What is (Good) Financial Advice?

You’ve probably heard it before: the best way to invest is through low-cost index funds. They’re simple, inexpensive, and consistently outperform most other strategies over time. So, if investing is basically “solved,” why would anyone still need a financial advisor?

It’s a good question, and it’s something that gets asked all the time. There’s a lot more to financial advice than just picking investments. Let’s break down why having a financial advisor can still make a big difference, even when you’re sticking to index funds.

Investing Is Only Part of the Puzzle

Yes, low-cost index funds are a smart choice for most people. The idea of “beating the market” has been largely discredited by academic literature dating back to the 1960s. Most investors simply cannot consistently outperform the market, and instead, the majority are better served by owning a diversified, low-cost index fund. Attempting to pick winning stocks or mutual funds is a risky and often losing game.

But here’s the thing: investing is only one part of managing your money. Financial advice is about much more than just choosing where to put your money. In fact, focusing only on investing can cause you to miss out on other crucial parts of your financial plan.

What Financial Advice Isn’t

First, let’s talk about what financial advice isn’t. It’s not about trying to pick the next hot stock or predicting which fund manager will outperform. We can’t predict the future, but we can look at base rates—like the fact that 90% of active fund managers underperform the market over a 10-year period. So, advice based on trying to beat the market should be a red flag.

What Financial Advice Is

Real financial advice covers five key areas:

1. Setting Financial Goals
   Before diving into investing, you need to understand why you’re investing. Are you saving for retirement, a house, or your kids’ education? Setting clear goals guides all other financial decisions. But here’s the catch: humans are bad at predicting what will actually make them happy in the future. That’s why financial advisors can help you set realistic goals that align with your long-term happiness and well-being.

2. Asset Allocation
   Once your goals are set, the next step is to determine how to allocate financial assets. Figuring out how to split your money between stocks, bonds, and other investments is one of the most important decisions you’ll make. This is called asset allocation. A good advisor will take into account your income, job security, time horizons, individual circumstances, and risk tolerance to create a personalized investment strategy. For instance, someone with stable income might invest differently than someone whose income is more volatile.

3. Insurance Planning
   Even the best investment plan can fall apart if something unexpected happens, like a disability or death. That’s why insurance is a key part of financial planning. This is an often-overlooked, yet essential component of comprehensive financial planning. Advisors help you figure out how much coverage you need to protect your family and your financial future.

4. Choosing Financial Products
   Only after goals are set and asset allocations are determined does the conversation about financial products, like index funds, take place. But it’s important to remember that picking the right funds is just one small part of a larger plan. Advisors help you find the best products to fit your overall strategy, whether it’s ETFs, insurance policies, or other financial tools.
5. Tax Awareness
   Taxes are a critical piece of the puzzle, as smart tax planning can significantly improve financial outcomes without adding risk. Financial advisors offer strategies that can minimize tax liabilities and increase net returns.

Overcoming Biases and Emotions

One of the biggest reasons people seek financial advice is to get help with decision-making. We’re all prone to biases—like the four “villains” of decision-making: narrow framing, confirmation bias, short-term emotions, and overconfidence. These psychological tendencies can lead to poor financial decisions if left unchecked. A good advisor helps you avoid these traps by giving you an outside perspective and reality-testing your assumptions to make more objective decisions. This perspective can be invaluable, particularly when making complex or emotionally charged financial choices.

Why You Might Still Want an Advisor

Even though there’s tons of free information online, people still choose to work with financial advisors for a few key reasons:

• Optimizing Trade-offs: Financial decisions often involve trade-offs, like whether to buy a bigger house or save more for retirement. Advisors can help you weigh these decisions and find a balance that works for you.
• Simplifying Complexity: The abundance of financial information can be overwhelming, leading to decision paralysis. Advisors help cut through the noise, providing clear recommendations.
• Boosting Confidence: People often seek reassurance that they haven’t overlooked something. A professional can provide that confidence by ensuring that all aspects of a financial plan have been considered. Studies have shown that people who work with advisors often feel more confident about their ability to meet financial goals.

• Saving Time: Advisors save clients time by eliminating the need for constant research and ongoing management of complex financial plans.

The Bottom Line

Financial advice is not simply about which stocks or funds to pick. Financial advice goes far beyond investment strategies. Advisors help people set meaningful goals, quantifying those goals, determining the right asset allocation, addressing insurance needs, and staying aware of taxes—all while avoiding common psychological pitfalls.

So, while you can certainly manage your investments on your own, there’s a lot more to financial advice than just telling someone to invest in index funds. A good advisor helps you avoid the common trap of endlessly pursuing “more” by helping you quantify realistic goals that align with a meaningful life.