When Should DIY Investors Hand Over the Reins?
As my wife and I approach retirement age, conversations about what’s next are becoming more frequent. While we think about retirement in general, I, as the primary “wealth manager” in our household, also reflect on when it might be time to step back from managing our own investments. This post aims to explore the question of when DIY investors should consider handing over the reins.
The Success of Ross and Emily’s DIY Journey
Let’s meet Ross and Emily, a married couple in their mid-60s who have recently retired. Fifteen years ago, Ross took over the reins from their financial advisor and became a successful DIY investor. Today, their financial assets are worth $3.3 million, and they own a mortgage-free home valued at $700,000.
Thanks to Ross’s careful management, they’ve achieved an average long-term return of 5%, placing them in a very comfortable financial position. They’re now enjoying retirement, confident in the choices they’ve made along the way.
However, despite their success, Ross and Emily are facing an important question: What happens when Ross is no longer able to manage their investments due to age or health? With Emily’s limited investment knowledge, this is a real concern.
The Problem of Aging and Complexity
Ross is realistic. He knows that within the next 5 to 10 years, his ability to make sound financial decisions may start to fade. He doesn’t want to wait until mistakes happen before making changes.
Although Emily is well-educated, she hasn’t been involved in managing their investments. She’s not sure what she would do if something happened to Ross.
Their concerns are valid. A 2011 study found that financial literacy tends to decline by about 1% each year after age 60. Yet, confidence in making decisions doesn’t decline at the same rate. This means that while Ross might remain confident in his choices, his ability to execute those choices effectively will weaken over time. If he continues managing their investments alone, it could eventually lead to costly errors, increased stress for Emily, and poorer returns.
The Need for Professional Help
Ross and Emily have started discussing the idea of shifting the management of their investments to a professional. While Ross has been successful on his own, they understand that professional guidance will become necessary at some point.
Ross, however, is reminded of their previous experience with a financial advisor who fell short of expectations. “It felt like he was more interested in selling us mutual funds than understanding what we actually needed. The products weren’t bad, but they didn’t align with our long-term goals. It just didn’t feel right.”
This experience highlights a common issue DIY investors face when seeking professional help: the difference between an advisor who meets the minimum “suitability” standard and one who is bound by a fiduciary duty to act in the client’s best interests.
Suitability Standard vs. Fiduciary Duty
In Ross and Emily’s earlier case, their advisor likely worked under the suitability standard. This means that while the advisor recommended investments that were suitable based on their situation, the advice didn’t have to be the best or most cost-effective. Advisors who work under this standard may have conflicts of interest, particularly if they earn commissions from selling certain products. As a result, while the recommendations weren’t inappropriate, they weren’t necessarily optimal either. This left Ross feeling uneasy.
In contrast, Ross and Emily now want to find an advisor or portfolio manager who operates under a fiduciary duty. Advisors with a fiduciary duty are legally and ethically bound to act in their clients’ best interests, prioritizing the client’s needs above their own.
In Canada, professionals with the Chartered Financial Analyst (CFA) or Chartered Investment Manager (CIM) designations, or those who are portfolio managers, designation, which allows for discretionary management of client portfolios, is among the few investment professionals who are expected to adhere to this higher duty. must adhere to this higher standard. Advisors who are members of the Financial Planning Association of Canada also pledge to follow a fiduciary code.
Here are some benefits of working with a fiduciary:
- Transparent Advice: Fiduciary advisors must disclose conflicts of interest, and recommend investments that align with the client’s specific financial goals.
- Ongoing Monitoring: Fiduciaries typically provide continuous portfolio oversight and adjustments, ensuring investments remain aligned with changing needs, particularly as clients age.
- Fee-Based Structure: Many fiduciaries operate on a fee-only basis, charging a flat fee or a percentage of assets under management, reducing the potential for conflicts of interest.
By choosing a fiduciary-focused advisor, Ross and Emily can be confident that their investments will be managed with care, focused on long-term success rather than short-term gains. Making this shift will also allow them more time to travel and visit their children and grandchildren, without worrying about day-to-day portfolio management.
Embracing the Transition to Professionals
Identifying Needs and Verifying Credentials
Ross and Emily want an advisor with the Chartered Financial Analyst (CFA) and/or the Chartered Investment Manager (CIM) designation to handle their investments, and someone with the Certified Financial Planner (CFP) or Registered Financial Planner (R.F.P.) designation to manage the broader aspects of their finances, including tax and estate planning.
Understanding Fees
They were disappointed by the high fees on mutual funds recommended by their previous advisor. This time, they are asking detailed questions about fee structures. Most portfolio managers charge a percentage of assets under management, which could range from more than 1% for smaller accounts to lower rates for larger portfolios.
Asking the Right Questions
Before meeting potential advisors, Ross and Emily created a list of important questions to ask, such as:
- What is your duty to your clients?
- How are you compensated for your services?
- Do you specialize in working with specific types of clients?
- What is your experience and background in financial advising?
- What range of services do you provide?
- What is your investment philosophy?
Preparing for the Handoff
While some suggest a hybrid approach—handing over assets gradually—Ross and Emily feel it’s better to fully transition once they find someone they trust. Ross plans to stay involved initially, asking for explanations on unfamiliar decisions, while Emily’s main concern is the sustainability of their retirement income.
The Future of Stress-Free Investing
With a trusted professional team in place, Ross and Emily anticipate many years of secure, stress-free retirement. Should anything happen to Ross, Emily will have peace of mind knowing their investments are in good hands.
Their advisors will also help them plan for the future, ensuring their wealth is passed on in a tax-efficient way to their children and the charitable organizations they’ve supported over the years. This kind of long-term planning offers reassurance that their financial legacy will be well managed for future generations.
To the Readers…
If you’re nearing or in retirement and managing most of your financial assets yourself, it may be time to consider professional help. DIY investing can be empowering, but there’s no shame in seeking guidance when your financial future—and quality of life in retirement—are at stake.
This is the 264th blog post for Russ Writes, first published on 2024-09-30
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Disclaimer: This blog post is intended for general information and discussion purposes only. It should not be relied upon for investment, insurance, tax, or legal decisions.