Should You Manage Your Own Money (With Time and Cost Comparisons)

drawing on napkin | should you manage your own money

You may be at a point where you’re wondering if you should manage your own money or hire a financial advisor.

After using several financial advisors, and also managing my own money over the years, I learned that there are some good reasons to invest yourself. This includes lower costs, alternative investing, overall returns and other the reasons outlined below.

Reasons to Invest Your Own Money

There is no single right or wrong answer as to whether you’d be better off managing your own money vs hiring a financial advisor. Some advisors do an excellent job, and some individual investors do an excellent job.

Having clarified that, let me share what I’ve learned over the decades as advantages to managing your own money vs hiring financial advisors.

Note that while this is a big decision, it’s not irreversible. But it can be a hassle to switch, so you’ll want to give this some serious thought. It’s easier to manage your own money and hire a financial advisor later than it is to hire a financial advisor, then go back to managing your own money. This is because a financial advisor or wealth manager will typically want to replace your all current investments with investments she recommends.

Passive Index Investing Defined

Before I proceed, I want to clarify how most stock and bond investing is done nowadays so you can see the ease with which you can manage your own money should you choose.

You (or someone else) divides the amount of money you want to invest into stocks, bonds and cash type investments.

The amount put into each type (stocks, bonds or cash) will depend on your age and acceptable risk. It may be something like 50% in stocks, 35% in bonds and 15% in cash equivalents.

This is called your asset allocation. There are well known standards available for free to everyone for this model based on a lot of math and research.

The amount in stocks and bonds will be subdivided another 2 to 3 times into more specific categories such as between international and US based, for example, or between Treasury bonds and international bonds.

Next trades are made to buy the stocks and bonds based on your asset allocation.

The trades are for funds that hold the stocks and bonds, either with index mutual funds or ETF’s, OR possibly but much less often the actual stocks and bonds themselves.

Then the amounts in stocks, bonds and cash and readjusted to equal the desired percentages, usually once a year.

That’s it. This is how most investments are made. I will explain this more in another post.

Wealth Building Tip – In financial lingo, cash equivalent is the term used for investments that should not fluctuate in value, such as money market funds.

Cost of Hiring a Financial Advisor Vs DIY

If you’re going to manage your own money, you’ll want to compare the cost of doing so with the cost of using a financial advisor, so let’s begin there.

You’ll likely pay a financial advisor or wealth manager total fees of between 1% (possibly lower if you’re very wealthy, use a Robo advisor, or you find a very low cost advisor) and 2% or more. Compare this to investing your own money with low cost ETF’s (Exchange Traded Fund) that cost between .03 to up to possibly .20 for common ETF’s.

On the other hand, for a standard diversified portfolio of index ETF’s run by high quality financial firms you can pay under .10%.

should you manage your own money

Fund Types – ETFs Vs Index Funds

Note that there are two major types of funds that represent these investments into index based stocks and bonds, called ETF’s and index funds.

Investing with ETF’s isn’t some second rate investment product which those managing their own money have to settle for. In fact, 88% of financial advisors recommend ETF’s for their clients based on a Financial Planning Association study.  1.

Wealth Building Tip – In financial lingo, ETF stands for Exchange Traded Fund, and it is a cheap way to invest in a stock or bond index. Unlike mutual fund index funds, ETF’s trade throughout the day like stocks.

One big advantage for investors who manage their own money is that the cost of ETFs has gotten extremely low due to competition among the financial firms that offer them. For example, Schwab, Vanguard, iShares and Fidelity began offering ETF’s with fees under .05% not too long ago. 2.

Wealth Building Tip – In financial lingo, this cost percentage, such as .10%, is referred to as the expense ratio.

Let’s do the math since the percentages can get tricky sometimes, at least for me.

For a $500,000 investment into a low cost ETF’s with a .04% expense ratio, your cost would be $2,000 a year!  Compared to overall wealth management fees of 1.5% with a financial advisor, the cost would be $7,500 every single year.

That means the advisor has to make $5,500 more each year for you just to break even with managing your own money in low cost funds.

In this example, you can add another 1% or more to your return each year simply by managing your own money.

But we’re using estimates based on common fees for financial advisors, probably leaving you to wonder exactly much would the fees be if you hired a financial advisor. The only way you can know for sure is to ask a couple of financial advisors to find out the cost for investing the amount of money you want them to manage. Be sure to ask for total fees.

Then compare this cost to paying on average about .10% to .20% for a diversified ETF portfolio. While it can be cheaper than that, I like to assume there are some things I could be missing when it comes to my money, so I always estimate conservatively, or worst case scenario.

Compare Financial Advisor Costs Realistically

If you want to venture outside of passive investing in the common major stock and bond indexes, you could end up with some specialty funds that have fees in the .75 to 1.5% range. This is only if you choose to add some special spice to your portfolio. An example of a fund where we pay higher fees is an MLP fund with a high dividend yield.

Another example is commodity ETF’s, which are a common element in popular asset allocation models. Many ETF’s can cost roughly in the .40 to 1.25% range. As you can see, they cost much more than an ETF that represents the well known S&P 500 index.

Compare Apples to Apples

To be fair, we cannot compare investing your own money to using a financial advisor if you are going to add in such products with higher expenses. This is because adding in higher cost funds will increase the costs, but probably not too significantly since a small percentage will be allocated to unique funds.

I feel it’s important to mention this because many online articles compare the cost of using a financial advisor to manage your own money, but many financial advisors venture beyond simple index investing. The key here, then, is to compare apples to apples, by understanding the methodology of advisor you’re considering. (Notice that this circles back, again, to really understanding investing basics before you interview or hire a financial advisor.)

For example, I have written here about a financial advisor that specializes in retirement income for older clients. She and her research team carefully pick individual stocks with high dividend yields yielding on average about 5%, with a goal to add another 3% capital gain annually, on average.

I cannot compare the cost of what she does to a simple passive index investing strategy based on the standard asset allocation for my risk profile and age. She brings special talent by solving a big problem for retirees without enough income but enough wealth to live off dividends (perhaps added to their other income streams).

This talent isn’t free, nor should it be. Plus, you have an entire research team behind her stock picks.

Can you do this same type of dividend investing yourself? Of course, you can do it, but it’s a little more work than buying a few popular ETFs.

In deciding whether to manage your own money or not from a cost standpoint, don’t overlook the fact that some financial advisors can be well worth their fees.

Click here to read my post Investment Strategies a High Net Worth Advisor Uses to Lower Risk.  

Again, it all comes back to understanding how investing works so you can confidently evaluate whether investing your own money or using a financial advisor will deliver the results you want.

Alternative Investments

Another consideration for managing your own money is if you have (or want) alternative investments, as we do. This is because much of your wealth building strategy expands far beyond investing in stocks and bonds simply using a standard asset allocation.

On the other hand, if you own alternative investments, you may find that it is a relief to hire a financial advisor to manage your paper assets (stocks and bonds) to free yourself of this responsibility. This would allow you to focus more on finding (or creating) and managing your alternative investments, especially if this is your higher skill.

Click here to read more about your higher skill in my post Wealth Building After 50.

If this is the case, ideally, you can hire a financial advisor that specializes in alternative investment portfolios. Such an advisor could consider your other investments in designing your overall portfolio structure.

You could keep this amount of wealth outside of the amount for which you pay fees, unless, of course, he has found and manages these alternative investments for you. While this would not be the norm, there are some financial advisors and funds that specialize in alternative investments.

Finding a financial advisor that encourages and understands alternative investments could be a challenge, but they do exist.

I explain this more in my article on The Pros and Cons of Using a Financial Advisor which you can click here to read.

Having alternative investments will affect the risk profiles and tax implications of your portfolio, as well as the more traditional investment choices. You’ll want to make sure any advisor you’re considering has many other clients with alternative assets similar to yours, so she has a true understanding of the special adjustments that your investments need.

For example, if you are invested in an oil partnership, you would want your financial advisor or financial advisor to consider this if she wants to load up on undervalued oil stocks (or funds) at certain times. The same could apply to real estate and other commodities as well.

Likewise, if your alternative investments are higher risk, your advisor could lower the risk level of your stock and bond investments, perhaps keeping a higher percentage in short term debt (notes or bills).

In other words, your alternative investments that are outside of your financial advisor’s care, but your managed assets should all complete an investment profile that both meets your needs and your acceptable risk tolerance.

Time for Investing Your Own Money

So, will you save time if you hire a financial advisor? In working through this recently with a wealth coaching client, we found the answer to be no. Here is why.

In order to hire and evaluate a financial advisor, you have to know investing basics. If you don’t, how can you choose wisely, and then make sure she is doing a good job for you?

While many investors feel like they can turn over wealth management and thus save a few hours having to learn the basics of investing, it’s just not correct for those who are truly taking responsibility for their wealth.

And beyond getting the initial knowledge base, you’ll want time to meet with your advisor at least 2 to 3 times a year. A Qualtrics study showed that investors meet with their financial advisors 5 times a year on average. If you met in person, this could take at least 4 hours plus travel time.

You’ll want to read the newsletters and updates from your advisor, probably every few weeks.

Then at least once a year you’ll want to check the performance in comparison to the benchmark index.

This time seems to all add up to about the same amount of time, if not more than the time you’d spend investing your own money from the comfort of your home computer.

Wealth Building Tip – When an index is used as a performance comparison, it’s called a benchmark in financial lingo.

Accountability When You Invest Yourself

I don’t know about you, but when I really get into the implementation of a project, I immerse myself in it. At this stage, I understand it better. I own it. I embrace it. Do you?

If so, this is what will happen when you invest your own money. You can’t avoid managing your money  because you are doing it. It’s your job.

Forced Investment Education

And before you are comfortable investing yourself, you’ll naturally have to learn about investing. That’s what we all need to do when we take on a new project in an area we don’t know.

I don’t think this same investing education immersion happens when you delegate actually putting your hard earned money into a fund or security.

How long will it take to learn about investing? It takes a few hours. This can be done from reading a couple of books, taking a course, or working with a financial coach like me.

The books take the longest, since you need to choose the right  books, study them, etc. but it would be the cheapest. Let’s say you spend a solid 10 hours over 2 months reading the books, taking notes and doing a little online research along the way.

Back to the earlier example of managing your own money vs hiring a financial advisor, where you’d save about $5,500 every single year. Remember the fees would increase as your wealth increases every year, assuming your investments do well.

Would it be worth the 10 hours to manage your own money? Compare 10 hours to a college course requiring 250 hours, from which never really used the information.

Here’s the reality: [bctt tweet=”Even if you hire a financial advisor, you’ll want to time learning investing since you can’t confidently hire a financial #advisor if you don’t understand #investing. ” username=”retirecertain1″]

♦ Wealth Building Tip – Learn about investing from an unbiased source, not someone selling investment services.

Realistic Expectations

If you hire a financial advisor, you may expect unrealistic investment returns based on data the advisor presents. Realistically speaking, expected performance will be presented in the very best possible way to help get more clients. Financial firms have entire departments that create marketing data.

While there is a lot of regulation about promising unreliable performance data, the numbers can vary significantly by changing a year or two in the data being presented.

When you manage your own money, you are immersed while estimating expected future returns. You’re probably going to be cautious and realistic about the amount of wealth you can accumulate over a given time. When you are in the trenches making your own investment decisions, you make your own probable future return estimates instead of relying on data from a source that sells wealth management services.

Again, it’s unlikely there are false promises going on in the financial industry, since that would be noncompliant with the SEC rules. It’s simply presenting data in it’s the best possible way but there is a problem with that. The reality is that often the best possible expected returns don’t happen. In planning my financial future, counting on the best possible return expectations just feels too risky to me.

I want to see what happened in the worse years (or decades) with an investment strategy, not what happened during the good times. I don’t want to see what happened with the data averaged to the most advantageous outcome.

I want to see what happened during years and decades with bear markets and recessions.

Unfortunately, the further in the past that such damaging events occur, the better the investment performance data looks. This leads investors to plan for higher returns that don’t factor in bear markets and recessions.

All you have to do is consider the bad times as well as the good times when you are estimating future returns. When you invest your own money, you tend to learn more about investing. You know to do this.

You Won’t Have to Find a Financial Advisor

There is a lot to be said for not having to interview several financial advisors to find the one that is best fit for you. If you took this same time and spent it learning about investing, you’d be ready to begin investing yourself.

When hiring a financial advisor, there is a lot to factor into getting to the point where you are even ready to consider him. What is their methodology? What is their account minimum? Are they fiduciaries? What exactly do they invest in? What are their fees?

The list is long. If you manage your own money, you don’t even need to consider it. Sure, you can always just hire your brother in law’s cousin because you “trust him” but what about hiring someone because they can deliver the results you want based on the performance?

Note that trust was the number one reason reported for hiring a financial advisor, not performance, as shown in the chart from Qualtrics below.

should you invest your own money

Yet, not trusting a financial advisor was the second highest reason cited as the reason investors felt their advisor failed to meet their expectations. The first reason advisor clients were disappointed was due to performance as shown in the Qualtrics chart below. 3.

should you manage your own money 2

Index Investing Is Very Simple

A very good reason for managing your own money is that online investing is simple nowadays.

Note that regardless of whether you hire a financial advisor or manage your own money, you still have to do the initial paperwork to set up the accounts. Then doing the math and buying the funds is simple once you understand investing.

A financial advisor attended a book signing that was held for me several years ago. Her method was to buy index funds for her clients. She said that she had told them they could do this themselves easily. She confessed that she felt badly about them paying her to do it for them, but her clients said they wanted her to manage their money.

I get this. Investing your money can feel very big and scary. As I have said, I’ve been there and done that for some of our money over the years.

What I learned is that the stocks and bonds will drop about the same whether I place the trades or someone else places the trades. And the stocks and bonds will likewise increase in value regardless of who places the trades.

Get Help as Needed

If you decide to manage your own money, you can always hire a financial advisor by the hour to review your plan. Similarly, for other wealth management issues, like insurance or estate issues, you can hire a financial planner by the hour. For tax issues, you can hire a CPA.

In other words, professional help is there if and when it is needed. It’s a lot cheaper to pay for a few hours of help when you need it vs paying blanket wealth management fees every year.

Investing Your Own Money Summary

If you are considering managing your own money vs hiring a financial advisor, I hope these points have helped.

Remember, there is no shame in either choice. If you decide to hire a financial advisor, find a fiduciary advisor that adds some special sauce to the mix.

If you choose to manage your own money, consider ETF’s as your investing vehicle due to their low cost and ease of buying and selling.

Feel free to share this post on your favorite social media channel. Thanks for reading.

should you manage your own money


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The information on this website is for education only and is not to be construed as personal financial advice.