Why do I need a financial advisor if I can just buy an ETF and chill? Here Are 6 reasons it’s not that simple

When you think about why you need a financial advisor, some people shrug off this idea and say they can manage their finances just fine on their own. In fact, some investors are so confident, they believe they need to do little more than invest in an ETF or two and sit back and do nothing. 

The problem with this line of thinking is two-fold in that buying and holding ETFs isn’t the only way to be financially successful in the market. While they have advantages and can help you build wealth, a financial advisor can do much more, especially building and personalizing a portfolio specific to your needs. 

Think About Risk Management

One of the biggest considerations around using a financial advisor is their deep knowledge of risk management. Any good advisor will help build a portfolio specific to your level of risk tolerance. This generally means having some money in cash, some in the market, and maybe some in fixed income like treasury bonds. 

The problem with any line of thinking around ETFs is that they are specifically tied to market volatility, meaning that a recession or tech crash could bring down your entire portfolio. Obviously, this is not an ideal scenario, especially if you are close to or nearing retirement. There is no variance in risk tolerance and whether you want to be a conservative or moderate investor. 

Adding a financial advisor to the mix will help look at your age, income, current net worth, projected net worth, and any financial obligations you might have later in life. Not only will this be instrumental in building out a personalized portfolio, but they can also help make real-time adjustments to your portfolio, enabling you to avoid (bigger) losses. Better yet, a financial advisor will also help you ensure you have an emergency fund and some liquidity if any emergency happens. 

You Should Be Diversified 

In the same way you have to think about risk management, you also have to consider being diversified to spread your risk. Even if you choose a broad-market ETF that pulls from the S&P 500, you can still have a portfolio heavily weighted toward specific market sectors like telecom, healthcare, or technology, which adds to your overall risk. 

If you have multiple ETFs, you might be accidentally increasing your exposure to the stocks, which puts you at more risk. On top of this, most ETFs are only focused on US companies, so you don’t have any international diversification available. 

The bottom line is that working with an advisor will help you consider how to spread out your holdings so you are not exposed to just one aspect of the market. This could mean adding dividend stocks or bonds to the mix or purchasing mutual funds to help offset market volatility. 

Proper Tax Planning

As your income and investments grow, your tax obligations and expenses increase. The easy answer is to work with a financial advisor, who will immediately help you understand the tax implications associated with different investment vehicles like ETFs, bonds, individual stocks, IRAs, 401(k)s, and more. 

Unfortunately, the “ETF and chill” approach here has some tax implications as there is no opportunity to sell off your losers to offset any capital gains you might have earned in a given year. In other words, you won’t be able to squeeze into a lower tax bracket by selling off your losers, because you either sell the ETF as a whole or not at all. 

Ultimately, a financial advisor will help you consider different ways to integrate your holdings into a broader tax strategy, often in partnership with an accountant. A financial advisor can also help you consider the long-term tax implications of your investment strategy so you can be prepared not just for this year but maybe the next five or ten years. 

Always Think Long-Term

At the end of the day, every investment you make, whether it’s in ETFs or broader investment portfolios, should always have you thinking long term. You have to consider your life goals, such as when you want to retire and how much you want to have to live on during retirement. 

The challenge with an ETF-only portfolio is what you are not accounting for, like inflation or changing income needs during retirement. Investing in an ETF won’t help if your healthcare costs suddenly rise in retirement, as you don’t have a way to generate more cash flow. There is also a consideration of how much liquidity you might want to have at any given time. 

Any financial planner, or at least any good one, will ensure you have an emergency fund to help with any immediate emergencies. Everything from car trouble to hospital bills should be considered, and you don’t want to be in a situation where you don’t have enough cash when you need it most. 

There is also the thought of whether you want to set up trusts or designate any beneficiaries for your ETFs. If so, a financial advisor can help you understand what legacy building should look like and how to set it up so your family has almost nothing to worry about after you are gone. As a bonus, a financial advisor should meet with you quarterly to help you see where things stand in the short and long-term so you can make real-time adjustments together. 

Starting A Family

If you’re starting investing earlier in life and about to start a family, it’s important to consider what this will do to your financial situation. According to Brookings analysis, the current cost of raising a child for the first 17 years of their life is just over $310,000. 

For this reason, you want to start working with a financial advisor and think about how you will pay for all of this beyond just traditional income. Is investing in ETFs the right step to help grow enough money so you can help pay for college, or should you set up a 529 fund instead? 

Thankfully, a financial advisor can help you understand how to save for retirement and college simultaneously without making any sacrifices to either account. 

Inheritance Considerations 

While this won’t be applicable for everyone, inheriting money sounds great on paper but in reality it can be overwhelming and completely upend your financial life. As many new doors an inheritance opens, it also means thinking about your financial life in a whole new way, including new avenues of investment and tax considerations. 

Having a good financial planner can help you navigate an inheritance in the best way possible so that this money can immediately get to work for you. Any conversation with a financial advisor would likely start with setting up goals for what this money should do, and it will go far beyond just investing in ETFs. 

Now that you have this money, depending on how much of a windfall you received, it might also affect your retirement date, something a financial advisor can help with by creating a personalized plan. Overall, the benefits of using a financial planner far outweigh the downsides, generally just paying them 1%. 

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