Probably, like most of you, I prefer not paying people to do the little things I can do for myself. I think doing some things myself can provide good learning experiences as well as save some money. And I’ll pay for help when I need it.
- If I feel sick, I can take my temperature, eat chicken soup and try to get more sleep. I don’t need to pay a doctor to tell me to do this.
- If I donate money to charity, I can keep a record of my donation for a potential income tax deduction. I don’t need to pay a CPA to help me to do this.
- If I have a minor auto accident, I can record the ownership and insurance information of the other car involved, call the police if necessary and call my insurance company to make a claim. I don’t need to pay a lawyer to help me to do this.
Like I said - I’ll pay for help when I need it. But there’s the rub: how will I know when I need help? After all, I don’t know what I don’t know. I think the answer to this question is to get periodic “check-ups.” You cannot know when you’re not heading in the right direction, if you haven’t defined what the right direction is. To paraphrase Yogi Berra, if you don’t know where you are going, you’ll wind up somewhere else.
To explain this a little more, some examples from my life:
- Although I’m relatively healthy, as I’ve gotten older, I realized that I need to see a couple of different doctors regularly to monitor my health and to help me prevent mistaking some symptoms as unimportant. In addition, there has been the occasional acute malady that has caused me to see additional specialist doctors. None of this means that I can’t make my own decision to take an aspirin for my headache, but I do realize and have learned that not all headaches mean the same thing.
I am also trying to consolidate the doctors I see into the same reporting group so that each doctor has access to my entire medical history. I have learned there are several different groups of physicians that operate locally (Northwell, NYU Langone, Mount Sinai, etc.) and that it is much easier and more efficient to share information within a group than between multiple groups. I, as a patient, have benefitted specifically from this efficiency.
- Although some might consider me financially sophisticated, I do not prepare my own tax returns and instead I consult with my CPA a few times each year. It seems that every year income tax rules change, and I think it’s important to understand how these changes might impact my personal tax situation.
About 20 years ago, I did endeavor to prepare my own tax returns, as I was a do-it-yourselfer. The complex tax return preparation process for a non-CPA with personal and business returns, as well as estate income tax returns (it included the year my father died) quickly disabused me from continuing these efforts in ensuing years. I did learn a great deal from the experience and though I outsource tax preparation now, I remain involved with my CPA in tax preparation and do not outsource the ultimate decisions made on my returns.
I did not hire a separate accountant for each business or a separate accountant for my personal tax return preparation. Since my business activities were, and are, directly related to my personal tax condition, it was more efficient to consolidate the knowledge of my business and personal tax situation with one accountant.
- I went to law school, passed the bar and practiced law. However, I am a firm believer in the adage that a lawyer who represents himself has a fool for a client. This doesn’t mean that I cannot and will not handle minor legal issues that arise in my life, but I retained (and yes, I also paid) an experienced trusts and estates attorney to help create my estate plan. It was very beneficial to have this objective, independent third-party expert help craft the plan and explain it to my wife.
By the way, I previously consulted the same attorney for advice in connection with a business I was involved in. In addition, I do review my legal documents and objectives with him occasionally (although I admit not as often as he suggests). His knowledge of both my business and personal goals helped inform his advice to me and helped him tailor my plan appropriately.
So, why can’t you be a do-it-yourselfer in the financial arena? Well, you can. The big issues I will address are:
- Whether you should, and
- How to do it right
Should you be a do-it-yourselfer?
This is the most important question, and the answer involves a kind of risk/reward analysis.
If you are not a financial services professional, it’s likely there’s stuff you don’t know. Since we don’t know what we don’t know, it is difficult to assess the risk of making decisions. Second, in addition to and possibly more troublesome than what you don’t know, is the stuff you think you know to be true, which isn’t. Misinformation and misinterpretations informing important decisions with your money can have very damaging results.
So, what’s the analysis thought process? Although it’s hard to assess the potential cost of relying on information that you have not verified as accurate, you can know more accurately the costs you’ll save by doing it yourself.
The analytical question then becomes: Is what I’m saving enough to compensate me for any risk that I might be taking by potentially using misinformation or not knowing what I don’t know?
The decision to be your own financial advisor may vary based on many factors too numerous to list here. But I’ll provide just a few potential concept examples which might be useful in your analysis:
- The greater the amount of wealth involved, the greater may be the risk of not securing advice.
- The shorter the amount of time available prior to retirement or a significant reduction or cessation of earned income, the greater may be the risk of not securing advice.
- The larger the number of advisors you have who do not meet regularly to discuss your situation, the greater may be the risk of confusing advice or missing opportunities.
- The greater the amount of debt or unfulfilled family goals, the greater may be the risk of not securing advice.
After addressing the analytical question posed above, there’s another question you should ask yourself if you want to be your own advisor: Do you have the understanding and personal finance knowledge to address your money decisions in an informed manner? Following is some food for thought for those who might want to do it themselves - in no specific order of importance:
- Regarding investing, the 2018 P-Fin Index2 found that most Americans seemed to lack this level of financial knowledge and understanding, especially in their comprehension of risk and risk related concepts.
- A recent GAO report found that almost 40% of 401(k) participants do not understand the fees their plan charges, and this is despite all the required disclosures.1
- If what you need is different from what you want, will you as a self-advised person, be able to adequately address your needs?
- If you are a self-advised individual, have you considered how to measure and fund your lifestyle maintenance needs and family goal needs, and how to protect your ability to achieve them?
- Changes in goals, family structures and health and financial conditions occur. Do you have a Plan B ready to go to help accommodate changes to your Plan A when necessary? Do you actually have a Plan A in place?
- The perfect plan is useless if not executed. Have you considered what is needed to execute plan strategies efficiently and effectively?
How to do it yourself - the right way.
All right – you’ve made the decision to be your own advisor. Although you’ll notice that my big picture concepts above didn’t specifically address investing as an activity, investing is very frequently the beginning and the end of the spectrum of the world of financial advice for many people…especially those who have not sought advice from professional planners. And therein lies one of the issues.
Many have heard me say over the years that “your financial neck bone is connected to your financial leg bone.” The point is that making financial decisions (investing and other financial decisions) may well impact other areas of your financial life in the short run and in the long run. Financial decisions do not happen in a vacuum, and they do not stay in silos, isolated from all other aspects of your life. Your investment decisions are connected to many of the other decisions you make in life.
So, if you want to invest for yourself and make some other financial decisions for yourself, do it right - hedge your actions…just as you might hedge an investment.
- Begin by hiring a professional financial planner to construct a written comprehensive plan in a collaborative manner with you and your tax and legal advisors. This can provide the baseline structure within which you may make productive decisions. It can also be an educational process, potentially filling in some knowledge gaps for you.
- Have annual consultations with your planner to check that you are moving in the right direction, to discuss tax issues and anything else which may be timely.
- When money is in motion such as transitions in life (for example from working to retirement, relocation, etc.) or you experience a life-cycle event (death, birth, marriage or divorce), consider consulting your planner to revisit your plan in detail.
Bottom line – you can do it yourself, but you don’t need to be by yourself doing it. You don’t necessarily need to know everything, but you do need get a handle on what you don’t know about, and you need to know where you can go to get help.
If you have been doing it yourself and you want an assessment of how you are doing, contact us and we’ll be happy to help. If you’d like to have a conversation about whether you can do it yourself or partly do it yourself, contact us…we’d love to help you evaluate that issue. If you want someone else to do it for you, please contact us, we’re there to help with that as well.
CRN-3918384-111621
- https://www.gao.gov/products/gao-21-357
- https://www.tiaainstitute.org/sites/default/files/presentations/2018-04/TIAA%20Institute_GFLEC_P-Fin%20Index_April%202018.pdf. TIAA Institute-GFLEC Personal Finance Index (P-Fin Index) is an annual barometer of knowledge and understanding