Financial Planning: Do it Yourself or Hire an Advisor?

There’s a lot of info on investing out there. Should you go it alone, or is using an advisor to guide you the better choice?

If you’ve followed me for a while, then you know I don’t recommend getting advice from commission-based salespeople.  In my opinion, the best advice comes from advisors who are fee-based or fee-only.  But, when considering a relationship with one of these advisors, you might ask yourself if it’s worth the cost and whether or not you’d be better off doing things on your own.

It’s a fair question that deserves a fairly straightforward answer.

Financial Planning is Not a DIY Project

Many people are under the illusion you “save” money by not hiring a financial advisor.  Nothing could be further from the truth!  Is it possible to self-direct your own financial planning utilizing the power of the internet and avoid spending one red cent on outside help?  Yes, but only the minority of people benefit from this strategy and dentists, specialists, or other service-based professionals are NOT among these people.

Your Time is Worth A Lot of Money

You have already invested a great deal of money and energy into building a highly specialized skill set.  These skills reward you with a very high rate per hour for the work you do.  It is important you maximize your hourly production, as it allows you to generate significantly more income compared to what you would pay an advisor to work on your personal finances.

By taking time out of your schedule to moonlight your personal financial planning, you rob yourself of income you could have otherwise earned by being more productive in your practice.

Consider this, if you optimized your free time fine tuning your schedule, reducing overhead or attending CE, how much further ahead would you be? In short, let your financial advisor do what he does best, and use your time doing what you do best.

It’s Not As Easy As You Might Think

Getting all your financial essentials in order is very time consuming and requires extensive knowledge.  When people take a DIY approach to financial planning, they often overlook many essential components and tap into just a few of the outliers (e.g. setting up an investment account).

To give you a rough idea of what a real financial plan entails, I took some time to spell it out for you.  It’s a lengthy list; I broke it down into categories to make it easier to digest— or at least I hope!

Tracking Your Assets

• Build a personal balance sheet of all your assets and debts to track your progress.
• Estimate values on your practice, real estate, and privately held investments to keep your wealth balanced.
• Measure the correct amount of liquidity to keep in your practice.
• Project your retirement date and plan accordingly.

Data You Need About Your Income

• Track exactly how much you make each year (not just what your tax return says—they’re not the same)!
• Measure your personal tax rate each year (% of income).
• Track your personal lifestyle expenses.
• Measure your debt-to-income ratio so you can refinance to reduce interest expense or improve cash flow as needed.
• Establish regular savings habits, measure the % of your income you save, and automate that plan.
• Measure the appropriate retirement plan contributions you should make each year and maximize your tax deferral.

Housekeeping Items that Affect Your Personal Financial Planning

• Adjust your practice overhead to increase your income.
• Plan in advance for major cash outflows (equipment, taxes, house plans, vacation properties, second locations, and commercial real estate).
• Plan for your practice real estate (lease renewal negotiations, building improvements, expansion, remodeling, etc).

Things to Track Regarding Investments & Insurance

• Select mutual funds and securities to put inside your accounts.
• Analyze your life, disability, home and auto, and business insurance regularly.
• Measure your investment performance and risk exposure and make appropriate adjustments.
• Make adjustments to your portfolio to reduce taxes and minimize capital gains.

Legal & Tax Coordination

• Rename your accounts and beneficiaries as your wealth increases.
• Maintain copies of all your important legal and financial documents.
• Determine the appropriate amount of funding for your children’s education.
• Select an appropriate insurance company for all your risk management needs.
• Keep flow charts of your entities.

This is not a comprehensive list, but it gives you an idea of what you’d need to know in order to adequately address all your financial planning concerns.

Even with the best intentions, I’m willing to bet most people never get around to completing many of the above items.  If financial planning was really as simple as picking an insurance company or mutual fund provider, then I would recommend everyone self-direct their financial planning. However, while some proponents of self-directed investing make it seem like DIY financial planning takes very little time or effort, this simply isn’t the case.

Advisor’s Alpha – The Behavioral Component of Investment Management

Many advocates of self-directed investing will point to Vanguard as a resource.  Vanguard has a rich history of helping individual investors self-direct their investments.  With that being said, Vanguard still recognizes the crucial role financial advisors play for many people, especially as it relates to their overall investment plan.  Several years ago, Vanguard published an article titled “Advisor’s Alpha” which highlights some advantages of hiring a financial advisor.

“…advisor’s alpha (that is, added value) is … the ability to effectively act as a wealth manager, financial planner, and behavioral coach—providing discipline and reason to clients who are often undisciplined and emotional…”

I’ll tell you upfront that most of my clients make different decisions with their investments after talking to me than they would have made previously.  Their investments end up being more strategic, researched, and calculated.  This is because dentists and specialists are more disciplined, rational, and less emotional after we talk about investing than they would otherwise be.

Don’t Do It Yourself, Go With A Pro

In conclusion, you need the help of an experienced advisor who knows the intricacies of your practice and personal finances.  Without an advisor, you run the risk of wasting time in an area you have little expertise.  You also risk reacting emotionally to investing patterns, which can cause you to miss the important financial planning essentials we discussed earlier.  I promise you that these negative affects carry a cost much greater than what you would typically pay a fee-based expert to help you manage this important area of your life.