Should You Use a Financial Advisor
I am often asked if I use a financial advisor. Financial advisors can be very helpful. In this post I will give my thoughts on whether you should use a financial advisor.
In the investment world there are all sorts of “advisors” that go by many names. There are financial planners, retirement planners, financial advisors, investment advisors, portfolio managers, etc. These advisors come with all sorts of letters after their name to indicate they are “certified” such as Chartered Financial Planner (CFP), Chartered Financial Analyst (CFA), Chartered Financial Consultant (CFC), Chartered Investment Counselor (CIC), etc.
I don’t want to spend time describing the differences between all these certifications because in general financial advisors fall into two groups: financial planners and investment advisors. The difference between them is that a financial planner advises on all financial matters in your life from life insurance to retirement planning. Whereas, an investment advisor’s main role is to manage your financial investments. Generally these two types of advisors do not cross over into the other’s area of expertise; however, many financial firms employ people of both types so they can offer both services.
Even though I read a lot about financial planning and consider myself very knowledgeable in this area, I have employed the services of a financial planner. About six months before I retired, I hired a financial planner to review my entire financial situation. Since my wife and I do not have children this review was focused mostly on our retirement plan and long term care insurance. I did this because I wanted another opinion (other than my own) about whether our retirement plan was realistic.
I think it is a good idea for everyone to employ the services of a financial planner as early in their working lives as possible. A planner will provide an objective view of your current financial situation and can provide a detailed guide to reach your financial goals. A financial planner is especially important if you do not have the inclination to study the area of financial planning yourself.
However, I do not believe that most people need to employ an investment advisor to manage your retirement assets. As I have discussed in this previous post investment advisors take an annual fee (usually around 1%) from your portfolio balance. This fee is in addition to any management fees that the specific funds you are invested in may charge. This is a high fee for services that most people can do themselves.
If the historical data of investment advisors showed that they usually beat the market averages, then paying their fee might make sense. But several independent studies covering many years show that a majority of the time investment managers do not beat the market indexes in any given year. And the investment managers who do beat the market averages in any given year are different from year to year. So you have to ask yourself, “Why should I pay an investment manager to do no better than the market averages?”
But many people may still think that investing is too complex and they feel they don’t have time. This is a very expensive point of view to have. In reality most investment advisors are just asset allocators. That is, all they are doing with your portfolio is choosing an asset allocation based on what you tell them about your goals and their view of the current market.
If the average investment advisor does not beat the market index averages in any given year, then it makes sense that you should just invest in stock/bond index funds. And if the investment advisor’s main job is to determine your asset allocation, then you should consider doing this yourself. But it is important to educate yourself on asset allocation and portfolio management. It is not hard to do but it does require obtaining some knowledge. The reason it is important to understand asset allocation is because it is the single biggest determinant of your long term market returns, not the specific funds you choose. I talk about asset allocation in Post #11, Post #12, and Post #13.
I think it is important for most people to manage their own portfolios, because an advisor’s fee is another obstacle to reaching your financial goals. The earlier you learn to manage your own portfolio, the more you will save in fees. This savings will compound over the years and will be significant.
For people who are very wealthy using an investment advisor may make sense. This is because wealthy people have complicated tax and estate plans. In addition, wealthy people can better afford to pay the advisor’s fee as they have plenty of money to fund retirement.
Finding a fee only financial planner, however, is not easy. The reason is that this is not a good business model for retaining clients. As such most financial planning is offered as an additional service to investment management. That is, you turn over your portfolio to an investment advisor/manager (and pay their management fee) and the firm provides financial planning services in addition to managing your portfolio. Firms like this arrangement because they receive fees from your portfolio for years.
If you cannot find a fee only financial planner in your area, there is a nationwide group of fee only, hourly financial planners associated with the Garrett planning network. You can find one in your area by going to garrettplanningnetwork.com.
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