Should You Manage Your Money Yourself Or Hire An Professional Adviser?

business accounting in office concept
business accounting in office concept

Many individual investors try to manage their own finances in order to save some money while others simply enjoy managing their own investments. In this age of real-time news, discount brokerage, index ETF and robo-advisor, it is easy to invest by yourself. However, the outcome is not always optimal.

Studies have shown that the track record for individual investors is not encouraging. DALBAR, a leading financial services marketing research firm, released a 20-year study that showed from 1998 to 2017, the unmanaged S&P 500 Index earned an average of 7.2% annually. Over that same period, the average equity investor earned a much worse 5.3% annually.

The problem is that most individual investors suffer from common human behavioral biases. They often make investment decisions based on recent price movement, headline news flow, and gut instinct, instead of long term business fundamentals, analysis, and probability. Many investors chase high-flying stocks or funds with euphoria when the market is going up and then sell in panic when the market is going down. Overriding these behavioral biases is difficult for most individuals including many professional investors.

The difference in wealth accumulation between 7.2% and 5.3% annual return is significant. Over 20 years, an $100,000 investment would grow to about $402,000 if compounded at 7.2%, while a $100,000 investment would grow to only $281,000 if compounded at 5.3%, a 30% difference! Investors unknowingly make a lot of behavioral and emotional mistakes that add up to dramatically worse investment performance. The stakes are so high in retirement that everyone should strive for an optimal outcome, instead of just an acceptable one.

Here are three ways that a financial adviser can benefit you:

  • A good financial advisor could make you more money – There are a lot of ways that smart people can lose money. One of the most common ways is venturing outside their circle of competence after seeing other investors make money faster than they do. For a small fee, a typical advisor can add more discipline to your investment plan and help you avoid the behavioral and emotional mistakes that might cost you a lot of money. A good financial advisor can use his/her asset allocation and investment knowledge to complement yours and help you maximize your chance of outperforming the market over a business cycle. But your decision to hire a professional shouldn’t be only about investments.
  • It is not just about investment – A good advisor can also serve as your financial butler and help you get your entire financial house in order and keep it that way forever. Real financial professionals can advise and assist you in expense budgeting, debt elimination, tax optimization, health and life insurance analysis, estate planning, entitlement and charitable giving strategies, and more.
  • Frees you up to enjoy more out of life – Your most precious resource is your time. Hiring a finance professional can free you up to do the things you love most in life and alleviates the stress that can come from managing your financial matters.
Should You Manage Your Money Yourself Or Hire An Professional Advisor?

The Bottom Line

While it is quite easy to manage your own finance and investment in today’s Internet age, the outcome is often not optimal due to common human behavioral biases. Having a finance professional as your adviser could improve your chances of success in investment, help you achieve financial independence earlier and let you enjoy more out of life.

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