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Retail trading has captured the attention of the financial world over the past year as first-time investors have poured money into the stock market. More than 10 million new brokerage accounts were created in 2020. So far in 2021 the spotlight has been on the irrational rise of share prices of companies such as GameStop GME, +26.94% and AMC Entertainment Holdings AMC, +13.02%.
With assets to leverage and more government stimulus on the way, first-time investors are at a crossroads. Should these rookies soldier on alone with their trading and investment accounts or enlist a financial adviser’s help?
Here are some key issues involved with this decision:
1. Investing is important. But don’t ignore the other parts of your financial plan: Investing amid the stock market’s ups and downs can be exciting, but it is important to make sure your investing activity supports your longer-term financial goals.
According to a study conducted by the FINRA Foundation and the National Opinion Research Center (NORC) at the University of Chicago, investing for retirement was the most frequently cited reason for opening an investment account.
Given that 38% of people in the study were first-time investors, it begs the question: Did these folks know they would be taxed on their investments? If not, might they have opened a different tax-advantaged retirement account, such as an IRA, instead?
Tax planning is just one of the important areas that may be overlooked by first-time investors. It is also one of the biggest reasons to work with a financial planner.
Financial planners will help you create a roadmap that is designed to reach your financial goals. This roadmap will integrate investment accounts with the other parts of your financial plan. If you go at it alone, you may risk missing out on opportunities to minimize your tax burden or address important goals such as transferring wealth or calculating your retirement income needs.
2. How much of your portfolio should be in your brokerage account? An effective investing strategy may require a significant dedication of time, the right temperament and the right training. Becoming an expert in this area can take months or even years. This is challenging for anyone, especially if you’re a first-time investor with a full-time job.
It’s easy to become overwhelmed by the market’s daily fluctuations and their impact on your investments. A professionally managed portfolio with an experienced adviser who can diversify your risk is a good way to pursue your financial goals. A financial planner can help you find the right balance between your self-directed brokerage accounts and other investments. You don’t want your successes (or failures) as an investor to put your larger financial goals at risk.
3. Be wary of advice found on social media: Financial advice from self-described “experts” is everywhere. More than 3.5 billion people have watched videos on TikTok’s “Personal Finance” channel, for example. Although I am encouraged by the increased interest in personal finance — particularly among younger generations — I worry about the quality of advice.
While the catchy content may be enticing, take heed before acting on generalized investment recommendations published in social media. For instance, when you watch a video on a personal-finance influencer’s Instagram account, you’re effectively “paying” for the advice in that video with your follow. This influencer is incentivized to put out content that generates even more views and clicks. Unless the influencer knows your personal financial circumstances, their advice won’t address the important details relevant to your specific needs.
Some of this online advice may be sound and offered by well-meaning individuals. General advice on topics like managing credit card debt or recommendations to invest in one’s employer sponsored retirement plan can be helpful for those just starting to get their financial life in order. But beware because some “experts” are peddling dubious claims and long-debunked myths.
Even if you find advice that is generally true, it may not be right for you and your own financial circumstances, and following it can have unintended consequences. You are better off paying for a financial adviser, preferably one with a fiduciary obligation and duty to you.
4. The case for professional advice: Unfortunately, many investors think that to work with an adviser, you need a lot of money. Others think that working with an adviser is too expensive. Not true. Many financial planners have varying business models that cater to investors of all wealth levels.
Additionally, many brokerages offer low-cost financial and investment planning services that includes “digital advice.” There often are CFP professionals who provide services on these platforms. It’s up to you to verify your advisor’s qualifications.
If you want to build wealth, picking the right investments is just one part of the process. How you sustain and preserve that wealth is just as important. Enlisting a financial planning professional is a good start.
Kevin R. Keller is CEO of the Certified Financial Planner Board of Standards, Inc.
Plus: How aggressive should young investors be in this stock market?
