This is a guest post from Tough Money Love, the personal-finance blog that doesn’t pull any punches.
You don’t have to look far in our economy to find someone willing and able to assist with your financial planning. Bankers, insurance agents, stock brokers, wealth managers, and professional financial planners are everywhere. Advice passed along by personal finance bloggers and other amateurs is easy to come by as well.
Many of those wanting to give you advice or manage your money are competent and focused on your best interests. Unfortunately, some are not. Separating the good advice from the bad advice can be a daunting task for anyone.
That’s why I am suggesting that many of us can (and should) be more actively involved in our own financial planning. Although a complete do-it-yourself financial plan may not be best for you, applying DIY energy to the overall planning process keeps you in front and in charge of your financial destiny.
Here are some advantages to increasing your level of personal involvement in your financial future:
Save Money
Professional services are not free and financial planning is no exception. Whether you are paying commissions, fees based on assets under management, or fee-for-services charges, you are going to pay something. Fees that represent even a small percentage of your assets can be substantial. The impact of the fees is magnified over time and is particularly harmful in an economy where investment returns are depressed. That’s where we are now and where we may remain for an extended period.
If you do for yourself that which is within your realm of competence — and let a pro do only what you cannot — you will save money and come out ahead overall.
Reduce Conflicts of Interest
Some financial advice you receive from others may be burdened by inherent conflicts of interest. For example, a stock broker or insurance agent makes a living by selling financial products to you. The advice may be “free” but you could end up buying something that is not best for your situation. If an advisor’s income is based on what you buy or how much you invest, the temptation to give advice in that direction is hard to resist. Complete objectivity may be missing. That’s where the DIY planner — you — steps in to recognize what is really happening.
Maintain Focus
When you are advising yourself, all of the focus is on your money and on your money issues. A third-party advisor may be distracted by other clients and by personal needs. If most of those other clients have more money than you, they will likely garner most of the attention. The wealthy receive custom solutions. The not so wealthy often receive standard recipe solutions. If you are more involved, you can determine if a proposed plan or solution for your money problems is really designed for your unique circumstances.
Appreciate the Risk
Perhaps the biggest variable in providing appropriate financial advice is adapting to the client’s tolerance for risk. I have seen dozens of different questionnaires designed to ascertain a person’s financial risk profile. The problem is that this is a highly subjective metric, heavily influenced by emotion. The best person for understanding how risk tolerance will affect your sense of money well-being is you. That’s worth a lot.
Adapt to Changing Conditions
Most financial planning decisions are made for the long haul. Others are made in response to internal and external conditions. Some of those conditions can change rapidly, as we have seen in recent months. A third-party advisor with hundreds of clients may find it difficult to keep up with all of the changes that affect you or promptly react to them. You won’t have that problem.
Be a Better Consumer
If you are crafting and following your own financial plans, you will have a more intimate knowledge of how your behavior as a consumer affects those plans. This makes you a better consumer thereby improving the prospects for a successful plan outcome.
Be a Better Citizen and Voter
Politicians have a lot of control over your financial destiny. Many voters lack real knowledge of how government spending, taxes, and budget deficits will affect them personally. If you are deeply involved in your own financial planning, you will better understand how monetary and fiscal policies impact your plan. That will make you a better voter. We need better voters.
Take More Responsibility
If recent economic events have taught us anything, it is that we must be personally responsible for our financial future. Depending on government or Wall Street has not worked. Turning everything over to a third party can be just another way of passing the buck — literally and figuratively. Having someone to blame for money misery doesn’t get your money back. So keep the ultimate responsibility at home.
Final Words of Caution
I am not suggesting that DIY financial planning is for everyone.
- If you are a high net-worth individual there can be complex estate and tax planning tax issues that require professional guidance.
- If you are already in financial trouble, that may signal a need for third-party intervention.
- If you are unwilling to read, study, and read some more — constantly — then don’t bother with your own financial planning.
- If you cannot prepare your own tax return, track your spending, or monitor your portfolio performance, you are probably a poor candidate for self-directed money management and investing.
That’s okay. But at least give the idea of being more involved in your own financial planning some serious consideration. You may be the best candidate for the job or at least to play on the planning team. To get you started, here are some ideas on how to be your own financial planner.
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I’ve spent a lot of time over the last year or so trying to decide if I needed to hire a financial planner to figure out my investing needs for me.
However, the more I read about investing and financial planning, the more voracious of an appetite I get to learn more and figure it out myself. I am a chronic DIYer but I think it is incredibly important, as you mentioned at the end of the post, to recognize when a do-it-yourself route is not going to work for you and a professional can provide you with better, faster results.
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I have never hired a financial planner to date, but we are on the verge of turning our taxes over to a CPA. Not because our networth has gotten uncontrollably high (I wish), but because we have multiple business interests and rental properties to manage and I worry about making a mistake at some point. If I get audited going forward, I want there to be someone else to take the blame! Good post.
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I HIGHLY, HIGHLY, HIGHLY recommend that you find a firm with a good track record and great testimonials.
I used to intern for a wealth management firm and I could not tell you how well their clients did when the market was tanking…remember, it’s about benchmarks.
Throwing all your money into an ETF in an attempt to save a couple dimes and be frugal is bad advice!
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I’ve never thought about hiring a financial planner because I felt that I wasn’t “rich” enough to need one. I can handle what I have right now by myself. If I won the lottery or something, I would definitely consider one then.
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I’d never hire a financial planner. I wouldn’t invest in anything unless I knew exactly what it was, and if I understand it fully enouch to want to invest in it I’d understand it enough to do it myself! Furthermore, I have a spectacularly low risk tolerance, and wouldn’t feel comfortable letting other people decide what’s best for my money.
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I think I’ll be agreeing with the vast majority of folks here – I would never hire a financial planner. Learning how to handle your own finances is well worth the time when you consider the savings.
The feedback I often get is that it is far too complicated for the ‘average’ investor and thus the massive industry which financial planner’s play in. My solution to that is to ‘invest the lazy way’. Its the easiest way to stay diversified and still minimize fee’s while maintaining some control over your finances.
Check out the post regarding how to ‘invest the lazy way’ – http://www.twentysomethingsense.com/2009/01/investing-the-lazy-way.html
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J.D: I know you’re really a closet philosopher! This is not a post about money or hiring an adviser — it is a post about self-awareness and self-knowledge.
Put simply, wisdom may be defined as the awareness of one’s own ignorance.
The most expensive “advice” is free and the greatest fools are those who have the least awareness of their own ignorance.
What makes the ideas great here at GRS are not necessarily the quantitative concepts of attaining monetary wealth prudently — it is the idea that the virtues of contentment, simplicity, patience and humility are the foundation of “success” in any endeavor, whether it be financial or otherwise…
Thanks for the wisdom, J.D.
Kent
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The whole point for me to get out of debt was to get rid of ALL the middle-men, mortgage too, so got rid of them as well. Whew – love the feeling. My money is mine, 100% of it. And so the last thing I would do now is to hire another middle man (financial planner) and pay them — not when there is so much free advice out there. I could write a book myself on all the knowledge I’ve gained.
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JD,
The post touches on a number of very important issues that may be obvious to the trained financial person and a little less so to us mortals.
I agree with a number of the issues, but I do beleive that if we were talking about medical advice, very few of us would not go to a medical doctor if we feel ill. Yes, we will be involved in the decisionmaking but we will heed the advice of the medical practicioner.
Why do we think (and sometimes even advocate) that everybody is a financial specialist and that most of them who makes a living out of it are crooked?
I do not even trust myself (a trained financial specialist)with my financial advice for myself as i am to close to my own finances to be objective, and always find an external advisor to provide me with objective advise. It is true that I will not give the advisor a free hand and do whatever is avised, but more often than not, I get advice that is sound and follow it.
The concept of not asking for professional advice when it may be needed is often the reason why some people run into financial trouble.
My recommendation is to ask for the advice (and there are lots of places where you can get FREE quality advice) and then deside for yourself what to do with it.
Advice is just what it is, not an instruction to act but an indication of what may be prudent at the time.
I feel sorry for the people who think they have the same knowladge of any subject than somebody who has studied for years and worked in an industry for a long time, these individuals deserve to make their own mistakes and we should allow them to do just that at their own expence.
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Carl, I think think most DIY investors think they know more than an investment professional – the problem is the compensation. There are so many conflicts of interest that you just can’t trust a financial advisor to do the best job for you (since they need to get paid). It’s not their fault and they aren’t bad people – it’s just the way it is.
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Hey what happened to the edit comment function? I need to replace the first “think” with “don’t”.
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@ABC and everyone else on here is totally right (sarcasm)…
if you do your research ON FINANCIAL PLANNERS instead of MF, ETFs, and stocks – you will return more in the long run even with the cut you give them.
absolutely HILARIOUS the ignorance on here and disrespect you are giving CFA’s (35% pass rate of all who take and average 5 years to complete).
BTW, it is the most internationally recognized financial designation you can earn..
not to mention, unless you have a finance/acct degree or got licensed – you would not even begin to know how to value any company.
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should I even add the ETHICS portion of the exam is quite large…
I love the personal finance blogs/community out there, but saying the financial services industry is corrupt and you can do better (which you quite possibly could with luck) is just plain wrong.
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@Carl Marx (#9): If doctors came to your house and evaluated you free of charge, then recommended a series of pills for you to take daily (which they happen to conveniently sell), then you’d have an argument.
The problem with these financial advisors is that they operate in a perpetual conflict of interest. They are constantly forced to choose between offering you investment products that are EITHER the best fit for you, OR the most profitable for them. It is extremely rare that this ends up being the same product. Thus, you can never really trust that you’re getting objective advice from them.
Doctors get paid whether you live or die, and they don’t care where you buy your medication. It’s completely different and not really analogous at all.
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@Gloomberg News (#12):
“if you do your research ON FINANCIAL PLANNERS instead of MF, ETFs, and stocks – you will return more in the long run even with the cut you give them.”
Well that’s just provably false. There’s a mountain of evidence out there that shows that AFTER FEES, a scant 5% of managers manage to beat a simple index fund over the long-term, and that’s attributed to simple dumb luck. Even worse, there’s absolutely no proof at all that a manager who’s managed to beat the index for the past N years has any better chance of doing so this year than any other manager. John Bogle covered this in great detail in The Little Book of Common Sense Investing.
“not to mention, unless you have a finance/acct degree or got licensed – you would not even begin to know how to value any company.”
Of course you would – the correct value for any company is exactly equal to its current stock price. Efficient Market Theory states that any and all available information impacting any company’s stock price is already factored into that price. Thus, the only factors that can influence a company’s stock price are events that are impossible to predict with any certainty. That’s kind of the entire premise of Burton Malkiel’s A Random Walk Down Wall Street.
There’s little new ground to be covered here. When this much money is at stake, you can bet it’s all already been researched to death. And I trust the findings of industry giants like Lynch, Buffet, Bogle, Bernstein, and Malkiel a lot more than I trust some random commentor on a blog (no offense).
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@Kevin
you are NOT DOING ENOUGH RESEARCH if you are choosing advisors like the one you described…
seek private wealth mgmt/fin planning firms that take a cut of your portfolio…do you think they will push you products that are biased? no, they win big if you win big (aka your port goes up)
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@Kevin
“Of course you would – the correct value for any company is exactly equal to its current stock price.”
you just proved my point that you can not value a company…the instrinsic value of a company is by discounted it’s future cash flows…NOT ITS CURRENT MARKET PRICE lol
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@Gloomberg (#16)
I didn’t come up with this stuff myself, this is the finding of over a CENTURY of research and historical analysis. It’s a simple fact: absolutely nobody can pick stocks such that they consistently beat the market, year after year. Nobody can do it, for a wealth of reasons. There’s no point in me writing an essay on it here, it’s already been explained in several books, by industry experts. Specifically, Bogle’s “Little Book of Common Sense Investing,” Bernstein’s “Four Pillars of Investing,” Fred Schwed’s “Where Are the Customers’ Yachts”, and on and on and on. The verdict is in, the experts have spoken: NOBODY can beat the market consistently, so as individual investors, the best we can do is minimize the fees, buy index funds, and ride the average.
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@Kevin
thanks for not addressing the “current market price is right price” theory LOL
as for your essay..no one is picking individual stocks – financial planners are not brokers cold calling about BAC’s dividend cut..
they take taxes strategy into consideration, discounted bulk commissions, lawyers for should a problems occur with a company you have a position in…i can go on all day…t
hey have access to information THAT YOU DO NOT HAVE ACCESS TO, regardless if you think you do (they read this day in and out, independent research, bloomberg terminals, squawk boxes, etc)
I am saying that if you want to live a “frgual” life and save every penny that is fine – it is wise to take professional advice from someone who has dedicated their life to the topic
…i can’t argue anymore, the point is mute and this crowd will not understand because most are trying to save every penny and get out of debt as opposed to maximizing long term investment gains
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Gloomberg, your clumsy reference to the Discount Divident Model demonstrates that you’ve read just enough to be dangerous, but not enough to realize how little you know. I’ve cited numerous books and experts that all agree with what I’m saying, whereas you’ve done is recite some ad copy from CFA sales brochures. If you really think you’re right, and Bogle/Lynch/Bernstein/Malkiel are wrong, well then clearly nothing I write will convince you.
By the way, it’s “moot”, not “mute,” genius.
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who said discount dividend model…DISCOUNTED FUTURE CASH FLOWS…if you do not know this, you need to stop arguing…discount dividend is another valuation model, however I am not nor did I ever talk about that.
looks like you are the clumsy one.
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LOL…
http://www.fool.com/investing/beginning/how-to-value-stocks-cash-flow-based-valuations.aspx
read the first line in that tutorial, lol pricless
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@TML
btw, sorry for hijacking this comments thread…it was a good article and this banter does not really pertain to it.
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GloomyNews – you are entitled to your opinion (even if it is wrong) but you don’t have to be a complete and utter jerk about it.
I agree 100% with Kevin – the financial industry is based on commissions which automatically creates a conflict of interest. Same thing as real estate agents and the guys at the local electronics store.
That said there is nothing wrong with hiring a fee-only advisor to help out with certain areas such as taxes, asset allocation etc if necessary. It doesn’t have to be all diy or all advisor.
Since you are so much smarter than the rest of us and have an undoubtedly brilliant financial advisor – why don’t you share your performance number for the last few years (which I’m sure your advisor has prepared for you)?
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To aid in the overall argument here, it is important to resist generalizations and stereotypes, as the ABC’s of Investing (#24) prudently implies.
It is also important that the reason for hiring an adviser is not an objective one — it is quite particular to the individual — and should have nothing to do with “beating the market.”
Selecting an adviser is also part of the DIY process. To avoid the stereotypical adviser, as Kevin is referencing, one must learn how to select the adviser — just as one might learn how to invest their own money. Without skill or past experience in hiring an adviser one is more subject to hiring one of those stereotypical advisers.
In my humble opinion, the “right adviser” does not profess (or attempt) to “beat the market,” even if their record demonstrated it. The right adviser makes a good faith effort to find and allocate investments to reach a rate of return suitable for the individual’s financial objectives, which almost never would include “beating the market.”
The right adviser is also not likely to be just an “investment adviser.” They are likely to be a CFP or CFA and their real monetary value is likely to be realized in areas beyond investments, such tax planning, estate planning, and cash management.
Above all, the adviser or planner will perform functions that normally would distract the client from those things in life that the client would rather pursue, such as time with family and other meaningful pursuits that have far greater value than “beating the market.”
Success cannot (and should not) be measured by monetary means. Until one begins to see this, they are blind…
“I can see, and that is why I can be happy, in what you call the dark, but which to me is golden. I can see a God-made world, not a man made world.” ~ Helen Keller
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We interviewed a number of financial planners years ago and found that most of them quoted books that we had already read. Once we had read enough to know whether we had a good advisor, we no longer needed the advisor.
We did have one write up an asset allocation for us. It was ridiculously complex with over a dozen funds – all load funds and some extremely complex proprietary funds funds that made the plan useless if we tried to implement it elsewhere. In the end, we realized that we couldn’t even accurately determine the stock to bond mix in the proposed portfolio so we went our own way can kept it simple.
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Solid post!
People need to take ownership and responsibility of/for their financial lives.
The passive approach allows too much “What if . . . !”
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Responsiblity is the key to any decision making process. If you think that the end result will be your responsiblity then you will be diligent in finding the correct solution.
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