Should You Hire a Financial Advisor?

Investing is challenging. The path to becoming a successful investor can be difficult and time-consuming. With so many investment choices available, it can be tough to determine which options are best for your individual needs.

In order to be successful, you also need to put in the work. It's important to do your research and due diligence in order to make educated investment decisions. You can't just blindly pick investments and expect to earn good returns. That isn't investing. That's called gambling.

The problem, for most people, is finding the time to do that research. The large majority of people aren't full-time investors. Most of their time is already taken up by their job and other responsibilities. They're living busy lives, which makes it even harder to be a successful investor and find the right investments.

Are You Saying I Should Hire a Financial Advisor?

Not necessarily. Don't get me wrong, an advisor can be a useful asset. Their job is to help people with their investments and managing their finances. Some of them are pretty good at it, too. They can also help an investor manage their emotions and prevent them from making bad investment decisions. Many people would be much better off hiring an advisor than trying to manage their investments themselves.

I was a financial advisor for several years earlier in my career. I have a strong understanding of the financial services industry and I know what it takes to be a good advisor. In my honest opinion, though, I think most people are better off investing on their own. I have a few points to make to back up my reasoning. Let me break these reasons down:

-Advisor fees

Advisor fees can eat into your profits and make it hard to generate strong returns. If you're going to hire a financial advisor, I highly recommend finding one who is transparent. Many advisors try to hide some (or all) of their fees, which shows they aren't looking out for your best interests.

Trust is a huge component of your relationship with an advisor. If you don't trust them, don't invest with them. This is a relationship business, and you should make sure you know your advisor well.

-Conflicting interests

A lot of advisors make money regardless of whether their clients do or not. This is accomplished through commissions, asset management fees, and other compensation structures. I think this eliminates most of the incentive for the advisor to outperform the market. They become complacent since they are going to get paid whether their client's portfolio goes up or down.

Look for advisors who share interests with their clients. This could be accomplished by finding advisors who invest alongside their clients or through advisors that only get compensated when their client does. You can also look for advisors who are held to a fiduciary standard. Try to find advisors with their CFP (Certified Financial Planner) designation. These advisors are held to a much higher standard. They are usually more knowledgable on investments, as well.

-Many advisors aren't qualified

In my opinion, becoming an advisor is way too easy. In fact, you don't even need to have a college degree in order to manage other people's money. Basically all you need is to pass a licensing exam in order to sell securities. This can lead to problems.

A lot of advisors are good salesmen, but not good money managers. They're great at convincing you to give them your money, but they aren't so great at investing it. To prevent this, make sure to track your investments that your advisor is managing. You don't need to look at them constantly, but a few times a year you should review your investments and make sure they are aligned with your goals.

-Most advisors don't use alternative investments

Alternative investments (real estate, commodities, private equity, etc.) are extremely important to include in any portfolio. They can provide great diversification and often aren't correlated to the stock or bond markets. In fact, the majority of wealthy people in the world invest almost exclusively in these types of investments.

Why don't most financial advisors recommend these investments to their clients, you ask? Because they barely know anything about them. Most advisors only know about stocks, bonds, and mutual funds. This is a common flaw I see in the financial services industry. The reason for this is that most advisors aren't compensated when recommending these products, so they aren't interested in selling them. Again, big problem.

To conclude, the decision is up to you. I believe that most people can become successful investors without an advisor. As I mentioned, it might be time-consuming, but it's definitely worth it. It always helps to understand investments even if you aren't managing your investments yourself. Financial advisors can help you build a diversified portfolio that reduces your downside risk. The thing is, diversification isn't always necessary.