Pros and Cons of Using a Financial Advisor (with Cost Charts vs DIY)

pros cons chalkboard | pros and cons of using a financial advisor

When feeling uncertain or overwhelmed about managing your investments, you may consider hiring a financial advisor.

I manage our own investments now. But over the decades I have hired and worked with 10 different financial advisors of various types.

Despite the many pros and cons, the most important consideration in using a financial advisor, or continue working with your existing advisor, is whether you’ll be more likely to reach financial independence with or without that advisor.

Pros of Using a Financial Advisor

There are many advantages of using a financial advisor, as outlined below. Many investors who use a financial advisor, however, don’t take full advantage of all the advantage.

Experience and Investment Education

Since financial advisors are certified and have years of experience in the field, so they know a lot about investing. Not only this, but many financial advisors have years, if not decades of experience. This means they have most likely worked through several cycles of bull and bear markets, adding to their arsenal of experience. (This is one of my suggested interview questions when hiring a financial advisor.)

Investing takes at least some level of knowledge. I’ve discovered that the best knowledge, which cannot always be duplicated, comes from experience.

Plus, many people who are busy with work or other aspects of life prefer not to spend time the necessary time learning about and managing investments. There’s no crime in that.

Human Influence

In recent years, several software programs have been developed to make investing easy for consumers. 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 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 again parent needs with an online app? The answer is no.

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.

pros and cons of using a financial advisor

(Note:Data for chart was from AdvisorHQ.com.)

Saving Time

Financial advisors can save time. 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 actually pretty simple these days to be completely honest.)

Then there is the time for managing your own portfolio, and tracking performance. There are also tasks such as tax loss harvesting, monitoring securities and adjusting them as needed, and keeping an eye on the economy as it relates to your investments. Then there’s bi annual or annual re balancing.

Personal Wealth Plans

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.

Wealth Management

A financial advisor is especially valuable when you have larger assets. 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.

Plus, investors over 50 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.

Wealth Team Coordination

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 have a significant impact on the amount of wealth you accumulate, keep safe and leave as a legacy.

Self Employed Investing Needs

Business owners may find that hiring a financial advisor is worth it. Self-employed people usually have a different set of financial planning needs the advisor can assist with, plus business owners tend to be short on time.

If this is your case, a financial planner may be your best option. You’ll want someone with specific experience working with many clients who own small businesses, however, as many do not.

For business owners, investing their money is one thing that can easily get pushed aside while growing their business. Yet, it’s the very reason behind all the hard work.

Financial Peace

Possibly the biggest pro of hiring a financial advisor is the peace of mind they provide. While this doesn’t alleviate you from the responsibility of overseeing your wealth, working with a financial advisor can ease some of the worry knowing your investments are being managed by someone with expertise and experience.

Financial Advisor Costs

The biggest reason people sway away from using a financial advisor is the potential cost. But when shopping around, you may find that many of them offer reasonable fees given the competitiveness that has risen in this field 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 you, and what you need based on your own situation.

I made the chart below to show common percentages paid for financial advisors. With clients, we look at both the dollar amount and the percent that is paid. $10,000 feels a lot bigger than 1%, right?

pros and cons of using a financial advisor - costs

Emotional Investing

While emotional financial decisions can be overcome (I have a process for this), acting repeatedly out of fear and greed is 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. Advisors can keep you from emotional investing #wealth #retire Click To Tweet

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. It studies how emotional reactions of investors affect 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 Avoidance

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 reason are more obscure.

pros and cons of using a financial advisor reasons

Financial Advisor Benefits

On a side note, I find that clients and investors I speak with don’t take advantage of all of these financial advisor benefits. Financial avoidance can feel better, but this is only temporary.

It also seems this happens because many investors:

  1. Don’t place having funds for life as a priority until it’s too late
  2. Feel intimidated and confused about investing

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?

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. You will want to find one with your best interests in mind, who acts as a fiduciary, unless there is something truly exceptional or it is a unique situation. In this case, we’d circle back, once again, to hiring a financial professional who will help you get the results you want faster and easier.

The biggest problem I see in hiring financial advisors is that investors often don’t truly understand the numbers behind the glossy pie charts, total return data, financial lingo and mathematical equations.

When you hire someone to do anything, it can feel like such an instant relief to know that you have delegated this huge, life determining task. You feel like you could never learn what you need to know, so you’ll just delegate it away.

Being a lover of delegation given the multiple projects on my hands (like most people), I’ve learned this the hard way more than once.

But 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 fees.

If you haven’t hired them yet, or they work with many clients so there is no accessible data, find out what the advisor would buy for you, and understand and discuss the past performance of those investments during both up and down markets.   

Financial Advisor 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, or not making suggestions to build wealth with assets outside of their management.

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.)

But 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. A surgeon promotes surgery because this is how they have learned to fix problems. It’s what they do.

(Confession: I think investors who embrace and understand their investments are more likely to reach financial independence.)

Likewise, a financial advisor promotes investing in stocks and bonds, perhaps with a sprinkling of commodities, because this is what they do. There is no evil here. In fact, I have found most financial advisors I speak with want nothing but the best for their clients.

But what wealth building opportunities exist outside mainstream investing, such as real estate rentals or buying or building a low cost online business can completely change your situation (as it did ours)? It’s very rare that a financial advisor will suggest this to their clients.

Number one, it’s less money under management for them and the firm they work for. Even without this underlying agenda, it’s simply not what they believe or know.

Financial Advisor Cost

If you are only investing a small amount of money, you may find that even a small financial advisor fee will eat up a large percentage of your investment since smaller accounts typically have higher fees. Plus, many financial advisors use at least some mutual funds or ETFs in their client portfolios, which means paying more expenses in addition to their base wealth management fee.

While many ETFs and mutual funds have low fees, some advisors place their client’s money in 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 advisor (or 401K) generates on your behalf must beat the related benchmark (or low cost index fund) by at least 2 to 3% over time just to break even. This kind of return is extremely uncommon with traditional investing methods.

Also, when purchasing mutual funds, you can buy into a capital gain which you don’t even receive yet you owe taxes on the gain because the gain is built into the fund already when you buy it.

Most people are unaware of this. Fortunately, my dad taught me how to check this many moons ago when I was a mutual fund investor.

So, if a financial advisor you are using are considering buys mutual funds for their clients, make sure they have your back on this hidden expense, or even consider looking elsewhere. After a long bull market, this snafu can be brutal since the capital gain is so large due to the rise in stock prices.

Traditional Methods

It can be hard for many financial advisors to think outside the box or implement tactical strategies based on market cycles. Years of working in an industry with common long term buy and hold methodology is the reason.

If you’re a long term buy and hold investor, this may not matter to you.

There are, however, advisors and funds that use tactical approaches to investing for their clients. Many utilize more innovative strategies such as more sophisticated hedging and even covered call writing for their clients.

I think this will become more and more mainstream over time. I’ve seen it happen in the financial industry as better tools are developed, and the public has become more educated.

Financial Peace

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 off your plate.

But financial peace 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. But you’re still the person hiring and monitoring the advisor you choose, which 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.

You’re also the person who needs to understand and review your wealth accounts at least annually to see if you are on track to accumulate the amount of wealth that you desire for the life you want, for life.

You’re also the person behind your spending and putting aside more money to grow.

This simply cannot be done with avoidance that comes disguised as financial peace . And it sometimes calls for some tough changes. I find clients really struggle with changing financial advisors until they truly understand why it makes sense to do it.

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 not selling wealth management services. It’s that simple.

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 financial advisors.

There is no right or wrong. There is only the fastest and easiest highway to financial independence, while enjoying the ride.

Thanks for reading my posts. To help others embrace and create financial independence, please share it online at your favorite social media site.

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Joy and Prosperity,

pros and cons of using a financial advisor

Camille Gaines

 

 

 

 

 

 

Disclaimer: Nothing in this post or on the website is meant to be construed as personal financial advice. Do your own research or hire a financial advisor.

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.advisoryhq.com/articles/financial-advisor-fees-wealth-managers-planners-and-fee-only-advisors/#Percentage-AUM

https://justinbrand.com.au/blog/index-v-active-funds-the-hidden-costs-your-financial-advisor-isnt-telling-you-about/

https://www.cnbc.com/2017/12/08/financial-advisors-fail-on-investment-performance-client-trust.html

 

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