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

Are Financial Advisors Worth The Cost?

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 has a entered in a million dollar bet that 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 investing 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.


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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 some reasons for certain people to use a financial advisor or financial planner. (But always be sure to understand your investing costs, whether it is from a professional, a service, or even just a fund’s costs.)


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Investing Realities

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.

This anomaly has been named the Behavior Gap (by CFP Carl Richards). Mr Richards has even written a book about The Behavior Gap – and another about creating a One Page Financial Plan.

Good investing isn’t a math problem – it’s an emotional problem. It’s a behavior issue. It’s how we manage our investments.

Even though we KNOW what to do – we read it over and over – we don’t always do it. In fact, sometimes we do the opposite.


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Accountability And Impartial Perspective

When the market gets scary, and your anxiety level is high, that is when a financial professional can step in to help. At that point when the market is tanking and you are tempted to sell, a professional can bring clarity to calm you. Or if the market is rising like crazy and you’re tempted to mortgage the house and invest the money, a professional can remind you about bubbles and volatility.

Having someone you trust “speak some truth” into a situation can mean avoiding the “buy high and sell low” practices that average investors experience.

Again, a professional isn’t necessary. But if you go it alone, you need control. You need discipline. You need a level of self-management that, unfortunately, most people don’t possess.

Bonus: Financial Planning

Not all financial advisors are financial planners. But financial planners tend to charge the very similar rates as investment advisors, yet provide a lot more value.

Most financial planners not only help manage investments, but set out specific plans to achieve your financial goals.

A good financial planner can help you understand how much you’ll need to retire. Based on that they can tell you how much you need to save each month, and how it should be invested. If you have kids a financial planner can help make sure you are saving enough, and the best way, to pay for college. Curious about the benefits of renting vs buying, or how downsizing might impact your goals? A financial planner should help with all of these things.


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What About Robo-Advisors?

There is actually a third option in the middle of full-DIY and using an investment advisor. That option is utilizing a rob-advisor. I’m a HUGE fan of this option for most people.

A robo-advisor is a low-cost easy-to-use platform that will handle your investments for you. It removes the burden of developing a personalized investment portfolio and managing it yourself.

Of course this doesn’t come free. The biggest and most popular platforms charge .25% (yes, only a quarter of one percent) for this service. So if you believe you have fairly solid discipline and just need investment advice, this is a great option.

In Closing…

So, yes, according to the math and performance comparisons, people are better off managing their own investments. But according to consistent results of investing studies, most people don’t do the right thing – even though they know what the right thing is. That’s when a professional becomes well worth their cost.

What do you think? Do you have a financial advisor? If not, have you established your own financial plans and manage your own investments?

 

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