As with any professional, most people would choose to use a financial advisor since they would not have the particular knowledge needed to plan their own finances. This is similar to going to a car mechanic when one does not know how to fix the car oneself. Of course the car mechanic does have more experience, does the repairs everyday, and probably has some special tools that the do-it-yourselfer would not have, so it can make sense for an individual to take the car in even if one could make the repairs.
Likewise, it can make sense for an individual to use a financial advisor even if one does understand finances. There may be aspects of finance like life insurance, stock investing, or tax planning that are outside of one’s comfort zone. Also, as with auto repair, while one might be able to change one’s own oil or replace one’s own brakes, one may not wish to spend the time. As is discussed in The Millionaire Next Door, the rich tend to spend their time at their chosen profession or with their families instead of doing things themselves to save the cost of hiring a professional. They figure they can make more money doing their profession than they can save by doing things themselves.
As with car repair, however, if one knows nothing about investing, one is left at the mercy of the financial planner. Unfortunately there are unscrupulous financial planners out there just as there are unscrupulous auto mechanics. The following are competencies one should have to allow one to ask the right questions of their financial planners:
1. A basic understanding about the different types of assets and their behaviors. The Money Book of Finance is a good place to start.
4. An understanding of what type of investing is appropriate for different stages of one’s life. For example, see the post The Stages of Investing.
5. An understanding of the role of growth assets and income assets in a portfolio, commonly referred to as “stocks and bonds.”
6. An understanding of the different types of mutual funds (open funds, closed funds), the different fee structures (load, no load), and the different investment strategies (momentum investing, value investing).
7. An understanding of the effect of frequent trading, called churning, on fund performance (basically, a lot of activity drives up fees). Also, an understanding of appropriate levels of fees (funds with fees below 1%, ideally below 0.50%, are best).
Some of the classic books on investing will help provide a good foundation. For example, A Random Walk Down Wall Street, One Up On Wall Street, and The Warren Buffett Way are all excellent.
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Disclaimer: This blog is not meant to give financial planning or tax advice. It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.