Have you ever wondered: “Are Financial Advisors Worth The Cost?” If so, you aren’t alone. This question comes up regularly so today we’ll look at two different perspectives to consider it fairly.
Why don’t I just say “yes” or “no”? Because this is another one of those investing “it depends” situations.
Let’s see if a financial advisor might be worth the cost for you…
A Frank Question
Someone recently asked the below question online:
“If 98% of funds don’t beat the market, why do people still give their money to financial advisors and money managers? Why doesn’t everyone just invest in a low cost index fund that follows the S&P 500?“
Without debating the specifics of the 98% (I’ve read studies showing 92%, but either way, it’s a big number) that’s a great question.
Honestly, as this person alluded, most people would be best off managing their own money and creating a diversified portfolio of low-cost index funds. In fact, Warren Buffet has stated:
“Consistently buy an S&P 500 low-cost index fund, I think it’s the thing that makes the most sense practically all of the time.” – Warren Buffett in a CNBC interview
Mr. Buffett believes in this so much that he entered into athat a low-cost S&P 500 Index fund will beat out professionally managed funds over a ten-year period.
S&P 500 Index Performance
Since inception, the S&P 500 Index has returned right around 10% per year on average.
Of course, that’s an average, so be careful. There have been years when it was down over 40%! And other years when it has been up over 50%!
With any investment, you want to make sure you have a reasonable investment timeline. The shorter you try to invest in anything, the riskier it is. The longer you hold a diversified portfolio (like the S&P 500 Index) the lower the risk of a loss.
You can also lower volatility (those huge swings) by further diversifying your portfolio. Perhaps adding some international funds, or bond funds, or other types of investments. Designing a well-diversified portfolio, and managing it, isn’t for everyone.
So, Are Financial Advisors Worth The Cost?
Given the above information, it seems like the answer to “Are financial advisors worth the cost?” would be a resounding “no!”
Well, not so fast. There are definitely reasons for certain people to use a financial advisor or financial planner. (But always be sure to, whether it is from a professional, a service, or even just a fund’s costs.)
Yes, there are some people who would benefit from a financial advisor – even given the fees.
In fact, according to numerous studies, MOST people would be better off with professional help.
Not because of “beating the market” though.
Study after study shows that investOR returns lag investMENT returns by several percentage points each year.