You Need A Financial Advisor

I am still shocked at how often I find participant-directed 401(k) plans without a financial advisor. While I understand how solo 401(k) plans don’t have an advisor because individuals think they can do it on their own. I have a solo 401(k) and I handle my investments. I always say that the moment that I add an employee, I am going to hire a financial advisor and there is an easy reason why.

I am often amazed that in the age of the Internet, there are still travel agents around in business because the Internet has allowed us to book trips and hotel rooms with a simple click button. In the old days, unless you had the travel agent software, you couldn’t do it on your own. Thanks to the internet, we can invest on our own, and buying and selling securities can be done with the click of a mouse as well. While many people think that the usefulness of a financial advisor has gone the way of a travel agent, I respectfully disagree.

When it comes to participant-directed 401(k) plans, the main role of a financial advisor, in my opinion, isn’t picking mutual funds as a broad range of investments as required under a Section ERISA 404(c) Plan. I believe that with all due respect to Commander Montgomery Scott from Star Trek III, a monkey, and two trainees can pick a mutual fund lineup to meet that broad range requirement.

I think the value of a financial advisor is having them a part of the fiduciary process, drafting an investment policy statement, reviewing the current fund lineup, and most of all, employee education.

I worked at a semi-prestigious (sorry, Lois) law firm on Long Island and there was no financial advisor on the 401(k) plan for a review of the mutual funds for 10 years. I knew we needed one when someone on the office staff stated that he only invested in the mid-cap mutual funds because “it represented the middle of the market.” That is why you have s financial advisor.

Even 401(k) plans that offer index funds or exchange-traded funds need a financial advisor because while index investing beats most of the active funds consistently, participants still need investment education to make an informed decision that will get the plan sponsor ERISA §404(c) protection. Index funds and ETFs are great, but what about asset allocation and risk tolerance? Index funds and ETFs won’t solve those issues on their own. So even a plan offering only a passive approach needs a financial advisor.

The moment I hire an employee will force me to hire a financial advisor for my plan because, despite my knowledge of 401(k) plans and investments, I don’t have the background or training to review funds and offer education. I stick to what I know, so I stay out of trouble.

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