Do you know what a financial advisor actually does?
There’s a broad spectrum of professionals who use the title “financial advisor”. Many of them are worlds apart in their credentials and expertise. And they all seem to make very different claims about what they can do.
But that puts you in a difficult position.
If you don’t know what a financial advisor does, how will you know which one to hire? Or which one is right for you and your family?
What the news media and financial industry want you to believe
Every morning, there are sane, smart, successful people who wake up believing their financial advisor will:
- Pick investments that beat the market
- Buy stocks before they skyrocket and sell before they plummet
- Predict next quarter’s GDP numbers
In fact, clients get mad when their advisor proves he is unable do these things.
But the truth is nobody can predict these things consistently.
Even Warren Buffett, the $60 billion man, said that he “never met a man who could forecast the market.”
WARNING: A smooth operator in a $3,000 suit will claim these magical powers to win your account…especially if you have big bucks. You’ve been warned, friend.
So why do so many people keep hoping their financial advisors will do something that is actually impossible to do?
Because the financial media and the entire financial services industry wants you to believe that you can predict where the market is headed.
Your “addiction to prediction” earns them billions of dollars every year.
They want you to believe that every economic report or guru interview is “required reading”.
They know you’ll buy that high-priced hedge fund if you believe you’ll make a fortune from the prescient market calls the manager makes.
Your experience tells you this probably won’t happen… but they make very sophisticated arguments… often supported by graphics, charts and numbers.
Studying economic data or stock charts or Fed minutes sounds a lot more respectable than reading tea leaves. But predictions are predictions.
The truth is nobody can scientifically predict market moves because nobody has a crystal ball. It cannot be done.
There are only 3 things you need in a financial advisor (anything more should send you running for the hills)
The good news is you don’t need someone with a crystal ball to put your kids through college or retire in style.
Here is what a real financial advisor can do for you and your family so you get where you want to go… and maybe even enjoy the ride more.
1. Create a goal driven financial plan
Everyone has financial hopes. Very few have financial plans.
A hope is, “wouldn’t it be great if…?”
A plan is a recipe for achieving a specific goal. And a goal needs two things to qualify as “specific” — a price tag and a deadline.
“Putting my daughter through college” is a hope.
“Saving $1,200 a month (automatically) so you’ll have a $250,000 college fund by Lizzie’s 18th birthday” is a plan.
“Retiring someday” is a hope.
“Saving $75,000 a year so that you’ll have $4,000,000 in 10 years” is a plan.
Plans are how your hopes come true. But besides being smart, having a plan gives you one other bonus. It feels great.
Which would you prefer? Watching Lizzie’s high school graduation ceremony “hoping” you can pay for the next 4 years… or knowing you have the next 4 years locked and loaded financially?
2. Build and manage a portfolio based on your plan
Your goals are serious business, and investing is a big part of how we achieve them. So we need to get clear on what investing is about.
Your portfolio’s sole purpose is to get the returns you need to fully fund the plan. Nothing more, nothing less.
If your plan dictates 8% a year, you probably need a global mix of equities. If you need 6%, you might own some bonds as well.
Go ahead, have an opinion about the market. But a pro won’t let you invest your kid’s college fund or your retirement nest egg based on that opinion.
The plan determines the portfolio, not talking heads on CNBC.
Good investing is about consistently acting on a long-term plan. Bad investing is about reacting to short-term market movements.
And now, I’ve saved the best for last…
3. Avoid the big mistakes everyone else makes
Yes, your advisor helps you make smart decisions.
- Diversifying properly and staying diversified.
- Updating your wills.
- Making sure your insurance coverage doesn’t fall too far behind your growing income stream.
But your advisor’s main job is to keep you from making dumb mistakes.
He talks you out of putting all your money in tech before the late 1990s bubble burst.
She makes sure you don’t panic in March 2009 at the worst moment… and she urges you to keep investing so you aren’t on the sidelines while the S&P 500 more than triples over the next 6 years.
He shows you why buying that gorgeous house you ogle every day is a bad idea… even though the bank approved the mortgage.
He keeps your emotions in check so you get the long-term investment performance you deserve.
She knows which small-cap value fund you choose won’t matter much. But that how you behave at market highs and lows will matter a great deal.
An advisor coaches you to make wise, rational decisions. That sounds boring. But when you have more money in your pocket because you didn’t make the same stupid mistakes your friends made… that’s very exciting.
The simple argument for why you absolutely need to hire a “real financial advisor”
Here’s what you get when you hire a pro:
- A made-to-measure plan designed around your goals (alterations included)
- A perfectly tailored portfolio built to fund that plan
- A personal coach to help you stick to the plan (without blowing it up by accident)
What does a reputable pro charge to deliver these benefits to you?
Probably around 1% a year, depending on the size of your portfolio.
If those three benefits combined increase your annual returns by 1%, then it’s a good deal for you.
But what if your advisor’s only job was to help you avoid big mistakes and you assumed everything else was free? Wouldn’t that “big mistake insurance” alone save you a lot more than 1% a year?
If that’s the case (and you know that’s true), then hiring an advisor is an incredible bargain.