Financial services is a robust industry, and financial advisors are a big part of it. But despite the industry’s prevalence, you might wonder if it’s really worth paying someone to manage your money.
As with many questions, the answer to this one depends on your individual circumstances. Thus, in this article, we will go over the things to consider when deciding if you need a certified financial advisor (CFA).
In many cases, paying someone to do something for you (like fixing a broken washing machine) can be well worth the cost. But due to recent innovations, it’s less clear whether paying someone to manage your money is worth it.
But is it right for you? Let’s find out.
Who Needs a Financial Advisor?
Short answer: not everyone.
But that doesn’t mean financial advisors can’t still be useful in many cases. Start by asking yourself the very obvious question: “Am I having trouble managing my money?”
For some of us, that may not be the case. Someone whose finances are simple and invests in an index fund or two may have no need for such guidance.
There is also the issue of discipline – or a lack thereof. Some investors have no trouble selecting a few long-term investments and leaving their money to grow.
For most people, though, our emotions end up getting the best of us when we notice our portfolios losing value. Unfortunately, making decisions based on these short-term drops is rarely, if ever, a good decision.
Studies have shown that these unnecessary changes to your portfolio usually lead to a long-term decline in returns. For instance, Vanguard showed that investors who made even one exchange over a five-year period trailed Vanguard’s target-date funds by 150 basis points (equal to 1.5%).
1.5% may not sound like very much, but it can add up to many thousands of dollars in the long run, in part thanks to compounding interest. Plus, the time period observed was just five years. Things would look even worse if you made these changes over the course of your career.
One way advisors can help is by acting as a financial coach. He or she can help you to not only formulate a strategy for success and find you recession proof stocks, but also help ensure you stay the course and not let your emotions get in the way.
Many of us need this kind of assistance, and there is absolutely no shame in it.
In addition, a financial advisor may be necessary due to a major life event or any other scenario where your money suddenly becomes more complicated.
How Much Do Financial Advisors Charge?
Every financial advisor is different, and they all have different rates. That being said, the two primary ways CFAs charge for their services is:
- By the hour – Hourly rates vary, but they tend to go up to two to three hundred dollars per hour.
- Percentage of your portfolio – Typically around 1% of your assets; may be higher or lower.
- Set annual fee – You can expect to pay a few thousand dollars per year to work with an advisor on an ongoing basis.
In addition to the fee structure your financial advisor might charge, there is another important way costs are determined, and that is how the advisor charges you:
- Fee-only – Many investors prefer fee-only advisors because there is no commission and thus no incentive to sell you costly financial products. Typically, with this arrangement, the fee will be a percentage of assets under management.
- Commission-based – Commission-based financial advisors are a little more complicated. Clients typically pay the advisor a fee, and the advisor may also receive a commission from a third party for selling financial products such as life insurance or other up-sells.
As the investor, it’s always a good idea to consider all alternatives, but fee-only advisors are usually a good starting point.
Fee-only advisors may have requirements that preclude certain investors from using their services such as a minimum investment. If that is the case, it may be a good idea to “shop around” a bit before fully committing.
Whatever you ultimately choose, having some guidance with managing your money will likely put you on the path to financial success.
Will My Advisor Keep My Best Interest in Mind?
You may have heard the term fiduciary before – a slightly funny-sounding work – but weren’t sure what it meant. Well, if you are concerned about your financial advisor keeping your best interest in mind (and that they won’t inundate you with sales pitches), a fiduciary is probably what you want.
In the context of financial advisors, a fiduciary has a legal obligation to act in your best interest. This helps eliminate conflicts of interest.
On the other hand, there is the idea of suitability. This means the investment should be “suitable.” But this is kind of a funny term that may not mean what you think it means.
Investments need not be in the best interest of the investor to meet the suitability standard. They may even be a conflict of interest.
In these cases, the financial advisor could steer you to investments that would lead to the advisor earning more, but won’t necessarily be best for you, the investor.
Due to the critical difference between fiduciary duty and suitability, it would be a good idea to ask a potential financial advisor if he or she follows one of these standards before committing.
An Alternative – Using a Robo-Advisor
While working with a real, human advisor can be beneficial for many of us, we don’t all need that level of guidance. Some of us just need a simple solution we can trust that we know will reliably grow our investments.
A robo-advisor can do just that, and the fees are lower than a CFA would charge. Robo-advisors are algorithm-driven investment with little to no human intervention. This explains how they are able to charge less than a human advisor.
One popular robo-advisor many people use is Betterment. When you sign up for Betterment, you are asked to fill out an initial questionnaire. Once that is done, your investments can be entirely automated if you schedule transfers into your portfolio, for example, every time you get paid. This Betterment review will help you decide if this is the route you should take.
Using a robo-advisor greatly simplifies the process and allows you to grow your money with almost no effort on your part.
Benefits of Financial Advisors
Whether you decide to hire a real, human advisor, or to leave things up to the likes of a robot, robo-advisors have several advantages:
- Consistent, expertise-driven decision making. Let’s face it, none of us is an expert at everything. Sure, there is a good bit of finance blogs with information available online these days, but that isn’t a substitute for managing investments for a living. Plus, a financial advisor is not going to make impulsive, emotional decisions that so many of us may be prone to.
- Having a plan. It may seem obvious, but an advisor (particularly a human one) will help you develop a financial plan. Many people tend to “just wing it” when it comes to their finances – and you may be able to get away with that if your finances are overly simple. But if there is any level of complexity to your finances, having a game plan will make you much more likely to succeed.
- Having a coach. No one is perfect. If you are prone to pulling all of your money out of the stock market due to a 10% drop, a financial advisor can help keep you on track. Sometimes we just need someone to talk to when the going gets tough.
Is a Financial Advisor Right For You?
Financial advisors aren’t right for everyone. Those with overly simple finances or particularly enjoy managing their own money may not benefit from an advisor.
However, these groups do not represent the majority of the population. Most could benefit from some level of guidance with their investments.
And that is one thing an advisor can provide: guidance. They can help you formulate a plan, keep you on track, and help you make good decisions with your investments.
If you do consider hiring a financial advisor, be sure to ask the right questions. Does she or he have a fiduciary duty? What is their fee structure? And so on.
Lastly, if you want guidance with your investments but don’t feel the need for a human advisor, you could consider a robo-advisor like Betterment.
Whatever you decide, be sure to take action sooner rather than later. The sooner you get your investments in order, the greater the long-term benefit will be.