Do you need a financial advisor?

photo credit: Financial District via photopin (license)I’m a big fan of the Tim Ferriss Show podcast, which I frequently use to motivate myself in the morning on my commute into work. One of his recent sponsors was the Paladin Registry, a company that has compiled a database of highly ranked financial advisors and attempts to pair you with one of them who will meet your specific needs. In this post, I’ll explain our experience with Paladin, and how we decided whether or not we needed to work with our own advisor. (Side note: WordPress keeps telling me I am spelling advisor wrong but I’m pretty sure you can spell it with an “e” OR an “o”!)

I’d like to preface this discussion by saying that I don’t believe most people need financial advisors, but there are some cases where having one makes sense. In my case, my interest came mainly from the need to reduce stress. In the past I have had a few run-ins with the IRS, which in turn now cause me to have near clinical levels of panic when it comes time for filing taxes each year. One year in graduate school while on a fellowship, the department whom was sponsoring my fellowship accidentally reported my income twice, which resulted in the IRS sending me a (quite pleasant, really) letter suggesting that I may owe them upwards of $10,000. I went over everything I had filed in the last several years to make sure I had done it correctly, which was when I realized an entirely separate problem: fellowship income alone does not qualify you to be able to contribute to a Roth IRA. Don’t make the same mistake I did. There are some pretty nasty penalties for contributing to a Roth when you aren’t eligible. Pulling out three years of Roth contributions caused some more IRS issues for me, as I didn’t fill out quite all the right forms to report it. And believe it or not, later I screwed it up again based on an entirely different rule which is that married couples filing separately are almost never eligible to put money in a Roth. IRS, if you are reading this, I swear I tried to do it right! In the middle of clearing all this up, Mr. Paradise and I moved to a different country (actually Mr. Paradise’s home country) for a little over a year and got married, further complicating our tax situation and also landing us with locked-in retirement funds that can’t be moved to the US for another six months. Blarg.

Anyway, to end this long story that is spiking my anxiety just to type out, most people are fully capable of investing and doing their taxes on their own (or with Turbo Tax) with a little research online. Then there are those of us who may have made a few mistakes in the past, and/or are so overwhelmed by the complexities of their own situations that paying extra money for help to reduce stress is worth it. This is why the potential of having someone take over our investments seemed so promising to me. Ok, back to the Paladin story!

When you sign up for Paladin, you fill out a short questionnaire including your location, whether you want financial planning or investing services, and your available assets. It’s free to sign up, so we figured why not give it a try and see if we meet someone we like? Paladin makes money by collecting dues from the advisors in the registry, so you can infer what you will about that situation, but it doesn’t appear that someone could pay just to be on the registry. A few details about their ranking system are included on their website. Within one day we had been contacted by 5 different financial advisors. Three of them left phone messages and two followed up by email.

Mr. Paradise and I spent a couple of hours researching the websites of the people who contacted us. We were disheartened when we realized that the fees for financial management were not insignificant. One institution was 1.5%, one was 0.5% quarterly, and another was on a gradient scale with a fee of 1% up to 1 million dollars (it was reduced after that). Compared to our Vanguard expense ratios of around 0.1%, we felt like were getting in over our heads. We called all three companies to say thank you but that we didn’t feel comfortable with the fees and we didn’t want to waste their time if it wasn’t going to work out. To my surprise, two of them actually still insisted we meet (in retrospect maybe I shouldn’t have been surprised) and just “chat” anyway. We figured we couldn’t go wrong with a little free advice, so we went ahead and set up the meetings.

To get ready for a meeting with a financial advisor, you normally need to let them know about your current financial situation, including the distribution of your net worth, your income, your goals, and all that jazz. You can check out our net worth info on our net worth tracker page. In all of our retirement accounts, we follow the Lazy Portfolio method, with our assets distributed among Vanguard Total International (VTIAX), Vanguard Total Stock (VTSAX), and Vanguard Intermediate Term Bond (VWITX). I provided all of this information to both of the advisors, and the two meetings were very similar. I was somewhat taken aback when both of the advisors described our investment setup as “kinda weird” (one person actually used those exact words). We were then shown multi-page reports listing all of the funds they suggested we invest in. Look at all the asset classes we are missing! Where are the commodities?! Real estate?! As a person who gets overwhelmed easily (as you may have guessed), I couldn’t decide whether to consider this a sales tactic meant to make us believe we needed them, or whether to hire them immediately to fix all of our mistakes. We thanked them for their time and went home to stew on our impending doom due to our stock market naiveté.

While the stewing was progressing, we received several emails (and even a holiday card) from one of the firms that was courting our business. Intriguingly, with each communication the management price decreased slightly, eventually settling right around 0.5% as an introductory fee for the first several years. I was sorely tempted. Mr. Paradise seemed unmoved (he always was the better negotiator). We made our final decision after a clarifying call with my mom (boy, I’ve said that a lot of times in my life…), which went something like this:

Me: “Mom, taxes are too haaaard. And they say we have all the wrong investments!” (read this in your best complainy-pants voice to get the full effect)

Mom: “No one knows ahead of time what the right investments are.”

Me: “But what if I screw up the taxes again?”

Mom: “It sounds like you really just need a good CPA…”

<insert moment of clarity here>

A CPA sounds a lot less glamorous than a financial advisor, and we hadn’t actually had great experiences with CPAs in the past because it is hard to find someone who wants to deal with cross-border tax issues of a married couple with two different countries of citizenship. While we were living abroad we paid over $2,000 in tax preparation fees and still sadly had to amend our taxes both years (sorry, IRS, sorry).

The way we finally decided was by considering the fact that while maybe some people thought our investment portfolio was weird, we are comfortable with living the index fund life. We are also comfortable with taking money out of our paychecks every month and investing, and with choosing the funds in both our personal accounts and retirement accounts. Where we are NOT comfortable is dealing with cross border investment issues, FBARs (reporting foreign accounts – actually much easier than we originally thought), and complicated / new tax situations. It turns out that all of these things can be handled by a good CPA.

If you are considering a financial advisor for yourself, in our opinion this is a good idea if you are so paralyzed by the complexities of investing that it is going to cause you not to do it at all. If that is the case, go ahead and sign yourself up. A lot of finance blogs proclaim that nobody really needs help – that all the information is available online. But, I think we have to admit that this is not everybody’s cup of tea. And you can always end your relationship with your advising firm once you become comfortable on your own. Keep in mind that once you get your foot halfway in the door of a financial advising firm, they are going to do their best to make it seem like they are invaluable to you. Please give it some serious thought before you even reach out so you don’t get sold something you don’t need.

In the end, for the reasons above and since it was a much cheaper proposition than hiring an asset manager, we decided to give hiring a CPA a go. We got a strong recommendation from our real estate agent (this is often the way to go, they know everybody!) for a CPA who new about international taxes. For a very reasonable fee of just over $300, our taxes were done in early February and I even received occasional email therapy consisting of me freaking out about a new tax form and the CPA telling me that everything was going to be ok.

And honestly, sometimes that’s all we need: someone to tell us that everything is going to be ok.


photo credit: Financial District via photopin (license)

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