Do you need a financial adviser?
Do you need a financial adviser? or to put it another way- can you get more value from a financial adviser than they charge?
Every day the FIRE community is promoting the lowest cost index fund investment for a number of reasons. One of which is that you will avoid paying extra in fees- does this mean that they also advocate avoiding not using a financial adviser to avoid the fees?
Do Financial advisers provide you with Value?
I don’t really know the answer and I suspect it lies between yes and maybe. I think it depends on your knowledge and comfort with your personal finances.
DIY Personal Finance
I’m a typical Kiwi. And as a typical Kiwi- we like to do things ourselves. It’s the DIY approach that we are famous for. The number 8 wire mentality.
I’ve sold my house privately to save on the real estate commission. I do all the maintenance on our cars- change oil, replace brake pads and rotors, sparkplugs, swing arm bushes, to name a few fixes I’ve done previously.
I make furniture as a hobby, maintain our home, build veggie gardens, and fell and prune trees. I even hired a moving-truck twice- to relocate across the country and between the Islands. There are many times when I do things myself rather than pay someone else to do them for me.
But is this always the right mentality to have? Do you end up spending more time when compared to a specialist? And is it the right mentality to have when it comes to our finances?
The Dunning-Kruger Effect
The problem with knowledge is that once you start to learn about a topic- say personal finance, you initially feel overwhelmed by all the jargon. You then move on and think you know everything- like you’re an expert.
You continue to learn about the subject, and you start to realise that there is so much more to learn- stuff that you never even knew existed before.
This phenomenon is called the Dunning-Kruger effect in which people mistakenly assess their own knowledge on a subject to be far greater than it really is.
Personally- In terms or personal finance, I think I’m somewhere between “there’s more to this than I thought”, and “It’s starting to make sense”. It depends on what area of personal finance you are talking about. There seems to always be more to learn when it comes to personal finance, especially with the changing nature of the world.
What do Financial Advisers Do?
So what exactly does a personal financial adviser do?
I’m no expert as I haven’t ever engaged an adviser, but I suspect a good financial adviser can help you organise your overall financial picture, including ensuring that your Kiwisaver is suited to you, develop and implement an investment strategy, and plan for your retirement.
They can help with planning for big expenses, like buying a house or having kids. And they can provide advice on everyday budgeting and spending- plus tax and estate planning.
The greatest value that I think a financial adviser can give is an outsiders perspective on your finances. Since we live our personal finances day in and day out, we might overlook certain things- or do other things in a certain way- just because we have always done it that way.
They can also remove any emotional element that we might have towards your money and decisions making.
I can imagine that having an outside non-emotional sounding board to discuss our personal finances can be quite useful. And it’s hard to put a value on that.
But if you are using a financial advisor to start a budget or track your finances, then there are cheaper alternatives- even free. You can set up a budget on Pocketsmith– and track all your spending. And you can track your shares and investments for free using sharesight.
How much do financial advisers cost?
There are many financial advisers that work on a commission model- that means they get kickbacks from funnelling your money into certain investment products- under your instruction. This means that you as a customer aren’t paying that much upfront for their services. But in reality- a commission model does introduce some conflict of interest issues- are they advising you a product because it’s the best for you- or are they advising you a product because it pays the highest commission for them?
If I were to get a financial adviser I would opt for an adviser who charges by the hour or a fixed cost, rather than commission. But how much would that cost? I’ve seen some financial advisers state that they charge around $400 per hour for their services- yikes- that is a lot! Some advertise complete financial plans including personal risk investments, estate planning, retirement planning, investment planning, cash flow and budgeting, for between $2000 to $6500.
So, in my opinion, engaging a personal financial adviser isn’t cheap- but they are worth the money if they help you get started on the right track to growing wealth and sorting your money troubles.
As I’ve mentioned earlier I’ve never delt with a personal financial adviser- I have once sort the help of a mortgage broker.
My experience wasn’t great. I felt like they were trying to overcomplicate my mortgage- splitting it up into three chunks. A proportion on a one-year fixed-term, another on a two year fixed term and a proportion as revolving credit. Whereas I like to keep it simple.
The idea was that the revolving credit could be used as an “emergency fund”, and that the one year would have a better rate than the two-year fixed term. And that having a proportion in both the one and two years would hedge against any sudden interest rate changes.
If interest rates go up- the two-year fixed term would be hedged at a lower rate, and if interest rates went down, the one-year fixed term could be renegotiated at a lower rate. The revolving credit also allowed you to pay off any extra when you were flush with cash. Sounds good in principle.
The issue I had is that I feel like your negotiation power is diminished when you have two loans on different terms with the same bank. They may not give you the best deal when it comes to re-fixing your first mortgage- because your second mortgage is still fixed with them and there is a fee to break that.
The second issue is that a revolving credit can be tempting. You may have the ability to pay down more when you can, but you also have the ability to buy un-necessary expensive items- because you can put it on the mortgage at a lower interest rate.
Keep Mortgages Simple
I like to keep mortgages simple- a fixed 2-year term with the best deal I can get at the time- and with the highest possible payment, we can afford. The minimum repayments calculated by the bank were around $400 per week-yes our mortgage is still quite large. But we said stuff that and double down and started paying back $900 a week. This cuts down the time it takes to pay off the mortgage and saves thousands on extra interest payments. Paying off the mortgage is part of my passive income plan.
And once the 2-year fixed term is up you have the ability to negotiate with all the banks- or with a mortgage broker if you like- to get the best deal you possibly can. You have more power when you are not tied to a bank.
After convincing the broker that we only wanted one mortgage on a two-year fixed-term- I waited to hear what offers they would come back with. Being sceptical- I went to my current bank, my partner’s bank, and another bank to get some quotes for myself. In the end, I managed to get a better deal going directly to the bank.
I’ve avoided using Mortgage brokers when it came down to refinancing our mortgage and managed the entire process myself. Sure the process took several hours to get quoted rates from several banks, but switching and refinancing saved up several thousand.
But that’s just my anecdotal experience with Mortgage brokers- and I’m not saying it’s the same with all Mortgage brokers- I may have found a bad one.
Does Everyone Need A Financial Adviser
For some people, money and personal finance are confusing and daunting. If you feel that way then seeking out advice from others is the best option. Even if you are confident with your financial situation I would argue that it may be beneficial to have a financial adviser looking over your shoulder.
Someone who can look at your situation objectively and remove all emotion. They might show you something that you don’t like- and at the end of the day- you are the one who decides whether or not to act on the advice that they give.
If you are considering a financial adviser I would suggest you check out the list of registered financial advisers on Money Hub (formally the list that Mary Holm has put together- but now regularly updated).
What do Kiwis think?
Doing a quick google search on financial advisers in New Zealand and reading their reviews shows a range of opinions on financial advisers. Some people really like their services.
It was my first time getting financial advice and it was a great first experience. The team was helpful in designing a plan to fit my goals and provided suitable recommendations for the future
Clever ideas and strategies that are broken down into achievable goals and time frames, so that even the most financially-illiterate people like myself can understand the process
Others suggest that financial advisers are sometimes not transparent and are invoicing for unsolicited advice. It is great to ask upfront about their pricing structure to avoid this.
Did not advise terms and conditions of offer and provided unsolicited invoice with evaluation materials.
Sending of unsolicited invoices. Enjoy the Commerce Commission.
But overall, there seem to be far more positive ratings than negative ratings. One thing that did keep coming up is the dislike of commission-based advisers.
Anyone that relies on a commission to fund their survival cannot be completely trustworthy. Buying a car, a house, insurance, salvation, the list goes on.
What’s your opinion about the value that personal financial advisers bring? Do you think it’s essential to engage with a financial adviser? Do you use one? What are their main benefits for you? Let me know in the comments! Genuinely curious as to what you think.
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