FOOL ON THE HILL

You Need a Financial Advisor

You're busy. You're lazy. You're bored by money matters. Whatever. There are a lot of reasons why you should hire a financial advisor. Paying someone to do something you could do yourself is fine if you know you'll never get around to actually doing it yourself. However, if you think professional help is for you, make sure you understand how folks in the financial field are compensated. If a financial advisor works solely on commission, be forewarned: Her and your interests may not always be aligned.

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By Robert Brokamp (TMF Bro)
April 1, 2002

It's no secret that we at The Motley Fool think you are the best person to manage your money. (However, it is not as well known that the letters in "The Motley Fool" can be rearranged to spell "Fly me to the loo.")

Despite our propagation of do-it-yourself money management, there are some good reasons why you should seek the help of a professional financial planner. Here are a few:

  • You're lazy.
  • You're busy.
  • You procrastinate.
  • You equate researching personal finance topics to sharing a jail cell with a 400-pound guy named Meat who eschews bathing.

In other words, you're like many of us.

We know we could handle all the aspects of our financial planning on our own; we may even think we should handle it all on our own. But we never get around to it. We have too many other things to do... or we convince ourselves we do. ("I know I should create a budget, but my Tupperware cabinet is a disaster!")

Herein lies the value of a financial advisor. You have someone who can tell you everything you need to know. You have someone to call when you have a question. And there's someone who will call you when you need a reminder to fund your IRA, to send in your life insurance forms, or to choose a 529 plan.

If every time you think of opening an IRA, you say to yourself, "I will, as soon as I learn whether I should choose a Roth or traditional IRA" -- and you've been saying this for several years -- then it's time to get a financial advisor.

There's an old saying: "The enemy of the good is the better." (I think Voltaire said it, but it may have been Homer Simpson.) In other words, we put off doing an OK job because we think we'll eventually take the time to do a great job. But you know what happens: We often end up doing no job at all.

We firmly believe that you can learn all you need to know about personal finances. It just takes time (and a little curiosity about the topic helps). But if you find that you're just not getting around to taking care of business, then get a financial advisor. The money you pay her will be worth the bigger nest egg, reduced debt, lower taxes, sufficient insurance, and peace of mind.

This is all predicated on finding a good financial planner, which brings us to another Motley maxim: If you hire someone who's paid via commission, watch out for the inherent conflict of interest. Though these people may call themselves "financial advisors," they're really salesmen. They care predominantly about your investments, and maybe your insurance. A good one will ask you about your debt, your budget, your mortgage -- but they don't have a financial incentive to do so. If a financial advisor recommends that you should first contribute to your 401(k) to get the employer match, he won't make a dime for his advice. However, if he instead sells you an annuity, he pockets a handsome commission.

A few of us Fools know about commission-based financial advisors because we were once them. I myself was a broker with one of those big brokerages, albeit for just 20 months. However, that was enough time to get an eye- and earful of what really goes on behind a stockbroker's closed door. You want to know what I really think of these "professionals"? I'll tell you: Some are really good people. In fact, I sent my mother to one. And he's not the only reputable broker I've met. I could name a few others who just about deserve their lofty incomes.

But there are plenty of others who place the size of the commission above the benefit to the client. The National Association of Securities Dealers (NASD) does try to keep out the criminals: To become a registered representative with a brokerage, you have to get fingerprinted. Does that say anything about some of the people who've been in this profession?

That's why we at The Motley Fool recommend fee-only financial planners. You pay them for their advice, not their products. And, if they're good, they'll discuss your entire financial picture -- your taxes, your budget, your estate (even if you're not a millionaire) -- not just your investments.

We have our own service, TMF Money Advisor, which provides phone access to a team of qualified financial experts. Have a question, give them a call. They won't try to sell you anything -- they just provide information and recommendations.

But these folks won't call you with a reminder to fill out those life insurance forms. If you're the type who needs a benevolent nag, then consider a financial advisor with whom you can build a more personal relationship. We have dedicated a sizeable chunk of Foolish geography to the topic of hiring a financial advisor. Give it the attention of your eyeballs if you think hiring a pro is in your best interest. As you do, keep these tips in mind:

  • The vast majority of financial planners are still paid exclusively or partially by commission. Despite the potential problems, there really are good, ethical commission-based advisors. Just be sure to do your due diligence. Get referrals from kith and kin. Utilize the resources available on the NASD and SEC websites to learn what you can about brokers and their firms.

  • Relay your expectations to your financial planner. Let him know if you'll need helpful reminders, or if you want a "Don't call me -- I'll call you" relationship.

  • If you're the dawdling type -- or if you understandably have a hard time making decisions involving hundreds to thousands of dollars -- just do something. Paying a mediocre financial advisor to implement a mediocre plan is better than no plan at all.

Robert Brokamp wore a suit every day during his 20-month career as a financial advisor (though he wore Superman Underoos underneath out of spite). Now, he sports a wardrobe that could be generously characterized as "unsightly chic." The Motley Fool is a bunch of do-it-yourselfers writing for people looking for the best way to manage their money.