I pay for a financial advisor, but I generally wouldn't recommend it

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Financial advisors are expensive. Like really expensive. I’m pretty savvy about my personal finance, and yet, I pay for a financial advisor. I generally wouldn’t recommend it to folks, but I’m actually quite happy to spend the money, and wanted to share how I think about getting a financial advisor. 

How financial advisors make their money

There’s a bunch of different types of financial advisors, and it’s really worthwhile to know the differences, and understand how they make their money. There’s a bunch of key terms that can be useful to know who you’re talking to and what you’re dealing with:

• Assets Under Management (AUM): This is a very common pricing model for financial advisors, where they charge you based on how much money they’re managing for you. The pricing is typically somewhere in the .75% to 1.5%, and often scales with the amount of money. Give them more money, get more discounts. What this effectively means is that for every $100 they manage for you, you’ll probably be paying ~$1 per year to them. This matters a lot when you’re younger, because losing that 1% today can grow into a lot of money if your investment time horizon is decades-long.
  

• Fee-Only: Fee-only advisors usually charge some flat fee ($1000-$1500 is pretty common), and will help you review your finances and build a financial plan, but this is a one-time exercise, and it’ll generally be up to you to implement the plan that gets produced. These are great if you’ve got some big life change happening and need to get your house in order (if you’re buying a house, having a kid, etc.). If you’re interested in finding one of these, check out https://www.napfa.org/
  

• Fiduciary: This is a really important term to know. A fiduciary is legally obligated to look out for your financial interests, and they have to advise you on what is best for you, even if it goes against their self-interests. A financial advisor that is not a fiduciary is likely selling you financial products that they get commissions on, and they’re looking to pad their bank account, not yours. Anytime you interview a financial advisor, it’s really easy to just ask them if they’re a fiduciary. Do it. You won’t regret it.

I wanted to get out of a highly-concentrated position

I got lucky in the startup game. I was an early employee at Cloudera, and the company IPO’d. Even though I sold the majority of my Cloudera stock before the IPO, I ended up in a highly-concentrated position of CLDR (overnight, CLDR became something like 30-40% of my net worth, which is a pretty scary sight if you’re risk-averse at all). 

There are lots of strategies you can take for getting out of a concentrated position. Sure, I could have just sold it all on day one, but that would have incurred a huge tax bill. I could have just set up a regular sale to sell some percentage every month, or every quarter, or every year. What I really wanted to do was use tax-loss harvesting to be tax efficient, but being super candid, that would have been a pain in my ass to do alone.

Using a robo advisor like Wealthfront, Betterment (or any of the other five thousand options there are out there these days) would have opened up tax-loss harvesting as an option within those portfolios, but they wouldn’t have factored in my concentrated position. Interestingly, Wealthfront actually started trying to build a product around this around the time that Twitter IPO’d, but it was short-lived, and was only available to a very small number of companies when they announced it.

I have to deal with some minor annoyances like RMDs

My dad passed away a few years ago, and I inherited some IRAs. Most people talk about RMDs (required minimum distributions) in the context of nearing retirement age, when the government starts forcing you to take money out of your IRAs. However, inherited IRAs work a bit differently, and unless you inherited IRAs from a spouse, you end up having to take RMDs before age 72 (the rules on this have actually been changing recently because of the SECURE act). While this isn’t really a huge burden, it’s one more thing that I have to remember to do annually, and it’s easier for me to push this onto a financial advisor to figure out how much I need to withdraw, and remind me to do it annually.

I wanted to have a single point-of-contact

Probably the biggest reason I decided to hire a financial advisor was that, in spite of my dad having a pretty simple estate, it was outrageously difficult to get a full picture of his finances. He had a handful of IRAs (some of his own, some that were inherited from his parents), and actually had a financial advisor, but that financial advisor only knew about the IRAs.

They didn’t know about a couple small life insurance policies he had, and dealing with those was nightmarish. I actually only found out about them by going through his mail, and finding some random statements that alluded to accounts that he held. It is outrageously difficult to get information on these sorts of things, because you’ll typically have to send them a death certificate, and then proof that you’re the executor of the estate before they’ll share any information about the accounts.

I tend to be way more experimental in my financial escapades than my dad was. My wife would probably never be able to piece together my total financial picture. As a result, I end up using my financial advisor as a single point-of-contact, so that I know she’ll have access to someone who has a very thorough understanding of my finances.

The pandemic made me thankful to have one

Seeing the market crashing back in March probably caused a ton of angst for a lot of people. Given that my investment time horizon is still very long, I don’t stress too much about major market moves, but I’m still human, and I’m not impervious to snap decisions. I look at sudden market moves like the crash back in March as exactly the time when a financial advisor is paying for themselves. Their function during these times is to make sure I don’t make a stupid decision along the way, and having most of my money managed by an advisor means the most I can lose is my Gamestop gambling money. 

Robo advisors or DIY are usually the right move

Being totally honest, I still question, fairly regularly, whether I really need an advisor. I think that robo advisors have come a very long way, and I’ve used Wealthfront, Betterment, WiseBanyan (before it was acquired), and explored many others. They generally offer great products that are right for the vast majority of folks. It’s turn-key, low cost (usually more like .25% AUM, which is much more palatable), and offer more sophisticated capabilities like tax-loss harvesting. For most people, I think they’re a great choice for low-maintenance investing.

You can even go lower maintenance than that. My 401(k) is the most boring thing in the world. I literally own one fund, and it’s Vanguard Target Retirement 2055. If you’re not familiar with target date funds, you should definitely get to know them. They’re fantastic investment vehicles because most major firms have them (Vanguard, Fidelity, and Schwab all have their own variants of these). They’re essentially funds of funds. Underneath the covers, if you read through Vanguard’s prospectus, the Target Retirement funds are comprised of various mixes of Vanguard Total Stock Market (which is all US equities), Vanguard Total International Stock Market (all non-US equities), Total Bond Market (US bonds), and Total International Bond Market (international bonds). The real beauty of these funds is that they adjust the mix of these funds over time, so in your 20s and 30s, you’re 90/10 into stocks/bonds, and by your 50s and 60s, it’s shifted closer to 50/50. It’s mindless, as good investing generally should be. The funds are also very low cost (usually .1-.2% management fees are backed into the structure of the funds). If you want to cut costs even further, you can buy the underlying funds and do the rebalancing yourself -- this will probably shave off 5-10 basis points off your all-in cost, if you really want to spend time on that.

Personally, I have a separate account with play money and gambling funds where I make stupid decisions and play with options, but the vast majority of my investable assets are invested in a really boring way. Investing isn’t supposed to be exciting. Don’t make it exciting for yourself. You’ll only end up unhappy.