I am often asked whether one really needs a financial advisor for retirement planning and other financial management, or whether one can get by with DIY retirement planning. Obviously, many people do manage their own finances themselves with varying degrees of success, but here are the six reasons why you really should have professional financial advice for retirement.
- It’s the biggest financial deal in your life.
Think about the degree of care you take with financial decisions of varying size. If you see a new restaurant you want to try, you just go. And if it’s not very good, you just don’t go back. If you are buying a new car, you compare a few models and maybe study some of the specs. If you are buying a house, you compare dozens of properties and several mortgage providers and have a real-estate agent and a lawyer helping you.
Well, retirement planning essentially consists of building up your net worth to a certain amount at retirement, and then drawing that down while you are retired. Your standard of living for the 20 to 40 years you are retired – 20 to 40 years-worth of cash – will depend on how well that is executed.
- Your time is just too valuable.
Let’s say you have a good general knowledge of finance and taxes, and so if you do your homework, you feel you could probably do what your advisor does for you. Fair enough. But in practice, how many hours would that take? And if you applied those hours to your own profession – whether accepting some extra clients if you are self-employed or building up your network or even a side-business if you work for a company, how much would they be worth? When they actually do the maths, most people find that it really does not add up. Bear in mind that you would have to spend many more hours than your advisor does on average per account – the time he spends doing research is spread out across all accounts, while you’d have to do the same amount of reading just for yours!
- You need an outsider’s perspective.
Retirement planning may sound rather boring, but it’s surprising how emotion and ego can get in the way. Sometimes you need to accept that a past decision was a mistake, or that a given dream doesn’t look achievable unless something changes, or that some investment is too risky. Even the best and the brightest have blind spots, and in fact, even the most skilled and experienced investment managers rely on committees to give them a reality-check when necessary.
- With compound returns, a little difference goes a long way.
Suppose that between tax savings, lower fund fees and higher investment returns, and after his commission, your financial advisor could achieve investment returns that were only 0.1% higher than what you could reach yourself. Almost nothing, right? But calculate how much USD 100,000 invested at 1.0% would grow to in 40 years. Now calculate how much that same amount would grow to if the rate were 1.1%. Not so small, right?
- This isn’t your parents’ retirement plan.
Go back a few decades and saving for retirement was much easier. Interest rates were high, options were limited (which wasn’t much of a bother because rates were high anyway), companies offered defined-benefit pensions and taxes were straightforward. Those were the days. Now interest rates are at all-time lows, which means the ‘standard’ investment alternatives (such as a savings account at your local bank) may no longer be sufficient to meet your objectives. Existing corporate pensions are at risk and few companies offer new defined-benefit pensions. And as capital, information and people have globalized, the taxman has tried to catch up with layer upon layer of extra rules. It’s simply a much more challenging environment.
- They can sometimes ‘get you in the door’ where you couldn’t go yourself.
Imagine an investment fund with a billion pounds in total assets and a minimum investment of US$100,000. An investor comes along and explains they’d like to invest US$50,000. The managers are not likely to accept. After all, the minimum is there for a reason. Now, assume it’s an advisor asking, and his clients, in total, represent about US$10 million of the capital in the fund. Unless there is a legal restriction, the answer can be quite different.
In conclusion, although you can do your retirement planning yourself, given the importance of the task, in terms of the amount of money and time involved, the impact of even small improvements in performance, and the ways in which an independent specialist is better positioned to execute it, a professional financial advisor is well worth his cost. Especially given how comprehensive professional retirement planning can be. http://www.planyourfinances.com/retirement-planning
