DO YOU NEED A FINANCIAL ADVISOR?

I am not opposed to financial advisors, but to say I am suspicious of them is a huge understatement. In my journey to Grow Wealth, I have never used a financial advisor, but I do have an enormous network of incredibly intelligent and experienced professionals I rely on for insight and ideas on how to manage my wealth. ~ DeLea


At a recent commercial real estate event in New York City, I had a conversation with a friend who expressed her desire to invest in commercial real estate. However, she mentioned that her financial advisor wouldn't be happy about it, a sentiment I've heard before and always find shocking.

Financial advisors should encourage their clients to diversify their portfolios, and commercial real estate can be a valuable part of that diversification strategy. However, financial advisors often make money based on the assets they manage, and commercial real estate doesn't typically fall under their purview. This conflict of interest can lead to advisors discouraging their clients from investing in commercial real estate, even if it aligns with their financial goals and risk tolerance. In this scenario my friend has been int he commercial real estate industry for over a decade, her CORE COMPETENCY is CRE. In my opinion, her advisor should encourage her to invest in real estate, not discourage her.

However, it's important to consider when it might be time to hire a financial advisor to help you manage your investments.

When and Why to Hand Over Control of Your Own Investments to a Financial Advisor

Navigating the world of finance can be daunting, especially when faced with the decision of whether to stick with a financial advisor or to take control of your investments. While financial advisors can provide valuable services, they are not always the best fit for everyone. Here are some key points to consider when deciding if it's time to part ways with your financial advisor and manage your own investments or vice versa.

The Cost of Financial Advisors

Fees and Their Impact:

  • A common fee structure for financial advisors is the Assets Under Management (AUM) fee, which is typically around 1% per year.

  • For a portfolio worth $2 million, a 1% AUM fee translates to $20,000 annually. These fees can significantly eat into your returns, especially over long periods.

  • High fees can be particularly detrimental to retirees who rely on their investments to support their lifestyle. For instance, if you are following the 4% rule for withdrawals, a 1% fee reduces your safe withdrawal rate to 3%.

Transparency and Understanding Fees:

  • Many investors are unaware of the total fees they are paying due to complex fee structures.

  • Fees can include not only the AUM but also front-load fees, fund management fees, and other hidden charges.

  • It's crucial to understand all the fees associated with your investments and compare them to the value you're receiving.

Performance and Market Timing

Missed Opportunities:

  • Poor advice can lead to missed opportunities. For example, being advised to stay out of the market during a downturn can result in missing a subsequent rebound.

  • The end of the 2022 bear market and the historic rebound in 2023 serve as a prime example. Advisors who recommended staying out of the market during the downturn caused clients to miss out on significant gains.

Alignment of Interests:

  • Advisors may have conflicts of interest if they are incentivized to sell certain financial products, such as whole life insurance or high-fee mutual funds.

  • Ensure that your advisor's recommendations align with your financial goals and are not influenced by commissions or other incentives.

Communication and Transparency

Communication Issues:

  • A primary reason for dissatisfaction with financial advisors is poor communication. Quarterly meetings and sporadic updates may not justify the fees being paid.

  • Regular, clear communication is essential for understanding and trusting the advice provided.

Lack of Transparency:

  • Some advisors are not transparent about how they are paid or how much you are paying. This can lead to confusion and mistrust.

  • Always ask for a clear breakdown of all fees and ensure you understand how your advisor is compensated.

Independence and Control

Taking Control:

  • Many people prefer to take control of their investments to save on fees and have a more hands-on approach to their financial future.

  • Learning to manage your own investments can be empowering and financially beneficial.

When Professional Help Is Needed:

  • Not everyone needs a financial advisor, especially those with less than a million dollars in taxable brokerage accounts.

  • High-net-worth individuals (e.g., those with $5 million or more) might benefit more from professional advice due to the complexity of their financial situations.

Let's be clear:

If you've built significant wealth, reaching a high net worth of $5 million or more, it's likely because you possess exceptional financial acumen. Your instincts and decision-making abilities have proven successful in accumulating wealth. So, why hand over the reins to a financial advisor who might not share your drive or expertise?

While financial advisors can offer valuable insights, their interests might not always align with yours. Their fees, potential conflicts of interest, and varying performance records raise valid concerns. Remember, they might not be as invested in growing your wealth as you are.

Before blindly trusting an advisor, assess your own capabilities. You've already demonstrated your ability to navigate complex financial landscapes. With a bit of research and due diligence, you could potentially manage and even surpass the growth potential offered by a fee-based advisor.

Don't underestimate your own financial prowess. Take ownership of your financial future, explore your options, and decide for yourself if a financial advisor truly aligns with your best interests. Your financial destiny is in your hands.



As a commercial real estate Investor/Broker, I believe it's important for investors to understand this potential bias and consider all their options before making a decision.



I recently came across a podcast by Katie with Money that delves into this issue in more detail, using data to back up the points I've raised. I highly recommend listening to the entire episode, but here are the main takeaways:

  • Financial advisors may have a conflict of interest when it comes to commercial real estate. Their compensation structure often incentivizes them to focus on assets they can manage, rather than those that offer the best diversification potential for their clients.

  • Commercial real estate can be a valuable part of a diversified portfolio. It offers the potential for both income and appreciation, and can provide a hedge against inflation.

  • It's important to do your research and understand the risks and rewards of investing in commercial real estate. Don't rely solely on your financial advisor's advice, especially if they seem hesitant or dismissive of the idea.

  • If you decide to work with a financial advisor, it's important to choose one who is transparent about their fees and compensation structure, and who has experience with commercial real estate investing.

Ultimately, the decision of whether or not to invest in commercial real estate and whether or not to hire a financial advisor is a personal one. However, it's crucial to have all the information and understand the potential biases that may be influencing your advisor's recommendations.



MONEY WITH KATIE - PODCAST

Listen to the full podcast HERE

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Dr. Lloyd Potter | TEXAS DEMOGRAPHER