Most people need financial advice. You don’t need much experience explaining financial matters to people to see that most need help. However, this doesn’t mean we can make the logical leap to saying that people need the services of a typical financial advisor. There is a huge gap between the financial advice people need and what they get from the typical advisor.
The typical financial advisor will choose investments for you (usually high-fee mutual funds) and handle the mechanics of opening accounts and investing your money. While people need some guidance to choose an appropriate asset allocation, the truth is that opening accounts and choosing investments isn’t all that difficult. One option is to take a risk-tolerance quiz and choose one of Canadian Couch Potato’s model portfolios.
Here is a sample of the types of questions that people really need help with:
1. Should I invest in an RRSP, TFSA, RESP, or something else?
2. My advisor wants me to borrow to invest. Should I use leverage?
3. How can I pay my advisor fairly for his or her advice but keep other investment costs to a minimum?
4. The market just dropped 500 points! Should I sell?
5. The market has been climbing crazily lately! Should I buy more stocks?
6. Which accounts should hold my stocks and which should hold bonds?
7. When I retire, how much can I safely spend without running out of money when I’m old?
8. How should I organize my finances to reduce income taxes?
There are great advisors out there who give good advice to their clients on these questions and more, but such advisors are in the minority.
If you think the main job of a financial advisor is to choose investments, then you’ll likely pay a very high price for a fairly simple service. If you think the main job of an advisor is to help you outperform the market, then you’re very likely to be disappointed. Consistently beating the market is exceedingly difficult and an advisor who could really do it likely wouldn’t waste his or her time talking to you.
If you’re going to pay for financial advice, make sure you’re getting the help you need on the difficult questions and not just a person who chooses expensive mutual funds.