Throughout this collection, I will use the term financial advisor and financial planner interchangeably. My training is in Certified Financial Planning. I chose it because, in my opinion, it is the highest standard of quality for financial education in the United States. Although I use the terms advisor and planner throughout this article if you need to hire professional services you should seek out a CERTIFIED FINANCIAL PLANNER™ professional or CFP®.

So what is the value of a financial planner and how do we estimate it? Their principle offerings can be divided into two main categories.

1. Good financial decisions made.

2. Bad financial decisions avoided.

Let's consider 1.

One would make their own financial decisions (vs. hiring a planner) if they believe they are rational and disciplined enough to choose and maintain portfolios that are best suited to their goals and adapt as their goals change. They also benefit by decreasing the risk of exposure to a dishonest or over-priced financial advisor to zero.

Most people who make their own financial decisions do so to save costs. This analysis requires estimating actual costs of the planner as well as putting a value on the time we are going to spend maintaining our own portfolios to compare it to. For this argument we will use 1% as an average advisor cost per year. This 1% is the fee applied to the size of your portfolio. For example a fee of 1% on a 1 million-dollar portfolio is $10,000 per year. The same fee level of 1% applied to a portfolio of $100,000 is $1,000 per year. So the question is ‘Will a good advisor earn 1% or more of value either in giving you back time saved, increased returns , or a mix of both?’ If you believe it is likely then you should hire a financial advisor.

Now let's consider 2. Bad financial decisions avoided.

Humans are sometimes irrational and therefore human investors are as well. It's been proven over and over again. Also, as physicians, we are particularly vulnerable to a form of cognitive bias referred to as the Dunning-Kruger Effect. I have fallen victim and paid in dollars. Here is that bias in action:

I erroneously conclude that because I am a doctor who has made it through medical school and specialty training I am of a certain sufficient level of intelligence, therefore, if I apply that same level of intelligence to investing I will be as successful as I've been in my medical career.

In my opinion many physicians are prone to this bias and you should understand now that this thinking can cost you. The logic here is false. While it is certainly possible to apply your work ethic and intelligence to a different subject matter and become knowledgeable in that field it is not a certainty. And when it comes to human beings being irrational investors, well, the evidence speaks for itself. Here’s some more info.

Thus when we weigh the costs of a financial planner we must sum the cost of the planner to make good decisions, the costs saved by avoiding our own worst investor qualities and then weigh them against the value of time we will reclaim by not having to do it ourselves.

Finally, understanding financial planners and their value proposition would be incomplete without a clear picture of what they cannot do. They cannot predict or forecast the economy, the markets or portfolios themselves. If you meet any financial advisors who claim they the other way. The greatest advisors focus on "planning, perspective and behavioral coaching" and these are the keys to building lasting wealth.

Up next- Stocks vs Bonds and Owners vs Lenders.