Should Young Investors Use A Financial Planner?

Despite the increasing democratization of financial markets in recent years, in my personal experience there seems to be a sort of counter-movement away from do-it-yourself investing (which I advocate) towards for-profit financial advisors among the young.  Don’t get me wrong, I think financial advisors definitely have their place, but for the most part, are best for older investors who’ve already accumulated substantial assets and need complex tax and estate-planning advice in addition to the standard investment planning services. 

I have several acquaintances around my age who feel the need to pay an investment professional to handle their investments, even though their portfolios are only worth a few thousand dollars at best.  What’s the harm so long as they’re saving for retirement, you ask?  Plenty.

Learn By Doing

The best way to learn pretty  much anything is by doing it.  Investing is no different.  Granted, at least these people are saving money, but they aren’t learning about finance, investing, money management, or anything else.  What they are learning is to become dependent on the advice of others, which I think is a dangerous state indeed.  If you never do your own research, you’ll never learn to make your own decisions.  Instead, you’ll blindly rely on the advice of others you deem to be “experts.”  The irony, of course, is that you don’t even know enough about investing to be able to determine who the “experts” really are.  Thus, you are just asking to be ripped off somewhere down the road.  I can’t help but think many of the people who were tricked into taking out subprime mortgages they could never afford fall into this category of “blindly trust the experts.”  By developing expertise in the financial arena, you also innoculate yourself somewhat against harmful scams.

It Creates A Disconnect Between Risk And Return

The average do-it-yourselfer is intimately aware of consequences of taking on too much risk:  they lose money.  Since there’s no intermediary, they have nobody to blame but themselves.   The connection between painful losses and foolish risk-taking is starkly clear.  If, on the other hand, that same investor had hired a financial advisor who implemented the exact same asset allocation (and thus suffered identical losses), the connection might not be so clear.  Instead of blaming themselves for investing beyond their risk tolerance, they are likely to simply blame their financial advisor for their losses.  While hiring a new planner may make them feel better, it will do nothing to solve the underlying problem.  Of course, part of a good advisor’s job is to ensure their client is taking the proper amount of risk, but without any experience or financial knowledge, how are you to be able to tell the good from the bad in the first place?

While this is of course an over-simplification of the situation, I believe the vast majority of young investors would be wise to handle their investments personally, at least for a decade or two.  Sure, they may not achieve the highest returns or make all the right moves;  that’s life, but the lessons learned will be invaluable for the future.  It’s far better to make mistakes handling a $10,000 portfolio early in your career than a $1,000,000 portfolio just before retirement.