When Does an Investor Need a Financial Advisor?

“It’s not rocket science.”  Members of the public have misconceptions about how financial advisors add value.  TV doesn’t help, since advisors are often featured in three roles: Murder victim, thief or good romantic catch.  Investors often think using a robo advisor or buying a balanced mutual fund allows them to cut out the middleman. 

Lets approach the value question differently.  Self direction may work for some people, but under what circumstances should an investor “seek professional help?”

1. They don’t have the time required.  They work in a job where their employer wants them focusing exclusively on work. (Isn’t that almost every job?)  They can’t stop what they are doing, see what the market is up to and make decisions.

Advisors:  As an advisor, you work with money managers.  They make the day to day decisions.  Your employer also wants you focusing on work, in this case, it’s paying attention to your client’s investments.  You will call them if something needs attention.

2. They are out of touch for long periods.  Surgeons, airline pilots and military personnel are good examples.  Something might need attention, but they can’t go online and deal with it.

Advisors:  The client can’t make decisions, but as their advisor you can buy them time (if possible).  You can let them know ahead of time. (mandatory withdrawals)   You can be given discretion (though a specific process).  You can suggest managed money.  Someone else has discretion.  

3. They are emotional.  You know all about drama queens.  You’ve heard the four most dangerous words on Wall Street are “This time it’s different.”  Left to themselves, they would jump in and out of the market constantly.

Advisors:  They need a stabilizing influence.  As a good advisor, you are great at hand holding and focusing on the long term.

4. They don’t pay attention.  Their statement arrives by mail, but they never open them.  They buy at stock at $ 10.  It goes up to $50.  It goes back down to $10.  They never knew.

Advisors:  They need an advisor who is aware of what’s going on in their portfolio, calling when something needs attention.  They sit them down at least once a year for a portfolio review.    

5. They buy things they don’t understand.  You’ve done this in restaurants.  “I’ll have what he’s having.”  Do you know what it is?  No.  Why did you order it?  Because it looks good.  They buy because their friend bought.  But if their friend sells, they might not get the memo.

Advisors:  Good advisors and their firm do due diligence on investments before they are offered to clients.  They take the time to explain to clients what they are buying.

6. Tax liability is a foreign concept.  They love trading.  They do it every day.  They see their account balance go up and down.  They trade in and out of the same stock.  Because of almost matching gains and losses over time, they haven’t made much money, but they have a gigantic tax bill.

Advisors:  They need someone to help keep an eye on their capital gains and losses to date.  They need someone who understands wash sale rules.

7. They are marching in place.  They trade, but their account doesn’t seem to grow.  Someone is making money, but it’s not them.

Advisors:  Someone needs to explain the bar of soap analogy:  The more you handle it, the smaller it gets.  A good advisor explains how you buy good investments and leave them alone.

8. They lose interest easily.  They bought an exercise bike.  It’s now a clothing rack.  They joined a gym on the pay by month plan, but they haven’t been there for months.  They started trading online, but lost interest.

Advisors:  They need an advisor who will pay attention to their investments even after they’ve moved onto the next big thing.

9. They think investing is a video game.  Some people think this way.  It’s why online casinos might be catastrophic for certain people.  These investors don’t realize they are putting real money on the line when they invest through an app.

Advisors:  Good advisors remind them know the money is real.

10. They are masters at running up debt.  They max out their credit cards.  They write checks greater than their cash balance, setting up a loan against their securities. 

Advisors:  Good advisors start with financial planning.  They constantly remind clients about what they owe, asking “How will you pay it back?”

Related: 8 Reasons Prospects Should Do Business in The New Year