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 a million-dollar betthat 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 its 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.
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Here is portfolio diversification in action
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 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 thatinvestORreturns laginvestMENTreturns 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 the 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. Financial planners tend to charge 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 in 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.
I strongly recommend working with a fee-only CERTIFIED FINANCIAL PLANNER™ professional. This type of advisor gets no sales commissions so recommendations will be unbiased and in your best interest.
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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…
Yes, according to 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?
If you’ve made it this far and think you might be better off working with a financial planner, just click Start Here to schedule a complimentary call to help determine if it makes sense for YOU.
Happy planning!
My wife is looking to get her retirement funds out of managed investments. Betterment might be a good option for her. I’ll definitely check out your review!
It’s certainly worth looking into Gary. I helped someone recently look up the costs of their managed mutual funds and found they were paying 1.75% annually. And that’s without any financial planning or fiduciary advice. Need to find a good balance of cost/value.
Investing for your future is a very personal thing and the end results can be devastating if not done correctly. DYI may work for the minority but having an objective professional may result in reaching your personal goals. Rate of return is normally not a personal goal yet, it’s what so many folks love to talk about in discussions, normally the folks that are actually doing nothing though.
Self diagnosis can be fatal so communicating your goals and objectives to a financial planner and working as a team still may net the best long term results. Even if the returns look better by doing it yourself, it’s proven when it time to retire the DYI usually regret their decisions when it’s time to actually use the money.
Yeah Boris, that Behavior Gap impacts the majority of people. Most are better of letting an advisor – “robo” or not – handle their investments.
A balanced post on this issue, and I think you nailed it with the behavior bias. That’s probably key. Other benefits could include tax and estate planning and insurance needs.
I too like robo advisers but watch out for their shiny objects! I’ve just done a post criticizing some of their new additions.
Thanks AoF. Tax, estate, and insurance planning would definitely be beneficial from a Financial Planner. I think only a small percentage of Financial Advisors (who are really mostly Investment Advisors) do that. If paying for Advisor fees though, regardless of their title, I’d look for those benefits for sure.
I just checked out your most recent post and it’s a great write-up of those new Betterment features. Thankfully it doesn’t detract from their core value. People should just stick with the initial basics that Betterment has been known for and not try to get too fancy.
Great nuanced answer, Brad. I feel like people tend to come down too firmly in one camp or the other. I have decided that a financial advisor isn’t worth it for me at this point in time, but it makes sense for my parents who are dealing with planning at the withdrawal phase. Sometimes it makes sense, sometimes it doesn’t.
Thanks Matt!
I can see how some people might need a financial advisor, but it’s not for me. Maybe the fact I’m somewhat a numbers and math geek has something to do with it.
Yeah, it’s not for everyone. The financial planning services would benefit most people, and be cost-justified, but still some people like yourself can do fine on their own.
Well for me, it’s absolutely YES. It helps me in my decision making.
Cool JB. It sounds like you have more of a true holistic financial advisor and not just an investment advisor. That’s great.