Financial Planning: Independence or Independents?

"A wise man should have money in his head, but not in his heart."  ~ Jonathan Swift

If you're like most Americans, you have given (or will soon give) more attention to your financial picture at this new year's juncture than at any other time of the year.  Before making any decisions, why not take a few steps back to see the forest before the trees?  Better yet, why not let someone else look at that big picture for you and report back the details so you can focus on more important things than money?

This post will take three logical steps in arriving at one solution:  Should you plan your finances independently or seek the advice of a financial planner?  As a secondary question, if using a financial planner makes logical sense to you, then what kind of advisor should you seek? 

Step One:  Selecting a Manager

Even if you do your own financial planning and make your own investment decisions, you have already chosen a manager -- you.  Why not use you as an  advisor?  After all, you trust you!  What's more, there is an endless supply of information and   inspiration to be found online and in print media to aid in your financial planning.  Right?  Here's the spoiler you're already anticipating:  Would you recommend you to someone else as an advisor?  Why or why not?  Self-awareness is central to asking those and other questions to follow...

Step Two:  Evaluating Traits & Skills 

Whether we are speaking of personal finance or any other area of your life, I'm confident you'll agree that there are certain traits and skills required to do something and do it well...

• Passion:  Let's face it.  If you are not interested in personal finance, then you are not likely to manage your finances well.  A significant amount of time is required (reading, research, education) to make financial planning one of your "jobs."  How productive and successful can you be at your work when you do not receive some type of intrinsic value from the process of doing it?  In a metaphorical context, why establish a long-distance destination if you will not thoroughly enjoy the journey itself?
• Priorities:  I often cite financial author, Mitch Anthony, in this regard:  "Life is not about making money.  Money is about making a life."  Can you think of anything more important to you than your money?  If not, think harder...
• Complexity & Capacity:  Beyond the complexity of financial markets and related matters, there is the complexity of your finances.  As your investment accounts grow  and your earning power increases, your financial complexity increases -- and so does the potential for mistakes.  Having the capacity to know how, where, and when to allocate your financial resources can make the difference of tens of thousands of dollars over the long-term.  Here are just a few of the most common "mistakes" I find when reviewing prospective clients' finances:  Thinking they are diversified with 5 mutual funds when 4 of them have similar objectives (stock overlap); buying/selling/holding investments in the wrong place (taxable vs. tax-deferred accounts) or executing at the wrong time (too soon, too late); and missing tax savings opportunities (net unrealized appreciation, tax loss selling, retirement accounts, estate planning, legislative changes).
• Cost: There is a price for everything.  The greatest "cost" in the realm of personal finance is "opportunity cost," which is the cost of foregoing an opportunity.  There is a price for every missed opportunity and there is a price for your time and efforts.  Have you ever asked yourself why you didn't buy/sell that investment three years ago like you initially intended?  How many opportunities exist to you now that you are not aware of?  Do you know where to find them or where to begin looking?  How much time does it take to plan your finances (and do it well)?  What is that time worth to you?  What else could you do with that time?
• Self-Awareness/Wisdom:  I have been an investment advisor and financial planner in the Charleston, SC, area for 10 years.  After all the training, education, degrees, designations, certifications, and economic and market environments along the way, a common and consistent theme remains:  There is much that I do not know.  In fact, the more I learn, the more I understand that knowledge is not wisdom.  For example, "beating the market" is a foolish pursuit (unless the passion in your pursuit compensates for the potential failures along the way).  Moreover, the majority of "professionals," such as analysts and money managers pouring over financial statements and technical charts every day, fail to "beat the market" over long periods of time.  Are you still convinced you should try?

Step Three:  Making The Decision

OK, it's disclosure time:  If you're new to this Blog, you should know that I own an independent, "fee-only," Registered Investment Advisory(RIA) firm that engages in financial planning.  I submit to you, the reader, to either commit to independence, in the form of managing your own finances, or to commit to an independent, in the form of a "fee-only" investment advisor or financial planner.  Here's why you should consider the latter:

• Fee-only RIA's must uphold a "fiduciary standard of conduct," which legally and ethically binds them to place the interests of clients before their own.
• They get paid by you, the client, and not by selling products.
• Independent Advisors (not affiliated with a major brokerage firm) boast a 97% client retention rate.
• Nearly half (49%) of independent advisors' new clients (in 2006) came from  full-service brokerage firms.
• A full 75% of new clients who worked with brokers in the past did not have investment guideline statements that were aligned with their goals.*
• As TheMotleyFool.com states in the online article, Where the Smart Money is Headed Today, "People buying funds recommended by brokers aren't dumb, they just haven't seen the facts (And their brokers aren't likely to share the facts with them)."
• Perhaps most important, independent advisors and planners own their business.  The buck stops with them.  Their name and reputation are on the line with every decision they make and they are not likely to leave the firm in three years and leave you behind for the next broker-in-training...

In summary, there are two logical approaches to managing your investments and personal finance: 

1) Do it yourself when simplicity and moderation can and will be applied, such as with passive investing (index funds, target-dated funds) and the time-proven habits of spending less than you make, dollar-cost averaging, and automating finances.

2) Seek an independent advisor when the complexity of your personal finances reaches a point at which managing your own money increases the potential for mistakes.  You may notice the quality of your life eroding by added stresses and subtracted time that would otherwise be allocated to more meaningful pursuits in your life...

If you think about it long enough, you'll realize that independence can be more easily obtained by enlisting the help of others... 

Related Posts: 

A Fool and Your Money

Invest Like a Philosopher:  Selecting a Manager

Know Thy Risk

*Additional Source:  RIA Benchmarking Growth Trends Study , by Charles Schwab Institutional 

TFPAuthor, Kent N. Thune, QPFC, is the President and founder of Atlantic Capital Investments, LLC (ACI), a 'fee-only' Registered Investment Advisory firm located in Mount Pleasant, SC.

 

    

Comments

[Brian Powers]

I am a "do it yourself" financial planner focused on managing my family's finances.

I must say, this is one of the best "new year" posts I have read. When you ask, "Would you recommend you to someone else as an advisor?" I felt the question was perfect. Every investor could learn a lot about themselves and their abilities by asking that simple, but often overlooked, question.

The question meant a lot to me at this juncture for a couple of reasons. The first is that after ten years of investing, I am starting to feel confident that I have reached that level. This may seem like a long time to some, but developing investing skills takes time and there are no easy paths to consistent success. I am not an expert (is anyone?). But, even though I have a lot left to learn and experience, I have grown as an investor.

The second reason is that I have recently enrolled in the CFA program and Level I exam. This will help me achieve further confidence giving advice to others. It will round out my skills and give me credibility analyzing financial information.

Thanks again Kent. You are knowledgeable about finance and philosophy, but you are also a great writer.

[The Financial Philosopher]

Brian:

You hit upon some excellent observations:

10 years experience in almost any field establishes credibility, knowledge, and, hopefully, wisdom. With regard to investing, 10 years experience means you have invested through a full market cycle (and more). Think about all that has happened in the financial markets (and the world) since January 1998! As Twain said, "history does not repeat itself, but it does rhyme..."

Regarding education, it never ends! I am a perpetual student as well! If we are not learning then we are not moving forward. What's more, it creates "options." We may not know where we will be five years from now but education provides options and opportunities.

Thanks for the comments. I wish you the best with your future endeavors...

[Art Dinkin]

Great post. I have been looking for other professional financial planners who blog.

Please get in touch with me regarding a project idea.

[Account Deleted]

If we are really willing to live a better life in the future, then financial planning plays a very crucial role. If we are not capable enough in handling our finances then the best option is to have a personal financial advisor. Nice article, has some very useful information.

[Financial independence planning]

To stay on track, pick a date to be financially independent; to get there, have a financial plan and even an adviser whose value added includes advice on taxes, household finances, estate planning, insurance, registered plans, and so on.