When Should DIY Investors Hire Financial Advisors?

I spent the last few posts exploring different DIY investing and advisor models and the balance between cost and value. The best balance depends on the cost, how much benefit the client can get from advice, and how good the advice and support are. Previously, I tried to put some numbers to that for an early investor and also for investors over their lifespan. The cost of not knowing what you are paying and whether you are receiving value can be high. That cuts both ways, and it could also be costly if you don’t hire a financial advisor when you should have.

Generally, minimizing costs has a large impact. Someone suitable for DIY investing can pull far ahead by taking on the investing part of their financial plan using a simple and effective method. Like broad market ETFs, and particularly a one-stop solution like an asset allocation ETF. However, that does require an upfront time investment to learn. Plus, the understanding and discipline to ignore noise and stick to it. My bias is that most people can do this (if they really want to) and that you must learn about investing regardless. However, investing is only part of financial planning.

You can and should also learn about different financial planning dilemmas as you face them. That will also save you money. It is why I have spent so much time building and promoting educational material for investing and making a financial plan. With free high-quality resources, many wonder why would anyone hire a financial advisor? Especially, if they have done some reading and research. The answer is that the right mix of DIY and advisors, and when to hire an advisor (if you do) will be different for everyone. It can also change. Today, I will describe some situations when I think that using an advisor is most likely to provide value. Potentially, even for a good DIY investor. Or even someone who is an advisor.

Matching Client & Advisor Types

Most analyses that you’ll see from bloggers about investing and advisor fees assume that everyone is a model investor. They get market returns minus the costs while losing nothing to bad behavior or procrastination. They also ignore the potential value that advisors can provide. That can be challenging to quantify. It is likely not as high as industry studies would suggest, but it is not likely zero either. In particular, behavioral coaching and automation of tasks are usually valuable. Tax planning may be valuable for those with higher tax burdens. Failure to plan for needed insurance can be devastating, but is readily remedied in advance.

DIY investing can be very successful if you take the time to learn the basics, and an evidence-based diversified strategy. After the upfront time spent learning, it should take very little time. Done well, the cost savings can have a large impact on growth compared to using a fee-based advisor, and a massive one compared to using high-fee mutual fund sales advisors. Still, you must have the motivation to do it with a simple enough plan that you can stick with it. Plus, the discipline to do that when it is hard. Like when you hear your brother-in-law bragging about their hot investment pick. If that is not you, being honest about it is important.

In my last post, I showed how a DIY investor using an asset allocation ETF with some behavioral imperfections (an extra 0.4%/yr) and a corporation that could benefit from some tax planning (0.5%/yr) might do better with an advisor. That hinged on the advisor providing good value in those areas for a low advisor & product fee of 1.1%/yr. If they used a fee-only advisor, even every single year, that would do even better.

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Matching to Fee-Only vs Full-Service Advisors

So, one time when a DIY investor should hire an advisor is if DIY investing is not suitable for them. There is room for error due to the significant cost savings, but some people just won’t or cannot do it. In that case, the sooner they recognize that, the better. As long as the chosen advisor is a suitable match.

I would look for an advisor that matches my deficits. If my main deficit is confidence and tax planning, that would be a fee-only advisor (advice and support for a fixed cost). They can help with that, and I can pull the levers to buy and sell for my portfolio. That said, there is significant variation amongst fee-only and full-service advisors as to how well they handle tax planning (particularly with corporations) and I need to know enough to identify good and bad advice.

A full-service fee-based (% of assets under management) costs more, but would be required if I don’t have the confidence, discipline, or motivation to pull the levers on my own. Paying someone ~1%/yr is better than missing time in the market, paying too much tax, exceeding my risk tolerance, or investing too timidly.

This applies to investors at any stage of their journey. There are other times when some financial advisor support may be helpful for a segment of the journey.

Advisor Benefits for New Investors

I have already shown how using an advisor may be helpful if the alternative is simply not investing. That is obvious. However, there are also situations when consulting a fee-only advisor when starting out could be quite valuable. That may not be intuitive because the cost is relatively high when you have little money. Spending $3-5K on a fee-only financial advisor when you are just starting to invest lumps of $3-5K seems silly. However, it quickly becomes apparent that it was money well spent in some cases.

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Hiring An Advisor for Launch

For someone struggling to learn on their own, that upfront cost could get you started on the right foot as a DIY investor. There is free education and support, like what I do here. However, many people still struggle to get going. Moving money around can be scary until you get used to it. It is easy to get overwhelmed and do nothing. Or second guess yourself when markets go through normal gyrations right after you make your first purchase. It is also easier to invest more aggressively when you have the added confidence of an advisor at your side.

Many fee-only advisors offer this type of support in addition to simply making you a plan. If that upfront cost enables you to have a long career in DIY investing instead of having a failure to launch and crashing into a high-fee advisor situation. That initial investment will return compounding fee savings over a longer period of time. It is pretty hard to say what the most dangerous part of a space mission is, but there is a reason why everyone cheers for a successful firing of the rocket engines and clearing the tower at lift-off.

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High-Income or Big-Saver

Another reason to consult a fee-only advisor early is if you will be saving and investing at a very aggressive rate. Not only does spending a one-off $3-5K seem less daunting when you are going to be investing over $40-50K/yr, but you will be very rapidly building assets in tax-exposed accounts. One of the areas where a good financial advisor can add value is tax planning. Should you attempt asset location and tax optimization? How could you do that without adding new challenges? Would incorporating help? What about income-splitting strategies?

The answers could be simple and you could DIY that. I have written extensively about incorporation. Accountants are great at short-term tax planning. However, it is uncommon to find one who is also good at long-term optimal compensation. Meshing investing with tax planning strategies is much more complex with a corporation in the mix. Again, I have made tools to help, like my salary & dividend mix calculator. However, you require some basic knowledge about taxes and investing to use it.

Most importantly, finding and hiring a financial advisor who understands these issues can help you avoid making bad decisions that are expensive or tricky to get out of. The most common condition that I see in my financial walk-in clinic is premature incorporation. Unfortunate, but usually self-limited. The most troublesome chronic condition is permanent life insurance purchased for the wrong reasons. A good advisor may prophylactically offer some protection against contracting that, but beware of the carriers.

Big Forks In The Road

Incorporation is a common big decision that high-income professionals and business owners often face pretty early on. However, there are many other times when we face big forks in the road for our financial journey. While you may be able to DIY invest on your own relatively easily, comparing different major financial options can quickly get more complicated.

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Real Estate Decisions

An easy example is considering whether to buy a house or even a second property. While there are many non-financial considerations, there are major financial implications. With real estate, there are major transaction costs. Knowing what you can afford and the trade-offs that you are making to do that before starting is vital. Once you are seriously looking, emotions take over, and the impulse to over-extend yourself is strong. The incentives of your brokers will have them stoking those fires.

There are also many options and some tricks for how you can plan and fund a downpayment. With very different tax consequences. That downpayment means money tied up in the asset. What are the opportunity costs of that compared to other options? Can or should I attenuate that by maintaining leverage (debt)? Those are questions that play out over multiple years, and that is what a good planner specializes in.

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Kids

Planning a maternity or parental leave can be pretty straightforward. Especially for those with employment and defined benefits. However, it is much more complicated for a self-employed person. Should they opt-in to EI? If they are incorporated, should they plan for some income smoothing? Should they incorporate a bit earlier than they otherwise would to do that? You might be able to figure that out with the resources here on Loonie Doctor, but it is pretty hard otherwise. Even then, an advisor could certainly help. Particularly if you are busy doing other things. Like trying to get pregnant. There should be a “reading The Loonie Doctor” verse in the Libido Killer music video.

Birth is only the beginning. It is pretty easy to set up and optimize RESP contributions. However, what if you want to invest for your kids beyond that? I have made a page about informal trusts to help the DIYers. However, it may be something worth discussing with an advisor. Passing on assets to our adult kids through formal trusts may be preferable, but that is a much more complicated decision.

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Receiving a Large Inheritance

You may be comfortable chugging along with DIY investing a portion of your hard-earned money each month. However, getting a big chunk of money from someone else may feel different. Not only do you want to feel comfortable while deploying it, you don’t want to mess it up. Adapting to generational wealth presents a number of challenges that an impartial third party may help with. There may also be important considerations to protect the money in the event of marital breakdown or other unexpected catastrophes.

Emotional attachments to whoever gave you the money may also cloud your judgment. Predatory sales advisors also seem to come out of the woodwork at vulnerable times when it is known that a big chunk of money is involved. You would be much better off finding and developing a relationship with a trustworthy and trusted advisor in advance. Using an advisor for some of the other reasons or forks in the road already mentioned could have laid that groundwork. If not, do not make rushed decisions. Take some time.

Retirement Planning

One of the biggest transitions that we make in our lives is retirement. Socially, emotionally, and financially. The shift from earning and accumulating assets to decumulating them without the safety net of work is tough. Engaging with a financial advisor in the years leading up to retirement may be helpful in a few ways.

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Advance Reconnaisance

Preparing for retirement means seriously considering what it will look like. To begin the financial discussion, you must have an idea of how you will spend your time and money. That may cue you to start preparing yourself by developing your non-work social network, sense of purpose, and interests. From a financial standpoint, it will help determine if you have saved and invested enough to support that. It is best to figure this out with some lead time. That gives you time to adjust and course correct if required. Or some wiggle room if you are forced to retire earlier than planned.

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Drawdown Planning

While there are some rules of thumb, drawdown planning is very complicated. Even for those just using registered accounts or with a pension, the question of when to take CPP and OAS comes up. The answer depends on individual circumstances. Throw in some personal and/or corporate non-registered accounts and it is much more complicated. Like other tax planning, the different options interact with each other. The impact of that also unfolds over time. There are also some unknowns. Like when you, or a spouse, will die. You can’t predict that, but you can plan to be able to accommodate different possibilities.

It is also important to make the best use of the time and money that you have. If you are unjustifiably terrified of running out of money, you may underspend in your early retirement, when you may enjoy activities the most. Ironically, those of us who save the most tend to struggle with this the most. On the other end, you do not want unpalatable surprises from spending too much either. This is an area where seeing a plan with numbers may help. A good advisor may help you to spend more confidently, enjoy it, and sleep well at night. That is hard to quantify with a number, but very valuable.

The End of the Road

It may surprise people to know that I will likely transition to a full-service advisor at some point. I am pretty knowledgeable about tax planning, DIY investing, etc. I even reflect a lot on my financial journey. With spreadsheets and planning software. Despite my ectopic brain in Excel, I am still human and my organic brain will age. I will eventually die too, and that will leave an estate to deal with. These are both reasons that I will eventually pass on my financial tasks, including pulling the levers, to an advisor at some point.

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Building Trust vs Saving Costs

As you can probably imagine, I will be very picky when it comes to choosing an advisor. So, that will have to be done well in advance of my developing cognitive impairment. I will need to be able to test my advisor and build trust in their services while I still can. That will take at least a few years. The challenge is keeping costs down using DIY as long as I can, with occasional fee-only advice when it is likely to be the most valuable to minimize the drag on growth. While also making the switch to more support before I start to slip or make a big mistake.

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Safety of a Co-Pilot

The ideal model for me would be a good fee-only advisor to support me who can also seamlessly transition to full-service with discretionary management when that suits me. The other reason why I think that model would be ideal, beyond balancing costs and value, is that I may not recognize when I am starting to slip.

An external eye on my finances would help. Like a passenger in my car, even if I am driving. Studies have suggested that older drivers may overestimate their abilities. There are parallels between this and financial management. Peak ability from the intersection of experience and knowledge vs cognitive decline may be in the mid-50s, but there will be variability as to when the decline becomes problematic. I want to be sure that I pay attention to this before I run out of runway.

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Helping Your Family

One of the reasons why people continue to cut costs in later life, even though they could afford and may benefit from some spending, is to leave a larger nest egg for their family. Families are complicated, and when you die there will be a double stressor. Grieving your death. And dealing with your estate. That is a complicated process. It can be very time-consuming and stressful for your executor, who will also be grieving if they were your loved one. You are also passing on risk to them. Financial risk if there are mistakes made – they can be liable for them. Social risk if people are not happy with how they distribute your assets. Whether or not they are just following your wishes, they are the visible face of it.

Even though we don’t plan to hire a full-service advisor for many years, we have already hired an institutional executor for our estate. Our goal is to distribute money while we are alive. However, if we die prematurely, there are trusts to set up for our kids to see them into adulthood and gradually transition our wealth when they are more prepared to handle it. In the meantime, we are passing on the wealth of our knowledge to facilitate that.

Hopefully, passing on some of that knowledge to you in today’s post will help make you wealthier too.