Do You Need A Financial Advisor When You’re Under 25?

Financial advisors are one of the most misunderstood services today and that is no one’s fault but their own. They come in many shapes and sizes, offering basic planning to a full menu of products like insurance, estate planning, and fund managing. Moreover, each individual is different. Some act like a used car salesman that push you towards worthless products while others have the perfect amount of communication and your best interest in mind. When you add in the fact that you’re young and just getting started on your financial journey, it’s hard to determine whether you need a financial advisor when you’re under 25.

Personally, I don’t use a financial advisor anymore. I have in the past to help manage just a piece of my finances and had a bad experience so I taught myself how to do it. This doesn’t mean I won’t be using be using one in the future but we’ll get to that later. I understand this article may get some people a little riled up but from my personal experiences and others, it’s what I truly believe. Now, it’s not fair to judge a whole profession off a couple of bad apples so later on I’ll tell you what to look for in a good advisor. Before we get there, we need to determine if you actually have the need for one though.

To understand if you need a financial advisor when you’re under 25 you need to understand your current situation. Some things you need to consider are:

Do I want to take responsibility for managing my money or pay someone else to do it?
Do I have a plan to pay down any debt I may have?
Have I been successfully investing for retirement?
Do I understand what my long-term goals are and how I’m going to get there?
Do I have any major expenses coming up in the future? Like a child or a home purchase.

These are just a few sample questions you need to ask yourself. There are dozens more but for the majority of you, this will cover your situation. Some of you may have confidently answered that you have a plan to tackle all these issues in the future and that’s great. This doesn’t mean you wouldn’t benefit from the help of an advisor. We’ll get to that reasoning in a little bit though.

What Is A Financial Advisor?

The first thing we need to discuss is what a financial advisor actually is and what they can do for you. For the sake of this article and your well being, you need to forget anything you’ve ever heard. You may think that your Aunt Sally is a financial wizard and she very well may be. But for now, I want to set you straight on what a good financial advisor is and how they can help you.

What Can They Do For You?

Most people laugh at the idea of paying someone to help manage their money. Why spend your money on someone telling you how to spend your money? While on the other end of the spectrum, there are people who blindly pay someone thousands of dollars a year and get very little value in return. You need to find the right person if you’re going to use a financial advisor when you’re under 25. Let’s be frank, for the most part, your 25 and under population probably does not have a huge nest egg built up and paying someone to give you nothing in return could have terrible long-term implications. Here is a list of the things a good financial advisor should bring to the table:

Expertise – This seems so blatantly obvious but unfortunately it is often overlooked. If you’re hiring someone to help you, they better know more about that topic than you do! You’re going to run into people that can talk the talk but they can’t walk the walk. Ask them how long they’ve been in the industry. Ask how much they personally have under management. What can they do for you?
Be Forward-Looking – You aren’t trying to plan for just the next year. You have a whole life ahead of you and money will always need to be something you need to manage. A good advisor should be able to make you a 1, 5, and 25-year plan at the minimum. They should know the questions to ask to help you consider the things you haven’t even thought of.
Accountability – Accountability is also one of the big benefits of a good advisor. It isn’t an advisors job (usually) to manage your everyday spending. That’s on you and frankly, you’ll have to pay them a lot more if you want that. It is their job though at the very least to make sure you’re putting back the appropriate amount for your goals. This also includes checking back in on a regular basis. Your situation can change quickly and they should be helping you reassess your contributions and if you’re reaching your goals at regular intervals.
Transparency – One of the biggest reasons I’m not a fan of financial advisors is that some aren’t transparent. If you’re paying someone to manage your money then they should be able to tell you everything you could possibly imagine about your financial profile. It’s 2019, everything, for the most part, is done digitally so if you have a question about your account, they should be able to answer it within a day. If you have a financial advisor that can’t tell you exactly how much you pay in fees per year and what those fees go to exactly, then you are being taken advantage of.
See The Big Picture – Your finances aren’t as simple as managing a single checking account. You have 401ks, a savings account, health insurance, and the list goes on and on. It can be confusing and overwhelming, to say the least. Your advisor should have the expertise and systems to manage all of this if you want them too. Obviously, there is nothing wrong with just getting assistance with a certain aspect of your finances like managing a Roth IRA. But if your advisor is hired to manage your entire financial portfolio, that’s exactly what they should do.

Do You Need One?

You don’t need to have a million dollar net worth in order to need a financial advisor. In fact, I would bet that 95% of people that use one don’t. It doesn’t matter what stage of your life you’re in; there are some great benefits to having a financial advisor.

That being said, almost everything a financial advisor offers, you can teach yourself how to do. For example, let’s look at retirement planning. This is a topic that everyone makes out to be extremely difficult but I think it is something a motivated person can teach themselves how to do in a day. If you want a crash course on it, then read my 5 part series starting here: Why You NEED to Worry About Retirement Now – Part 1.

A financial advisor should help you with much more than retirement though. If you are currently investing but losing money every year, have all your money sitting in cash, or have a mountain of debt that you don’t know how to pay down, then an advisor may be right for you.

The most common reason is that people just don’t want to deal with it. They want to go enjoy their life with their family, go to work, and end up with a great nest egg someday. This is 1000% okay and something you shouldn’t feel bad for. Just understand, your money is still your responsibility. Do the leg work to find a reputable advisor so you’re not looking back in a few years and wondering what happened to your money.

Where Do You Find One?

You can Google financial advisors in your area right now and a hundred options are going to come up. They are literally everywhere and all hungry for your business. My best advice is to close your laptop and go talk to people face-to-face. I don’t mean financial advisors, I mean talk to your family and friends.

Chances are you have quite a few people in your circle that use one and most of the time they are an open book. This is just like finding an accountant or getting insurance; you are going to use people that your family and friends trust.

One word of caution; still ask all the questions surrounding the points that make a good financial advisor that we talked about above. Did they answer your calls? How has your 401k been performing? What do you like most about their service? Have you made progress towards your goals?

This paragraph is going to make someone upset but it is something I truly believe. Try to find a financial advisor that doesn’t work for a big corporation. The conflict of interest and necessity of performing causes too much of an issue in my eyes. Are they here to help you or are they only here to fill their pockets? Just like any other financial service, I want someone local who has my best interests in mind and isn’t worried they will lose their job if they don’t hit the numbers. Please don’t email me telling me how dumb I am. It’s an opinion, form your own.

We’ve all read the headlines and seen the stories from these big institutions like Wells Fargo. Just know you can find great financial advisors that have access to all the same information and tools as these big corporations.

Keep Them Accountable

Out of everything in this article, this is far and away the most important thing to remember. If you do hire a financial advisor, it is up to you to keep them accountable, no one else. I wish we lived in a perfect world where you could give someone your money to manage and they would turn you into a millionaire but we don’t. The fact is, most actively managed accounts underperform the S&P 500 (the market) and you don’t want that to be you.

If your money is losing to the market AND you are paying this person fees you are losing twice. You are reading this blog, you are doing your research, you want to win and you will if you keep them accountable. I have seen financial advisors get defensive when clients ask simple questions about their account which to me is a sign you need to run. At the end of the day, it is still your money and you need to do what you need to do to ensure your financial security. Ask them the hard questions and don’t take no for an answer.

Hold A Yearly Meeting

The first thing you need to do is hold a yearly meeting to go over your results for the year. This is extremely common in the industry and is sometimes done more frequently. That’s a personal decision though. If your financial situation has changed or you have concerns about the performance of your account, schedule the meetings more often.

At this meeting your advisor should have your whole financial story laid out so that its easy to understand. Some items that will be included are:

Starting balances
Ending balances
% Gain/lost and WHY
Funds invested in (name, % invested, expense ratios)
Fees

Fees Fees Fees

Unfortunately, fees deserves its own section. I hate fees with a fiery passion. Fees are an unavoidable part of financial advising, as they should be. It’s a service just like any other business and they should be compensated appropriately.

What gets me riled up is that fees aren’t always cut and dry. The financial sector has figured out ways to pinch every penny possible out of investors and that’s where people get confused. You add in the fact that some financial advisors get paid by selling you a certain product and then you have the perfect recipe for a conflict of interest.

Say, for example, you need life insurance and the advisor has two different options. A and B are fairly similar but option A is the best choice for you. Option B however, offers a small kickback to the advisor every time he sells it to a client. Which option do you think an advisor would choose? You’d hope A because you are paying them to have your best interest in mind. More often than not though, they go with option B and that’s a problem that is hitting your wallet directly.

There is a way around this though and that is HOW you pay your financial advisor. There are three common ways to do this. They are fee-only, fee-based, and commission-based. Investopedia does a great job breaking that down with this graphic.

As you can see, the only option that eliminates the risk of losing money because your advisor has a conflict of interest is the fee-only payment style. Fee-only is incredibly rare though because these people want to get paid no matter what. When you work for a large corporation like New York Life, or Edward Jones, you have bosses to report to and those bosses have shareholders that need to see a profit coming in. See the problem now?

Find a financial advisor that shows you every piece of your financial story down to the penny. Pay them on a fee-only basis and if they are hesitant to show you certain numbers or explain their reasoning, run!

The Bottom Line

There is absolutely nothing wrong with using a financial advisor when you’re under 25. It is a great idea and can be a responsible money management tool but that doesn’t mean there isn’t still some work on your end. If you just feel overwhelmed or confused, then start asking around see what others are doing. There is no cut and dry answer here, as all of our situations are different.

In the beginning of this article, I told you I used to have an advisor but no longer do. This was a personal choice because I believe I can teach myself most of the things I need to know. I’m a money nerd and most people aren’t. This doesn’t mean I won’t use one in the future though. Who knows where my interests will be in 20 years, or if I’ll even have the time to actively manage my accounts.

Again, it doesn’t matter if your net worth is $10,000 or $500,000. There is always some way a financial advisor can benefit you. What you must do is find the person that has the correct skills for you, has your best interests in mind, and can be hired at the right price.

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