“Why should I hire a financial advisor when I can just buy the S&P?” If I only I received a dime every time I heard that question, I could quit writing this blog post and retire early. To be fair, it’s a good a question and one you should ask any financial advisor you are considering hiring. There are many acceptable answers, such as “I will help you save money on taxes”, “‘Buying the SP500’ is not a comprehensive financial plan”, and “There’s a lot more to invest in than just the SP500”.

For the purpose of this blog, though, I am going to focus on a particular situation that I encounter often. Ironically, the potential client most likely to ask this question is the one sitting on the biggest pile of cash. I encounter it all the time, hundreds of thousands of dollars in a high yield savings account, or, worse, checking, and they cannot fathom the idea of paying 1% of their investment to a financial advisor each year. My question is always, “If you can just buy the SP500, why haven’t you?”.

Inertia is a powerful force, and not doing anything and keeping the status quo can feel powerfully comfortable. They often know that cash loses purchasing power to inflation and that owning the SP500 over the long term builds wealth, but they don’t know how much or when to invest. Seeing the market go up and down creates both anxiety about losing money and FOMO (fear of missing out) on gains, so they just keep waiting for the right time. The word clients use most often to describe this feeling is “paralysis”.

A good financial advisor will help clarify the best path forward. Rarely that involves keeping the cash as cash, and most often it involves investing a portion of the cash and keeping the rest safe, and this balance will be different for everybody. For many, just buying the S&P makes sense in theory, but is in fact too overwhelming to execute. In this context, paying a 1% management fee is pennies compared to the wealth building power of a uniquely tailored financial plan and investment strategy. If this sounds like you, now is always the best time to do something about it!

Without writing out all four letters of the most satisfying and versatile curse word, Urban Dictionary defines “eff you money” as:

“An amount of wealth that enables an individual to reject traditional social behavior and niceties of conduct without fear of consequences.”

I often hear the misconception that only people with this level of wealth have or need financial advisors. Maybe you have this much money, but chances are you are like me and have what I call “Hi, how are you? money”. Everyone can benefit from sound financial advice no matter where they are on this wealth scale. Let’s explore the measure of the value of a financial advisor and when the best time to employ one would be.

When measured in dollars of value created, a financial advisor’s advice is worth more to a person with more money. However, this is the wrong measure of value. When measured in percentage terms, a far more exact standard, a financial advisor’s guidance is worth the same to everyone.

For example: If an advisor employs a tax optimization or investment strategy that adds 1% of value to an investment portfolio annually, regardless if your portfolio is worth $10,000 or $10,000,000, you should be happy to earn an extra 1%. An additional 1% per year brings you “that much closer” to achieving your financial goals. It can be as simple as having a few extra dollars for a vacation or, over a long enough time horizon, something far more meaningful like years shaved off your retirement age.

The importance of time horizon cannot be understated. Therefore, the best time to have a professional review your finances is now. I don’t say this so you’ll pick up the phone and call me (but feel free!), I say it because of the hidden cost of waiting: compound interest. Albert Einstein described compound interest as:

“[Compound Interest] is the eighth wonder of the world. He who understands it, earns it; he who doesn’t, pays it”.

Seemingly trivial mistakes or inefficiencies can negatively impact wealth over the long run. Let’s assume markets return 8% per year on average. If you were to misallocate $1,000 now, you would miss out on $80 of potential returns next year, the equivalent of a fancy lunch out, no big deal. However, over the next ten years, you would miss out on over $1,000 of returns, you would miss almost $10,000 over 30 years, and, if you are at the beginning stages of your career, you’ll miss out on over $100,000 over the next sixty years!

Tremendous strides in the sophistication of financial planning software have streamlined the process of identifying these inefficiencies and illustrating their effects over the long run. Getting your finances organized ahead of the new year makes sense from a tax perspective and also feels great. I use and love RightCapital, and you can try it for free by scanning this QR code:

Stay tuned for next month as we investigate the effects of compound interest on the other side of the ledger—Debt!