A friend recently called to tell me that someone had reached out and offered to be their financial advisor.

Before she even had time to think about it this person was already in a process of building a plan for her and she needed to decide asap if she wanted to continue moving forward or not.

This actually also happened to me earlier in the year, so I figured I just discuss my thoughts around financial advisors in one place.

Is a financial advisor necessary?

Well, it depends on the person, but most likely not.

Let's discuss.

What Does a Financial Advisor Do?

From my understanding, most financial advisors will do the following:

• Allocate savings into different investment opportunities based on risk tolerance
• Buy into investment packages for you
• Rebalance your portfolio to take advantage of the current market
• Tax-loss harvest to bring down your yearly tax bill

So essentially they are working around the clock to invest your gains, maximize your gains, and reduce losses due to investing and tax.

How do Financial Advisors Make Money?

There are usually two ways a financial advisor can make money

Flat Fee

Most financial advisors will take a flat fee between 0.25% and 1% annually depending on how big the portfolio they are managing is.

Commissions

Another way some financial advisors make money is through a commission on certain packages they sell you.

Based on the company they work for they may have some insurance options, mutual funds, or annuities that they'll make a small percentage from with each sale.

A Note on Commission Based Advisors

The idea of a commission based advisor has always rubbed me the wrong way.

Knowing they need to sell you certain packages to make money just seems off.

Personally, I wouldn't want anything to skew how my advisor chose to manage and make decisions on my behalf, so if I did ever get an advisor, it would be one that takes a flat fee,

Why Financial Advisors are not Necessary (For Most People)

The First Steps of Personal Finance are Straightforward

In my opinion, most people just need to follow the universal first steps that are recommended to everyone when they begin managing their own money.

Pay off debt, make an emergency fund, and contribute to your retirement accounts

The average person could leave it at that.

Taking it a step further, if you're ready to dabble in the stock market then just buy index funds.

These are things that take minimal effort to learn about and minimal effort to manage.

Financial Advisors Can't Beat the Market

Don't expect a financial advisor to bring you big returns because they understand the stock market.

No matter what they tell you they can not promise to consistently beat the market.

The advisor that pitched to me even admitted so. Saying that their goal was to actively manage my portfolio to take advantage of specific market trends.

They are not Worth the Cost

The fee you pay your advisor is already money lost from your gains each year.

Say the fee is 1% and you're targeting an 8% return each year. You're already making it 12.5% harder to hit your goal each year.

Not only that but the advisor then needs to make up that 1% and then some to make it worth it.

To me, it's not necessarily worth it to take on that cost, knowing for the most part they'd be doing what I'm already actively doing for myself.

My Counterpoint

The one case where I feel like it may make sense is if you already have a lot of cash or investment assets that need to be managed.

If you're looking to be a little riskier with your investments or you went a little too far and need to pull your portfolio back in order I think getting a financial advisor makes perfect sense.

They can actively help carefully expose you to different markets, rebalance all of your investments, and make sure nothing is getting out of hand.

It's Case by Case

I don't believe a financial advisor is necessary for most people.

When you look at managing finances for the average person it can be boiled down to a couple of simple strategies that anyone can find through countless articles or YouTube videos online.

But that's not to say that financial advisors can't provide value to the right person. If managing your finances is complicated and time-consuming because you have a lot of factors to consider, I think a financial advisor could definitely step in and help out.