Businesswoman at work as advisor in office, financial consultant with documents and customer. Health insurance broker meeting Chinese manager, businessman signing contract with retirement plan agent
Tae Kim

Tae Kim

5 Awesome Reasons You DON’T NEED A Financial Advisor

Share on facebook
Share on twitter
Share on linkedin
Share on pinterest
Share on email

Many people are still under the impression that they need to hire a financial advisor in order to get their finances on track.

However, this is not always true.

Financial advisors are often expensive and can be confusing, especially if you’re not sure what they do for your money.

That’s why in this post, I’m going to break down 5 awesome reasons why you don’t need a financial advisor.

1) Most Financial Advisors Can't Beat the Market

Most people paid to deliver higher returns than the stock market as a whole can’t do it.

When we talk about “the stock market” we are most often referring to what is known as the Standard & Poor’s 500, or simply the S&P 500.

The S&P 500 is an index of the 500 largest companies on the American stock market. It includes major companies such as Apple, Google, Coca-Cola, McDonalds including hundreds of other large to small companies.

Since 1980, the S&P 500 has delivered an annual average of over 7% – so in order to beat the market, a financial advisor would need to design a portfolio that surpasses this number.

This is not easy.

The financial advisor must be skilled at designating the right investments, diversifying and keeping up with market trends – a tall order for anyone.

Very few financial advisors have the skill and knowledge necessary to beat an index fund.

According to a 2020 SPIVA report, over a 15-year period, nearly 90% of actively managed investment funds failed to beat the market.

The majority of these actively managed funds had either poor performance and high fees or average performance and low fees, but only about one out of every ten performed well on both fronts.

So, to reiterate the reason why you don’t need a financial advisor.

They are expensive and don’t necessarily produce better returns.

2) You Pay Even When Financial Advisors Lose Money

The second reason why you don’t need a traditional financial advisor is because, even if they manage to lose your money (which the majority of them do), you’ll still end up paying for their expensive service.

Financial advisors make money by charging you a percentage of the amount they manage for you, typically ranging from one to two percent.

For example, let’s say you have a financial advisor managing your $100 million dollar portfolio and he or she charges you 1% for managing it.

And let’s say your portfolio lost 15% this year. $15 million dollars!

What is outrageous in this scenario is that while you lost $15 million dollars, you would still need to pay your financial advisor the 1% management fee, a $1 million dollars for losing you $15 million dollars!

Your advisor’s strategy didn’t work out well at all, yet he or she still makes money off of you while you lose!

This leads us into our third reason why you don’t need a traditional financial advisor.

Rather than paying for an expensive financial advisor who may not be able to outperform the market based on your goals and risk tolerance, you can invest in low cost index funds instead which will save you time (and money)!

3) Investing in Low Cost Index Funds Will Make You More Money

First, what is an index fund?

An index fund is a mutual fund that tracks the performance of an established financial benchmark, such as S&P 500 or Dow Jones Industrial Average.

Index funds are passively managed which means they don’t engage in any type of market timing and they simply buy and hold all securities included in the financial benchmark being followed by the index fund.

In essence, you can bypass the intricacies of stock selection that are outside your scope or knowledge by buying a share of every public company in the market through an index fund.

Most research shows that investing in index funds can lead to higher returns with lower risk over time compared to actively managed mutual funds.

Since 1990, index funds have outperformed the majority of actively managed U.S. stock mutual funds on a total cumulative basis with lower volatility and less risk according to SPIVA Scorecards.

Index funds also offer protection against the risk that you’ll lose money because they are a diversified portfolio — meaning that your investments will be spread out across varying sectors and industries to help balance out any potential losses in one area or another over time.

What’s more, this is my favorite – index fund fees tend to be much less expensive than what many financial advisors charge for their services.

I currently hold majority of my own investments in an Index Fund called VTSAX, a Vanguard’s Total Stock Market Index Fund and it charges an expense ratio of only 0.04% compared to actively managed funds of 0.5% to 1.0%. This is 25x less!

The combination of this lower cost and higher returns is why it makes sense not to hire someone as an advisor but instead invest on your own, through low-cost index funds!

4) No One Cares More About Your Money Than You

You care about your money more than anyone else does and it’s up to you to make sure that everything is working as efficiently as possible in order for you to be successful over time.

This was a harsh lesson I learned in my twenties.

I’ve made every possible money mistake you can think of.

– I’ve leased a car without calculating the true the cost.
– I carried credit card balance.
– I allowed financial advisors to invest my money in investments I didn’t understand
– I took out unnecessary student loans.

I allowed consumer marketing, financial advisors and bigs banks to take advantage of my naiveness and essentially make money decisions for me.

It wasn’t until I was at the brink of financial catastrophe in my late twenties that I started to pay serious attention to money.

I started to read every book I could get my hands on that related to personal finance.

It took me a while, but eventually I learned what made sense for me and began developing the personal financial knowledge necessary to make solid financial decisions without the need of an advisor or a bank steering me in one direction or another.

So, take responsibility for your own financial situation instead of trusting that others have your best interests at heart.

5) You Can Learn to Manage Your Own Money

I used to think that people who knew how money worked were just naturally smart.

They could spew out financial jargons like hedge funds, leverage, stocks, bonds, etc. and I would have no idea what they were talking about.

It was only years later I realized they also didn’t have any idea about what they were talking about either.

Financial knowledge isn’t a talent, it’s an acquired skill and you can develop those skills.

There are plenty of resources out there to teach us how money works – books, blogs, YouTube videos.

Like the one you are reading right now!

Let me share with you few of my favorite personal finance books that got me started

Dave Ramsey’s “The Total Money Makeover” – Great book on Debt Pay-down and money mindset overall. This book got my wife and I kick started on the journey to paying down our $105,000 of combined student loans

JL Collins “The Simple Path to Wealth.” – The best investing book I’ve ever read. He distills the principles of investing down to the simplest form possible that even I could understand it.

Ramit Sethi’s “I’ll Teach You to Be Rich.” – A corny title but a great book for professional millennials. He lays out some great frameworks and systems for managing your money.

The key is to get started and not be intimidated.

If you have the willingness to read this article and grow your self, you definitely have the ability to develop a strong financial knowledge so you can start managing your own money.

Share this post!
Share on facebook
Share on twitter
Share on linkedin
Share on pinterest
Share on email
Notify of

Inline Feedbacks
View all comments