Should I use a financial advisor or DIY my finances?

Bryan Jepson: ©Bryan Jepson

This question often generates strong feelings and firm opinions, largely based on unpleasant past personal experiences with financial advisors.My long history as a DIY investor as well as my encore career as a Certified Financial Plannergives me a good perspective of both sides.

Let me start with the conclusion: there is no right answer for everyone.It depends a lot on you. Are you willing to spend the time to educate yourself sufficiently in personal finance matters and feel comfortable managing everything on your own? If so, maybe the DIY path is the one for you. If not, or if you would just like another set of eyes on your plan, partnering with a good financial planner can be a valuable move. Either route comes with some important considerations.

First, the DIY route. If you are going to do it, do it well. Finances don’t have to be complicated, and physicians are certainly smart enough to understand them. But there are a lot of nuances to everyone’s situation and the rules are ever-changing, so it is going to take you some time, interest, and motivation to keep up with all of it.

Remember, a successful financial plan is more than just picking investments for your 401(k).You need to know about budgeting, retirement planning, tax strategy, investment strategy (including asset allocation and alternative options), insurance planning, estate planning, charitable giving, education planning, goal setting, retirement income distribution rules, and more.

Sometimes even the best of personal finance DIYers make avoidable mistakes or overlook things, simply because they weren’t on their radar. If you are willing to chalk up those mistakes to the cost of the education, the DIY route gives you the most control and avoids advisor fees. Free or low-cost resources are out there if you know where to find them.There is a lot of bad information out there, too, so you have to develop a healthy filter.

If you realize that you don’t have the time, aptitude, or interest to manage your own finances, don’t just ignore them. Find a financial advisor that you can trust to help you.

A good financial advisor should be more than just an investment manager. They should be able to help you define your time-related goals and create a comprehensive written personalized financial plan that covers all the areas that I mentioned previously. They can also help you better understand your behaviors related to money and avoid the common mistakes that will adversely impact your outcome. Think of them as a partner, coach, or mentor—someone who can help you become a better, faster, stronger version of your financial self and hopefully avoid injuries along the way.

But how do you find an advisor like that, someone who truly has your best interest in mind? I acknowledge that it can be a challenge.

The problem is that the financial industry has done a very poor job regulating who can call themselves financial advisors. The advisory world includes insurance salespeople, brokers, coaches, investment managers, or pretty much anyone that wants to give financial advice.The bar is quite low to get into it. Essentially all you need is to pass a test with FINRA (the regulatory board under the SEC) and you can start working. These tests cover mostly regulatory and legal material (very little on background knowledge of finance) and take only a few weeks to prepare for.

What about all the letters behind the advisor’s name? There are a large variety of specializations and certifications in finance with differing degrees of difficulty in obtaining them.Some are more recognized than others. I would say that, for financial planners, being a CFP is the closest thing to being “board certified”.

How does one filter through all of that to find the right advisor for you? I would start by learning how they get paid. There is a critical distinction related to advisor pay structure that is important to understand, even though the terms may sound similar. One type is called “fee-based”, and the other is “fee-only.”

A fee-based advisor gets paid solely or partially on commissions from the products that they recommend. In my mind, this makes them salespeople, not advisors. Their recommendations only need to meet a “reasonability” standard—meaning it is a reasonable choice, not necessarily the best choice for you. Guess which investments they are going to recommend to you? More than likely, it will be those that make them a commission. And without going through the fine print of their brochure, it can be difficult to figure out how much they are getting paid to sell you those products. So, vetting their recommendations can be a challenge and you often end up with inferior outcomes.

The other type of advisor is “fee-only”. These do not make commissions or sell products.You pay them for their advice only, or in some cases, for them to manage your assets for you (make trades, rebalancing, distributions, tax-loss harvesting, investment decisions, etc.) Fee-only advisors are typically paid either by a flat fee or by a percentage of your assets under their management (AUM). There are some who work on an hourly rate.

Each of these models have pros and cons and built-in conflicts of interest. A flat-fee advisor gets paid the same no matter how much time they spend on your plan. Their natural motivation is to spend less time. An AUM advisor does better with more assets that they manage for you. Their natural motivation is to retain and grow those assets (even if it makes sense to put them to use elsewhere). An hourly-rate advisor is motivated to spend more hours, perhaps at the expense of efficiency.

I don’t think that any of these conflicts means that they can’t be good advisors. Similar conflicts exist with pretty much any service-related business model. You just want to be sure that you understand them when selecting who you use.

Personally, I believe that a “fee-only” advisor is the right way to go. Avoid the sales folks for your financial “advising”. Use them to buy insurance if you need it, but have an outside advisor give you fiduciary direction. I also favor flat-fee advisors because their fee structure is the most transparent and easiest to understand. You know what you are getting ahead of time and how much it will cost. There should be no surprises. You can then make a judgment on whether the value of their service matches or exceeds the cost. They are best if you want a plan that addresses all aspects of your financial life and a partner that can help you adjust as life comes at you.

If you want to be more hands-off and don’t want to manage your own assets, you will likely need an AUM-based advisor. Just be sure that you calculate how much their fees will cost you each year, and again, be sure that the value matches or exceeds the cost. If not, look elsewhere. You are not stuck with an advisor that isn’t providing the level of service that you want. Shop around and find one that does.

At the end of the day, the right choice is the one that gives you clarity, confidence, and control over your financial life—whether you build the plan yourself or with a trusted guide by your side. Doing nothing and hoping for the best is always the wrong approach.

Bryan Jepson MD, CFP®, ChSNC®, MSF is a “mostly retired” emergency medicine physician and full-time fee-only financial planner who works for Targeted Wealth Solutions.He is the author of a book entitled The Physician’s Path to True Wealth: 12 steps to gaining control over your money and your time, available on Amazon.He also has a personal finance blog at www.bryanjepson.com. You can email him here.