necessary to pay for advice unless you don’t have the time to figure it out. For those with a lot of money where their time is very valuable, it may be a better decision just to outsource it. For those of us that aren’t rich and have free time, I say jump in with both feet!

    • @kiltedbroker on February 5, 2014 at 10:40 am

      I hear what you are saying, but don’t you think there is a place for low cost advice to at least point you in the right direction before you “jump in with both feet”? Lots of people have the “time to figure it out” but have developed terrible money habits that make it considerably harder for them to find success. Lets not forget that a lot of people have no idea how to manage their money, not everyone starts on even ground. I believe there is certainly a place for low cost, personalized financial advice, in fact… it should be the first thing you “invest” your money in.

  3. Joe on February 5, 2014 at 7:52 am

    I think, as discussed on Monday, there are differences between large and small portfolios. With a few hundred grand, there are economies of scale and solid advice/guidance is worth its weight in gold if a person is a financial neophyte (and especially if time can be spent more productively on other stuff). On a small portfolio, just buy index funds unless you’re inclined to enjoy investing as a hobby.

  4. KC on February 5, 2014 at 9:24 am

    I’m of the “pay the financial advisor while you dip your toes into the ocean” camp. Right now, I’m doing a practice money investments for a year to get the hang of DIY investing while talking closely with the financial advisor. She definitely looks after my best interests (a rarity, I know) and includes financial planning with the purchase of investments with relatively low MER (even if I decide not to purchase them after all).

    I think I will always have a hybrid of sort in investing. After all, it’s far easier to maintain a relationship with a really good financial advisor (if you can find one) than to suddenly find a new one if the DIY investing blows up in your face.

  5. Gary on February 5, 2014 at 9:53 am

    Not to be too negative but electricians have many years of formal education and apprenticeship; ” financial advisors ” maybe, maybe not. My point being; when I hire an electrician I know he’s qualified but I’m not so sure about the financial advisor.

    • My Own Advisor on February 5, 2014 at 6:54 pm

      I second your comment Gary.

      The other thing, all the tools to do the job, are available to the retail investor today and have been for decades. Not so easy to DIY without the tools of an electrician, plumber or carpenter.

      Also, you can result in personal injury if you DIY a home reno and you have no idea what you’re doing. I suspect losing a limb can be very costly than a bruised bank account!

      Mark

    • fiscally fit on February 7, 2014 at 2:20 pm

      Simple solution, Credentials. Find a CFP or a CFA and go from there. Use credentials as a the initial filter, not a compensation model. Once you have a pool of candidates to potentially work with, refine your criteria (experience, licenses, value propostion, process, transition plan, compensation model. Just remember that an IPS (investment plan) is NOT a financial plan. One is not a subsitute for another.

  6. CanadianDaniel on February 5, 2014 at 10:03 am

    Had a bad experience with a BMO advisor many moons ago. Let’s just say he was more focused on commissions than my best interests. I have to concede I’m too emotional for stock investing and have lived with the consequences of day trading (Lesson Learned: Don’t do it). Instead, I now use dollar-cost averaging to buy low-cost index funds to take emotions out of the equation.

  7. Ken on February 5, 2014 at 11:56 am

    As I crammed for my retirement, I did attend a lot of investment seminars. One of them was free seminar with The Wealthy Barber where I was given a free copy of the Wealthy Barber Returns. Although, I had heard the information before, I was convinced that index funds of the broad basket was a good long term strategy. So I follow that and it works for me.
    I find wealth managers to be an expensive and needless luxury. They charge around 1% of assets which may seem small but for a retiree, planning to live by the 4% removal rule, 25% of the capital draw down could be going to your advisor. Doesn’t make a lot of sense to me. Since no good advisor can outperform the market, why not just by an index fund where the fees are less than .25% and just relax?

  8. Zach @ Dividend Ladder on February 5, 2014 at 8:42 pm

    If you are young enough to have the time to learn and the will to learn then being a DIY investor is the way to go. But for many older adults I know there are many factors involved that drive them to pay someone to manage their money. Fear is often a major factor. Many are willing to pay for what is perceived to be peace of mind.

    The catch is that finding the right financial advisor takes a lot of time and knowledge. There are plenty of advisors out there with tons of capital under management that have no idea what they are doing. They are just great salesmen with lots of talk.

  9. fiscally fit on February 7, 2014 at 2:14 pm

    I think that the common misconception is that a DIY investor cannot work with a financial professional. I think it is also important to remember that we should never make decisions on the professionals we use based simply on a compensation model. Look at the value proposition of professional and how they will work with you to achieve your goals.

    IMO I believe that any “DIY” investor that does not partner with either a CFP, CFA, CA, etc. is doing themselves a great disservice and is missing out on what typically makes a financial plan successful, and that is “staying the course”. For most, having an accountability buddy will produce much better results than anything else. The trick is finding the right team to work with and not confusing value and price.

  10. R on February 11, 2014 at 11:05 am

    There is a difference between Investment Advisor and Portfolio Manager, the former gives you advice/suggestions but you ultimately must tell the IA what to buy/sell. PM on the other hand has autonomous authority over your account and can buy/sell without telling you first.

    Some cautions about DIY for beginners:

    1) Investmebt taxes are complicated! Like really complicated! Either be prepared to hire an accountant or be prepared to do a lot of reading and head scratching.

    2) As a DIY you will make mistakes. RRSPs and TFSAs are unforgiving – once your investments lose their value, you cannot get that room back nor claim a capital loss.

    3) As DIY, it will be easier to have decisions go unchecked. You might get a dubious “hot tip” from a friend or paper and impulse buy a stock dreaming of fast, huge returns. An IA or PM would not let this happen, but as DIY nobody is there to stop you. You can lose a lot of money this way. Know thy self – can you resist impulse decisions and stay the course on a relatively boring investment strategy? Do you have the time and patience and math sense to read up on lots of itty bitty tax rules? If so, DIY might be for you

  11. Henry Crutcher on March 10, 2014 at 1:15 pm

    I’m of the belief that many advisors are just closet indexers — their suggestions just mirror the stock index they are benchmarking against. As fees in tghe USA are in the neighborhood of 1%+, this seems like a bad idea, as you can just buy the ETF’s rather than paying someone else to do it for you…

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