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Cheapest is Not Always Best

Cheapest is Not Always Best

Amanda Vaught and Emily Agosto

Have you ever walked into a store looking for a specific product and find a few different options? You may opt for the cheapest option because it will probably work just as well as the more expensive one.  When our CPA Emily Agosto worked at a hardware store as a teenager, she saw many customers face this choice. Her store offered two hammers for sale: a cheap store brand and a superior, albeit more expensive, brand. Which one did customers typically buy? If you guessed the cheap one, you’re right. They figured the cheap hammer would get the job done for what they needed to do. After all, how much difference could there be between hammers? 

There turned out to be a big difference. Often, those same customers would come back to the store and pick up the expensive hammer after the cheap one did not work out. In the end, the customers spent more on the cost of two hammers instead of picking up the expensive, more durable hammer in the first place. 

 Believe it or not, financial investments are a lot like Emily’s hammers. Too many investors rely on free advice, which comes from salespeople telling them to invest in index funds or “guaranteed” investments like annuities.  For instance, investment management companies like Vanguard will offer cheap rates to set up index funds for investors.  But is simple and cheap really the best option for you? 

Historically, professional financial advice has been offered at high costs and geared toward the wealthy, which completely ignored investors who truly needed the guidance. Now that it’s being offered for less money or even for free, it’s benefitting anyone that’s ever wanted to invest their money even if they never knew where to start.  

While indexing might work for some, it will not work for everyone. There are several factors to take into consideration when investing, including how the market is behaving in the short and long-term and what works best for your own personal finance needs. Cheap options are not individualized to your needs and desires. 

 Tax planning can be very similar to investing in that respect. Most taxpayers do not want to go through the hassle of preparing their tax returns on their own, so they turn to companies like H&R Block to do it for them. They may shop around looking for the cheapest filing rate because it’s all the same, right? 

Not exactly. Just like cheap investment advice, cheap tax services may work for some, but not for everyone. It may not be enough to pay someone to simply enter numbers into software and file your tax returns.  With tax laws becoming increasingly complex and your individual situation changing almost annually, it is likely you need an experienced professional who will ask the right questions and review the laws that apply to your circumstances.  In short, you need an expert who will not only do it correctly for the current year but give you advice about years to come.  A tax preparer with six weeks of training cannot give you that level of support.

Let’s say you have a complex tax situation. It is a headache to try and understand everything, so you hire a low-cost tax service to handle it for you. Unfortunately, you receive an IRS notice after the firm files your tax returns. Now you have to either hope the low-cost firm will correct its mistakes for free, or you will hire a professional at an hourly rate to address the issue with the IRS.   Be aware that corrections could take hours to prepare and might include phone calls with the IRS.  Once the correction is made, it will likely take months to find out if the IRS is satisfied. Was hiring the low-cost tax service worth it in the long run? Or would it have been better to start out with the company that charged a little more, so you didn’t have to correct your tax returns and deal with the IRS? 

More often than not, we take advice from those in our immediate environment. We listen to our parents, our friends, or even social media to tell us what worked for them and why you should try it. Because you really do not understand the issue before you, you end up using services or buying products based on opinions from others, or worse, from salespeople telling you what you “need.”

Your parents might like a certain investment company, but is that same investment company willing to work with investors like you? When your friend hired a tax service to help with her unique situation, was your tax situation taken into consideration? Probably not. There are many factors to consider when taking advice from your friends or family, such as generational gaps, income variations, and specialties of different firms.  You should always interview multiple choices when hiring a professional to compare their capabilities and their willingness to address your needs.

And, of course, there’s social media. These days, more and more people are taking advice from social media influencers. Just remember to ask yourself, whose interest are they looking out for?  Chances are, they are being paid by someone to promote a particular service or product that has nothing to do with your needs or desires.  This podcast helps you wade through all of the advice and/or sales talk being offered out there.  Let us help you determine what can be useful to you. 

 First and foremost, hire a fiduciary, not a salesperson. A fiduciary is legally required to consider your needs and interests ahead of their own.  You want someone to look at your unique financial situation and help you make the right decisions by educating you about your options and the consequences. When you’re buying a house, is the real estate broker going to review your retirement investments and current income to determine if you can actually afford the house they’re selling you? Probably not.  That’s what your professional financial advisor does for you.  Advisors at Propel will consider the home purchase and its place in your financial plan.   We will consider things like cash flow, the impact on retirement savings and spending, and what happens if you lose your job.

At Propel, we are all experienced fiduciary financial advisors with your interests in the forefront. We are not paid commissions on anything invested or purchased on your behalf, and we do not charge an extra fee to answer your questions. We focus on the whole picture of your financial profile and not just individual transactions. We want to make sure that our clients’ financial futures are secure because we believe that financial advice does not end. We will work with you to make a series of decisions and let you know what we think about them along the way. 

 So, what works best for you? Do you want to make a quick decision and invest in an index like the S&P 500 or Nasdaq 100 that include companies based solely on the type of business they do or the size of the company?  Do you even know what companies those include?  Or would you rather work with an expert to choose investments that focus on the underlying company qualities and which ones are right for you? When is the right time to stop taking the easy way out and become more actively involved in your financial future? Is it when you lose your job?   When the market dives?  When you retire?  Emotional reactions to temporary situations are a salesperson’s bread and butter.  Hire a financial advisor who will help you formulate a plan and take care of those tough times for you.

When you choose the cheapest option, make sure to ask yourself this question: what is the true cost?   Is it really worth your time, your stress, and your finances to default to the easy route?