In every day life we are faced with decisions of whether to do something ourselves, or to hire some- one. Probably the most basic choice we face on a daily basis involves eating, in that we can prepare our own meal versus going to a restaurant.
Some tasks might be time consuming, such as painting one’s house, or doing one’s taxes. How-ever, there are plenty of people who either manage to prepare their own taxes, paint their homes, or possibly do both.
Even in fields where the professional has advanced training, such as in the fields of medicine or law, we might opt to handle things ourselves. Some people might only go to the doctor for serious problems, while others will go for minor ailments. Likewise for some disputes certain individuals will seek the services of an attorney, while others will try to take care of things themselves.
The investment field is really no different than other professions in that some people will do things themselves versus others will hire the expert. It should be noted that if someone makes some major mistakes with their investments the consequences can be quite serious. On the other hand, if someone does a poor paint job the costs to fix it would probably not be that great.
Oftentimes what might be the determining factor in hiring the pro would be the benefits versus the cost. For example someone would not hire an attorney to fight a routine traffic ticket, since it would not be worth the cost. However, if that person had a poor driving record and the ticket might cause that individual to lose his/her license then it might make sense to hire the lawyer.
Likewise in the investment field, if someone had limited assets the percent- age cost to hire a planner would be quite high versus someone who had substantial holdings. Frequently at investment firms, as with banks, you get additional services for having more money. For example at Vanguard, if you have less than $50,000afinancialplanwill cost $1,000, while having over $50,000 the cost drops to $250.
When someone is just starting out, the amount being saved is much more important than the investment return. If someone has $5,000, a 5 percent return nets that person $250, while a retired per- son with $500,000 will net $25,000 with that same return.
If someone is clueless about financial matters, but has limited funds to invest that individual might still need the services of a pro. However, that person should seek the services of someone who can help on budgeting, or possibly credit on how to avoid high cost debt. People have to save money first before it can be invested. While it is more cost effective to have an invest- ment pro the greater one’s assets are, many people By Allen Wisniewski with substantial holdings are still capable of doing things themselves. The proliferation of a wide variety of low cost index funds makes investing much easier for the amateur. Having an investment pro will not necessarily allow you to achieve higher returns. After paying the fee, you will frequently net less. What the investment pro will do, assuming they are competent, is help you avoid making foolish mistakes. If you are a person who easily panics, or is likely to change course frequently having an investment pro would be worthwhile. A knowledgeable and disciplined investor can probably handle things themselves.
There are some people with limited investment knowledge who have substantial assets who are content to keep their money in the bank. These people probably do not want to pay the fee for an investment advisor. However, with near 0 returns on bank savings accounts and CD’s these investors are losing money to inflation, so exploring other alternatives would be worthwhile.
The best course of action is for people to be informed about investing, whether they do it themselves or hire someone. Investing does not need to be overly complicated so many individuals can competently handle things themselves. However, investors do need to know their limita- tions, and be willing to hire a pro if the need arises.
Allen Wisniewski has been involved in finance for more than two decades. He lives in Culver City with his family.
