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, behavior influence, the time saved, wealth management delegation, personal wealth planning, and professional resources. The cons of using a financial advisor are the costs, challenge of finding a good financial advisor, a potential conflict of interest, adherence to only stock and bond investments, and relinquishing responsibility for your financial future.
Financial independence 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 financial independence using an advisor or investing your own money.
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
Since most financial advisors are certified, they have extensive knowledge about investing. Not only this, but many financial advisors have years, if not decades of experience. This means they have most likely worked with many types of clients; they have probably also invested through several cycles 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.
Investing takes at least some level of knowledge. Those acting as financial advisors have gone through extensive studies to do so. However, I’ve discovered that the best knowledge, which cannot always be duplicated, comes from experience more so than education.
From my own experience, it has also come from looking beyond what is taught in traditional investing programs.
Many people who are busy with work or other aspects of life, however, prefer not to spend time the necessary time learning about and managing investments. This is often when having a knowledgeable and experienced financial advisor can make the most sense.
Financial Advisors Vs Robo Advisors
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?
Or can you discuss aging parent needs with an online app?
Can you work through investing with too much risk, or too little 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.
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.)
Does Using a Financial Advisor Save Time?
There’s no doubt that financial advisors can save time for 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 need to be tracked.
Your portfolio will need to be evaluated 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 the financial advisor. Otherwise, you can’t know if you’re getting acceptable results for the amount you’re spending on investing services.
There are also tasks such as tax loss harvesting, and monitoring securities to adjust them as needed.
There’s also the task of keeping an eye on your investment asset allocation in light of ever changing economic factors. For advisors who use strictly passive asset allocation model portfolios; however, economic related adjustments are not typically made; this is why passive asset allocation has reduced the need for financial advisors.
Even with passive asset allocation models, portfolios will need to be adjusted at least annually.
Depending on what type of financial advisor (passive vs tactical) you chose to hire, however, the management of many investment portfolios is more passive and, therefore, excludes some of the above activities or attention.
Personal Wealth Plans
Ideally, a financial advisor will take into account your current financial situation and future goals to create a plan tailored to your needs and wants. You can also get help 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 needs.
Your advisor can evaluate existing retirement plans and IRA’s and make 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 strictly a financial advisor. As a holistic wealth coach, I will add that personal wealth plans are often best done by investors themselves. 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.
A financial advisor is especially valuable when you have a higher 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 spread over different accounts.
A financial advisor can help you invest in the most advantageous way from a tax and estate planning perspective. This may be one of the biggest pros of working with a financial advisor.
Older investors over 50, in particular, tend to have multiple investment accounts or funds in various places.
Again, this goes back to weighing the costs against the advantages of using a financial advisor.
Do Financial Advisors Work with Your CPA?
A financial 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.
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 or focused on their business finances. I certainly run into this myself and have found the solution to be using a bookkeeper and having set days for focus on portfolio investing and small business entity 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 easy always 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.
Possibly the biggest pro of hiring a financial advisor is the peace of mind they provide; this can have two sides, though, as addressed more later. 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.
How Much Does a Financial Advisor Cost?
The biggest reason people sway away from using a financial advisor is the potential cost. 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 cost of a low cost index investment strategy.
Again, the question goes back to this: Will I reach my 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 wealth 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.
While emotional financial decisions can be overcome (I have a process for this), acting repeatedly out of hidden fear and greed is often a good reason to hire a financial advisor.
This is because advisors can keep you from emotional buying and selling. This 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 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 can be an excellent place to remedy this wealth saboteur.
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. Financial avoidance is a very common and huge detriment to your financial security.
There are many reasons people hire a financial advisor as shown in this chart below. Sometimes the reasons are more obscure.
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. (Been there and done that.) Many people hire financial advisors to overcome financial avoidance. Financial avoidance can feel better after hiring a financial advisor, but this is usually only temporary.
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
- Running out of money is 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 because it feels intimidating. Knowing this, however, hiring a financial advisor doesn’t really solve financial avoidance on a higher level.
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?
Financial Advisor Benefits
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
Finding the right financial advisor can be a challenge. Of course, you’ll want to find one with your best interests in mind. This means they, by law, must act as a fiduciary.
The biggest problem I see in finding a good financial advisor is that 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!
When hiring a financial advisor, this fuels the fear that you could never learn what you need to know, so delegating the responsibility seems smarter.
In order to make the best decision to secure your future, however, 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 fees.
All of this lessens the challenge of finding a financial advisor since most financial advisors don’t beat the benchmarks after fees, unfortunately.
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.
Do Financial Advisors Have Conflict of Interest?
Some financial advisors act in their best interests, instead of yours. This could result in selecting sub par products due to pressure by their firm or someone else.
It could also result in not making suggestions to build wealth with assets outside of their wealth management expertise or capability.
Getting a financial advisor to work as a fiduciary will help resolve the conflict of interest problem. Fiduciaries are required by law to act in the interests of their clients first and foremost. (This is a big ongoing heated topic within both the financial community and political arena.)
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 promotes surgery because 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 covered calls on already owned stocks, or even buying or partnering in a small business. These more alternative wealth building strategies can completely change your situation, as it did ours.
There is a whole world of 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.
Alternative investments, 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 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 using an asset allocation model.
I see the lack of alternative investment strategies and more innovative wealth building solutions the biggest con 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.
Note that some financial advisors, do, however, sell covered calls for their clients. This is an alternative income strategy. There aren’t many financial advisors who will sell call options for their clients, however, since it is more work and it is different than implementing a basic asset allocation strategy.
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. Unfortunately, this kind of return is extremely uncommon with traditional investing methods that most financial advisors use.
Remember, too, that you’re paying fees on the amount being invested whether or not it makes money.
Strategic Investment Vs Tactical Investment Strategies
Most financial advisors use strategic asset allocation. This means they invest in stocks and bonds since the bonds usually go up when stocks go down. 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. This method can work well for many investors, especially those with the ability to invest for decades during favorable stock market conditions.
There are, however, advisors and funds that use tactical approaches to investing for their clients, especially among the wealthy. Tactical investing takes advantage of opportunities based on changing economic and market conditions.
I think a more tactical investing approach will become more mainstream over time as investors become more aware. I’ve seen it happen in the financial industry as better tools are developed, and the public has become more educated.
Nevertheless, for now, most financial advisors stick to strategic passive asset allocation models which sounds slightly more complicated than it really is.
Financial peace is both a pro and a con. 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 that 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.
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, hiring and monitoring the advisor you choose; this requires some degree of education and management.
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 hire a financial advisor. 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 even though it is not always popular in the financial services industry.
You’re also, of course, the person who needs to understand and review your wealth 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; it’s almost impossible for a financial advisor to be 100% unbiased through no fault of his own. You’re the CEO of your own wealth.
You’re also the person behind your spending affecting how much money you put to invest. 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.
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 drive 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 conclusions.
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. For our core portfolio, I personally invest using a strategy that financial advisors also use, but since I invest myself, I don’t pay management fees.
Investing on Your Own Vs with a Financial Advisor
Investing is something you can do on your own with the right information. The information is definitely out there but finding an unbiased independent resource not selling financial advisory services is imperative.
If you choose to invest on your own, you’ll want to learn about investing from an unbiased source.
Investing is not rocket science, however. It can be done much easier than you may think.
If, on the other hand, you’d rather have your teeth pulled out than manage your own investments, learn what you’ll want to know so you can confidently interview, hire and monitor a well chosen financial advisor.
As you can see, there are definite pros and cons of using a financial advsior. There is no right or wrong answer for everyone, as is usually the case here at Retire Certain.
There is only the fastest and easiest highway to financial independence while enjoying the ride.
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