When feeling uncertain or overwhelmed about managing your investments, you may consider hiring a financial advisor.
In this post I’ll share what I learned about the pros and cons of using a financial advisor after having hired and worked with multiple financial advisors over the years.
The pros of using a financial advisor are their knowledge, experience, positive influence, time saved, wealth management delegation, personal financial planning, and professional resources. The cons of using a financial advisor are the costs, challenge of finding a good financial advisor, potential conflicts of interest, adherence to only stock and bond investments, and relinquishing responsibility for your financial future.
Some of my financial coaching clients definitely want to use a financial advisor while others want to do their own investing. Here is what I tell them: Financial independence, or having enough money for your desired retirement, is the ultimate goal of investing.
Despite the many pros and cons of using a financial advisor, or continuing to work with your existing financial advisor, the most important factor is whether you’re more likely to reach be able to live off investments one day using an advisor or investing your own money.
In this post, I’ll share:
- The pros and cons of using a financial advisor
- What almost everyone that uses a financial advisor isn’t doing but should
- The wrong reasons to use a financial advisor
- The danger with using a financial advisor
- The biggest con of using a financial advisor and ways to address it
Pros of Using a Financial Advisor
There are many advantages of using a financial advisor. Some investors who use a financial advisor, however, don’t fully realize or utilize all the advantages below.
Experience and Investment Knowledge
Many financial advisors have years, if not decades of experience. This means they have most likely worked with many types of clients and situations; many have probably also invested through at least one cycle of bull and bear markets, adding to their arsenal of experience.
In fact, investing through both bull and bear markets is so important it is one of my suggested interview topics when hiring a financial advisor. Financial advisors who invested through at least one of the bear markets of the 2000s decade get a big star by their name in the selection process because these were long and nasty bears that took exceptional skills to navigate and manage risk.
Since most financial advisors are certified, they have extensive knowledge about investing. Despite this, I’ve discovered that true investing wisdom, which cannot always be taught, comes from experience more so than education.
From my own experience, true investing skill also comes from looking beyond what is taught in traditional investing programs. What is taught is based on what worked in past study periods, which will be different from future time frames.
Many people who are busy with work or other aspects of life, however, prefer not to spend the necessary time learning about and managing investments. Other investors detest the idea of investing. This is often when having a knowledgeable and experienced financial advisor can make the most sense.
Financial Advisors Vs Robo Advisors
Financial advisors add the human element to your investing; this is a big pro for financial advisors in a time of less human interaction.
In recent years, several software programs have been developed to make investing easy for consumers. These are usually referred to as Robo advisors.
Many investors are choosing to go with such programs in lieu of hiring a financial advisor. The problem with using these programs is you lose that human touch.
Plus, the advice can’t possibly be as personalized as tailored or personalized as what you would get from your own financial advisor.
- Can you discuss a special needs child with an online app, for example?
- Can you discuss aging parent needs with an online app?
- Can you truly work through your concerns about investing with too much risk, or too little risk?
- Can you explain to the app you own real estate rental properties, and thus, have that investment risk?
The answer is no; you cannot do these things with a Robo advisor.
Plus, are you more likely to stick to your investment plan if you work with a financial advisor, or if you use an online app? I think most everyone would agree that working with a human holds us more accountable, assuming you have built a good relationship with your advisor, and you work together closely to reach your wealth goals.
Does Using a Financial Advisor Save Time?
One pro of using a financial advisor is that an advisor can save a lot of time for most investors.
First, learning how to invest and structure your portfolio takes time. Next, your portfolio will need to be set up. (While this can feel overwhelming, it is actually pretty simple these days; I’ve set up many portfolios.)
Beyond initially setting up a portfolio, there is the time required for managing your own portfolio.
Portfolio performance will also need to be measured and tracked. You’ll want to evaluate your portfolio by comparing it to the related benchmark after fees are considered. This information will be provided by the financial advisor, although you may need to request it. Of course, this is something you’ll want to independently assess and stay on top of as the person hiring and overseeing a financial advisor. Otherwise, you can’t know if you’re getting acceptable results for the amount you’re spending on the financial advisor.
There are also tasks such as tax loss harvesting, and monitoring securities to adjust them as needed.
Keeping an eye on your asset allocation in light of ever changing economic factors is another big responsibility that takes time and can be stressful for investors.
For advisors who buy and hold investments while adhering strictly to an asset allocation model, however, portoflio adjustments are not typically made due to changing economic events. These portfolios are “set it and forget it” based on the asset allcoation template. Even with passive asset allocation models, however, portfolios will need to be rebalanced at least annually. This is easy to do but needs to be done for this investing approach.
Of course the time spent managing your investments will depend on the type of investment approach you choose, buy and hold vs alternatives to buy and hold, such as tactical investing. Buy and hold investing generally takes much less time. For example, I spend less than an hour a month investing my own diversified portfolio of stocks and defensive assets that I created using Allocate Smartly. Since at least some of my portfolio rotates about once a month I consider it tactical vs a buy and hold approach yet it takes little time.
Personal Wealth Plans
Another pro of using a financial advisor is that he will ideally take into account your current financial situation and future goals to create a plan tailored to your needs and wants. This often creates structure and organization that investors sometimes lack on their own.
You can also get suggestions from your financial advisor if you experience a surprise financial setback. They can provide you with advice to avoid any future financial mistakes and help you get back on track.
If you have a certain need for financial planning (college planning, life insurance, retirement planning) a financial advisor can provide a plan that focuses on those specific needs.
Your financial advisor can evaluate existing retirement plans and IRA’s and suggest changes as needed.
Keep in mind that many of these tasks are more personal finance or planning related and may be better suited for a financial planner than a financial advisor that is more focused on investing. This relates to hiring a financial advisor for the right reasons as addressed throughout this post. Many people think all financial advisors are the same; this is far from the truth.
As a holistic financial coach, I will add that personal wealth plans are often best done by investors themselves, at least in the initial phases. This is because no one knows your true life and financial goals more than you do. Such in depth topics can usually be revealed easier from a private space vs in a meeting with a financial advisor. From a personally created wealth plan, the investor can then decide from an unbiased and independent place whether a financial advisor is needed, and if so, hire one based on specific needs.
Wealth Management
Using a financial advisor can be particularly valuable when you have a high net worth. Trying to plan your financial future when dealing with the many elements of wealth management can be time consuming, especially if your assets are spread over different accounts, such as multiple retirement accounts. Older investors over 50, in particular, tend to have multiple investment accounts accumulated over the years and never consolidated in one place. A financial advisor can help get this done, ideally in the most tax efficient way.
A financial advisor can help you invest in the most advantageous way from a tax and estate planning perspective. This is one of the biggest pros of working with a financial advisor for some investors.
High net worth investors are also more likely to have alternative investments such as real estate or small business investments. A holistic financial advisor can consider such assets from a risk return perspective when investing. Most financial advisors don’t have expertise in these areas, however, which I consider a con to using most financial advisors as addressed more later in this post.
Do Financial Advisors Work with Your CPA?
Another pro of using a financial advisor is that the advisor can work directly with your CPA and or attorney to implement the most advantageous investment strategies for you from a legal and tax perspective.
This can help keep your money safe from a liability perspective. It can also have a significant impact on the amount of wealth you accumulate, are able to leave as a legacy, or in having more funds available for retirement savings from reduced taxes.
Financial Advisors for Self Employed Investors
Business owners may find that hiring a financial advisor is worth it. Self-employed people usually have a different set of financial planning needs. Some advisors can assist with this. Plus business owners tend to be short on time and must focus on their business finances.
If this is your case, a financial advisor could be your best option. You’ll want someone with specific experience working with many clients who own small businesses vs working mostly with employees. This isn’t always easy to find.
For business owners, investing their money is one thing that can easily get pushed aside while growing a business. Yet, it’s often the very reason behind all the hard work so it’s wise to make investing a priority even if it’s delegated to a financial advisor.
Financial Peace
Possibly the biggest pro of hiring a financial advisor is the peace of mind they can provide. This peace of mind can also be a con at times, as addressed more later. The peace of mind is fruitful when it comes from hiring a financial advisor for the right reasons, and having the knowledge about investing to confidently evaluate the job being done on your behalf.
While using a financial advisor doesn’t alleviate you from the responsibility of overseeing your wealth, using a financial advisor can ease some of the worry by knowing your investments are being managed by someone with knowledge and experience.
Emotional Investing
Financial advisors can help investors stop investing out of hidden fear and greed.
The emotional buying and selling of investments is known as the most common mistake that individual investors make.
While many dismiss this reality, deep rooted emotions drive your investing actions. This is so real that there is an entire field called Behavioral Finance in mainstream finance. It studies how the emotional reactions of investors affect investments and even the ways that the stock market moves.
My preference is to “dump your junk” because it can affect many areas of your finances besides investing. This means that even if you work with a financial advisor, you’ll want to address this important element in wealth building. Financial coaching or my investing course can be an excellent place to remedy this wealth saboteur.
Taking Responsibility for Your Finances
Most people avoid dealing with their finances for various reasons. A financial advisor can pressure you a bit to do what you need to do to reach your financial goals. This is a big pro in using a financial advisor if you’re complacent about focusing on your financial goals.
For example, you might commit to making monthly systematic deposits into your investment account. You can build this into the plan you create with your financial advisor. Then you can meet with your advisor quarterly to ensure you made good on your promise.
Survey on Cons of Using a Particular Financial Advisor
A CNBC survey showed the following reasons why investors hired a financial advisor.
Pros to Using a Financial Advisor
You can see there are many pros of using a financial advisor. From speaking with financial advisors as well as financial coaching clients, I find that most investors don’t take advantage of all of these financial advisor benefits. My experience has been that most financial advisors really want to do a good job for their clients. As such, they want to engage them more and have them utilize all the benefits that are available.
Cons of Using a Financial Advisor
Just as there are many pros for using financial advisors, there are cons, too. Here are some of the biggest negatives.
Challenge in Finding a Financial Advisor
One con in using a financial advisor is the challenge of finding a good advisor.
First, people are reluctant to talk about how they handle their money with others. From what I’ve seen, most people that are willing to recommend their financial advisor don’t really know if their advisor is truly good because they don’t compare after fee returns with the returns the advisor gets for them. This is how to know if a financial advisor is good or not.
Financial advisors are often recommended because they are known socially, often through another family member, or a common sport. This may increase the trust factor, which is important. What we really want in a financial advisor is someone that can help us reach our financial goals because their returns are exceptional. Nothing speaks like results.
Do Financial Advisors Have Conflict of Interest?
Another con of using a financial advisor is a potential conflict of interest.
Some financial advisors act in their own best interests, instead of yours. This could result in selecting sub par products due to pressure by their firm or someone else. Using a fiduciary financial advisor helps with this, but I’ve recently read there are workarounds with the fiducairy obligation many financial advisors have as RIA’s.
Common belief is that certain financial advisors must, by law, must act as fiduciaries.
Financial advisors make a big deal out of being fiduciaries. However, many financial advisors are RIA’s, or registered financial advisors in one role. In another role, they or their employer are broker dealers. As such, they don’t have to act as a fiduciary in the second role. This overrides the fiduciary responsibility from the first role as RIA!
You’ll want to clarify the fiduciary relationship if you use a financial advisor since it’s a good sign. Ideally, however, you’ll understand investing well enough to know if an advisor is making investments that aren’t in your best interest. Isn’t this our job as leaders of our money? This is what my investing course helps investors do.
Financial Advisors Use Complex Language
Another con when using a financial advisor is that most financial advisors talk and present information in an overly complex way.
Investors often don’t truly understand the return data behind the glossy pie charts, financial lingo, and mathematical equations that are presented to them when interviewing financial advisors. It’s darn confusing for anyone outside of the financial services industry.
I don’t think this is usually intentional. When interviewing a financial advisor, however, this can fuel the fear that you could never learn what you need to know, so delegating the responsibility (hiring the financial advisor) who appears so much more capable seems like the right choice.
Investors Delegate Their Financial Security
It feels like you don’t have to know anything about investing when you hire a financial advisor. This is definitely a con to using a financial advisor.
In order to make the best decision to secure your future, you’ll want to know enough to hire and monitor any financial advisor you are hiring or using. Quite simply, this means being able to understand their investing method and compare performance to the relevant benchmarks after financial advisor fees are paid.
The reality is that many financial advisors don’t beat the benchmarks after fees, unfortunately. Investors, however, don’t know to ask or evaluate this even though it is a perfectly acceptable measure of performance.
Wealth Tip – Find out what any financial advisor would buy for you, and understand and discuss the potential future and also the past performance of those investments annually during both up and down markets, not just the years in which the investments performed well.
Lack of Holistic Financial Advisors
Financial advisors don’t make suggestions to build wealth with assets outside of their expertise or capability even though this could be a better strategy at a given time.
This topic leads to the question: can there really not be a conflict of interest in any occupation? I don’t think there can be. The real estate agent sells houses. The surgeon suggests surgery. This is how they have learned to fix problems. It’s what professionals do.
And most professionals truly believe their way is the only or best way.
Likewise, a financial advisor promotes investing in stocks and bonds (perhaps with a sprinkling of commodities) because this is what they do. It’s what they were taught was best. There is no evil here. Again, I have found most financial advisors I speak with want nothing but the best for their clients.
Many opportunities, however, exist outside mainstream investing, such as real estate investments, small business lending, selling out of the money covered calls on already owned stocks, or even buying or partnering in a small business.
There is a whole world of investing opportunities beyond stocks and bonds. There are also times when stocks and bonds don’t have a high probability of good returns over the next few years.
The reality is that alternative investments in real estate and business, however, is how most of the wealthy got wealthy.
It’s very rare that a financial advisor will suggest alternative strategies such as these to their clients.
First, such suggestions would result in less money under management for them and the firm they work for. Even without this underlying agenda, like the sugeon or real estate agent, it’s simply not what they believe or know how to do.
Second, many investors and financial advisors are suspicious of anything different from what everyone else (at their same level of wealth) is doing, which is usually investing in stocks and bonds adhering to a rigid asset allocation model.
I see the lack of alternative investment strategies and more innovative wealth building solutions one of the biggest cons to using financial advisors. Most people, however, don’t care about alternative investments, making this less of an issue.
If you’re thinking of using alternative investments, however, you’ll want a financial advisor that at least supports your other investments even if they aren’t involved with them. For example, if a financial advisor wants to buy residential REIT’s in your account, she will take into account if you own rental properties yourself. A lot of this comes down to getting a personalized service from your financial advisor when needed vs doing for you what is being done for all the other clients, which is common.
Regarding covered calls, note that some financial advisors do sell covered calls for their clients that seek investment income. There aren’t many financial advisors who will do so for their clients, however, since covered calls can be a lot of work for multiple clients.
Avoiding Responsibility for Your Investments
One of the biggest cons in hiring a financial advisor is that it promotes financial avoidance among investors. It may seem the opposite, but stay with me, as I’ve learned this firsthand.
Financial avoidance is a very common and huge detriment to your financial security.
When you hire someone to invest on your behalf, it can feel like such an instant relief to know that you have delegated this huge, lifestyle determining task.
Financial avoidance seems to happen when investors:
- Don’t place having funds for life as a priority early in life because they are busy with working and family
- Feel intimidated and confused about investing
- Think even the thought that you might run out of money is just too scary, and, as humans, we tend to avoid what scares us
But hiring a financial advisor in any of these situations isn’t the answer since the financial advisor has to be evaluated, managed, and or retained by the person that hired them, probably you. Many investors avoid this responsibility because it feels intimidating or they don’t think they can learn the basics of investing that are required to evaluate a financial advisor properly.
If this resonates with you, ask this question: Is there any other circumstance under which you would hire someone, pay them thousands of dollars (likely hundreds of thousands over time, after compounding) and not make sure they are doing the job you hired them to do by closely monitoring and measuring the results they deliver?
How Much Does a Financial Advisor Cost?
The biggest con using a financial advisor is the cost. Thousands or tens of thousands of dollars are paid to a financial advisor every single year. This is problematic because the returns the advisor achieves should exceed their cost after measuring against investments with similar risk, and they often don’t.
When shopping around, however, you may find that many financial advisors offer reasonable fees given the competitiveness that has risen in this field both online and offline. The cost of using a financial advisor, however, is still considerably above the expense of a low cost index investment strategy or even the professionallly developed strategies I use at Allocate Smartly that do outperform investments with simiular risk.
Again, the question goes back to this: Will I reach my life and financial goals sooner with or without an advisor, after fees are paid?
For many, the answer is yes and for many, the answer is no. Only you know what is best for you, and what you need based on your own situation.
I made the chart below to show common percentages paid for financial advisors. With my financial coaching clients, we look at both the dollar amount and the percent that is paid. $10,000 feels a lot bigger than 1%, right?
Are Financial Advisor Fees Negotiable?
Financial advisor fees are definitely negotiable. There are a few ways to lower financial advisor fees:
- Increase the amount invested with the financial advisor
- If other family members use the same financial advisor, link investment accounts for a higher aggregate amount under management
- Educate yourself and become a low maintenance client so the advisor doesn’t have to spend a lot of time educating you
- Show the financial advisor other alternatives you are considering
- Let the financial advisor know that if she does a good job, you’ll plan on increasing the amount under management
Having said that, the older I have gotten the more I have grown to appreciate the value in paying someone what they are worth. Otherwise, it can put a strain on relationships, and result in a subpar team.
Many financial advisors are worth every penny they charge; it’s your job to find those that are.
Financial Advisor Fees for a Small Account
If you are only investing a small amount of money, you may find that even a small financial advisor fee will eat up a larger percentage of your investment returns since smaller accounts typically have higher fees.
Financial advisor fees typically decrease the more funds investors have under management with them.
Additional Financial Advisor Fees
Many financial advisors use at least some managed funds in their client portfolios, which can mean paying more expenses in addition to their base wealth management fee.
While many ETFs and mutual funds have low fees, be aware that some advisors place their client’s money in comparable funds that have high fees for various reasons. This means you can end up paying for both the financial advisor fee of 1 to 1.5% plus the fund fees of .5% to 2% or higher.
Doing the simple math on those costs we see that this could total 2% to 3% or more in investment fees. This means the returns the financial advisor generates on your behalf must outperform the related benchmark (or low cost index fund) by at least 2% to 3% over time just to break even.
I’ve seen fees this high with some of my financial coaching clients that were getting subpar returns after fees while also feeling like they weren’t getting personalized services.
Fees Are Paid Even When Investments Go Down
You pay financial advisor fees on the amount being invested whether or not the advisor makes money for you. This is a pretty big con to using a financial advisor.
Would the average financial advisor fees outlined in the chart below be worth it for you? Only you can decide.
(Note:Data for chart was from AdvisorHQ.com.)
Strategic Investment Vs Tactical Investment Strategies
Many financial advisors use strategic asset allocation which I now see as a con. This means they invest in stocks and defensive assets such as bonds to manage risk. This is typically done by buying and holding the same investments regardless of changing economies and market conditions.
Years of working in an industry with long term buy and hold methodology as the primary investing method is the reason for strong adherence to this method in my opinion. This method can work well for many investors, especially those with the ability to invest for decades during favorable financial market and economic conditions.
There are, however, a minority of advisors that prefer tactical approaches to investing for their clients. Tactical investing takes advantage of opportunities based on changing economic and market conditions.
I think tactical investing approaches will become more mainstream over time as investors become more aware of some of the problems with rigid adherence to buy and hold methods. I’m seeing this finally starting to happen in the financial industry as better tools such as Allocate Smartly are developed, and the public becomes more educated with advanced investing YouTube channels and podcasts.
Nevertheless, for now, many financial advisors stick to strategic passive asset allocation models which sounds more complicated than it really is.
Financial Peace
Financial peace is both a pro and a con in using a financial advisor. Here’s why. Again, it can feel great to delegate your wealth management to a pro. There is a peace about getting this crucial task off your plate.
Financial peace, however, can be something of a con, too. This is because many people think assume investing in stocks and bonds in the “correct” way through a financial advisor will automatically give them funds for life. This simply is not the case. Even financial advisors that are honest will readily admit this.
When someone else is managing your wealth for you, it’s much easier to avoid responsibility for your own money. You’re still the person, however, that must:
- Earn as much as you can or need to reach your financial goals
- Save money to invest
- Hire and monitor the advisor you choose;
- Learn about investing regardless of who invests your money
- Consider alternative approaches when needed
The bottom line is this: You’re the person who could run out of money one day if you don’t reach financial independence, not the financial advisor. It’s so easy for us to lose sight of this when we use a financial advisor because they’re managing our investments.
My least favorite phrase is “My financial advisor says I have plenty of money to live in retirement”. I think each of us needs to know that for ourselves to have true financial independence; that’s what I encourage in my work.
You’re also, of course, the person who needs to understand and review your investment accounts at least twice a year to see if you are on track to accumulate the amount of wealth that you desire for the life you want, for life. You can certainly do this with a financial advisor keeping in mind the pros and cons presented in this post. Remember, though, you’re the CEO of your own wealth, not a financial advisor that you hire.
You’re also the person behind your spending affecting how much money you put to invest and how much you need to retire. You’re at the helm of this foundational piece. The more involved you are with your investing, the more you’ll make or save to invest.(That is, of course, assuming you’re not investing emotionally.)
All of this wealth leadership can be harder to accomplish with financial avoidance that comes disguised as financial peace when delegating wealth management to financial advisors. Use a financial advisor if that makes it more likely for you to reach financial independence, but you steer the ship.
Do Financial Advisors Get Better Returns for Investors?
The real question is: do financial advisors get better returns for investors after fees? It’s worth repeating that an investor has to beat returns by the amount being paid in fees or she doesn’t come out ahead unless the advisor is providing valuable benefits such as peace of mind or extra time for the investor to focus on other pursuits.
One investor may get better returns on their own, while another investor may get horrible returns investing their own money. Even though some studies have suggested financial advisors get better returns for investors, it seems it would be impossible to reach reliable and unbiased conclusions that proove this.
Now, however, investors have many options to invest in ways that are like having a financial advisor without the full service of a financial advisor.
For example, there are robo advisors, as addressed elsewhere in this post. There is also now Allocate Smartly which I personally use and a few financial advisors also use, but since I buy the ETF’s myself, I don’t pay management fees. This means the returns don’t have to beat wealth management fees since I buy and sell the ETF’s myself (for free) following the strategy I chose.
Investing on Your Own Vs with a Financial Advisor
I teach that there are many ways to invest from beginner to advanced stategies, but many investors aren’t aware of this. They think there’s only one way to reach their financial goals, and it needs to happen through a financial advisor.
Using a financial advisor is one way to invest. And various financial advisors will use diferent investing methods.
Investors need to become aware of different investing methods from an unbiased and independent source so they can decide how they WANT or NEED to invest to acheive financial independence.
Then they can decide if they want to use a financial advisor or invest themselves from that place of confidence and knowledge while being aware of the pros and cons of using a financial advisor.
Thanks for reading my posts. To help others embrace and create financial independence, please share it online at your favorite social media site.
Thank you to my Sources below and as noted above in the images:
http://www.ariadnewa.com/an-unjustifiable-cost-of-financial-advice/
https://www.cnbc.com/2017/12/08/financial-advisors-fail-on-investment-performance-client-trust.html
