Is the Cost of a Financial Advisor Worth It?

THIS POST MAY CONTAIN AFFILIATE LINKS. PLEASE READ MY DISCLOSURE FOR MORE INFO.

 

financial advisorLast week, I took off work to have a staycation.  My wife is currently 34 weeks pregnant, so she appreciated having an extra helping hand during the day as we prepare for the arrival of our new bundle of joy.  

 

Honestly, I am not usually a huge fan of staycations.  I typically end up doing more work than I like, so it’s not as relaxing as an actual vacation.  When I go to the beach, it forces me to unwind and unplug from the rigors of work.  

 

As much as we wanted to go out of town, it didn’t work out that week.  The beach house that we wanted to stay at wasn’t available.  A couple of unexpected things also popped up with my sister-in-law, and finally, I also caught a summertime cold.  Clearly, we weren’t suppose to leave town.

 

financial advisorThankfully, the staycation turned out much better than I anticipated.  We treated it like a vacation, which meant we rented movies, went on nightly walks, and tried new restaurants.  It was wonderful.  

 

One day during that week, I also had some time to catch up with a good friend from college.  He works in the financial industry as an investment manager.  I always look forward to hearing his perspective on the market and his insights into the field of finance.

 

Since we are both finance nerds, we usually skip the small talk on family life and jump right into finances.  In anticipation of our lunch outing, I compiled a mental list of questions that I wanted to ask him.

 

Robo-Advisors

financial advisorSpecifically, I was curious to know what he thought about Robo-advisors, which are continuing to take market share.  There seems to be a constant push towards these Robo-advisors.  They are targeting millennials directly, trying to convince them that they should fork over their money to these firms instead of a traditional financial advisor.

 

My friend responded by laughing, and he said that he hoped these Robo-advisors would do well.  The look on my face must have been priceless because I was not expecting to hear his huge belly laugh.  I had assumed he would feel threatened by them, but he seemed confident that his services couldn’t be duplicated by this type of financial advisor. 

 

Investment & Financial Advice

financial advisorHe said that in his time as an investment manager, most people seeking investment advice are actually looking for financial advice.  They want to know if they are financially prepared for their future.  

 

An investment portfolio is only a portion of the total financial picture for the individuals.  Most people want help with understanding their healthcare and insurance needs, trusts, tax efficiencies, estate planning, and how much they can withdraw.

 

Psychology

power of self-talk financial advisorBut he confessed more than anything, his advice provides psychological benefits.

 

For example, Warren Buffett has said to “be fearful when others are greedy and greedy when others are fearful.”  A good advisor would explain when the market is acting irrationally and would provide sound advice as to why you should or shouldn’t buy something.

 

I have some friends who think I’m a fool for not buying Bitcoin.  They believe it is an outstanding investment that will sky rocket.  To me, their sentiment is reminiscent of the confidence many people had right before the dotcom crash and subprime mortgage crisis as well.  A great financial advisor would be able to detect a lottery ticket moment and stop you from jumping on the crazy train.

 

Portfolio Construction

financial advisor simplify financesBeyond trying to keep clients informed about their portfolio, a competent advisor sets realistic expectations along the way.  He or she should explain the construction of the portfolio and provide honest feedback.

 

One of my friend’s pet peeves is when his clients ask him if he himself invests the same way as his clients’ portfolios.  His answer is always no.  Is that a huge red flag?  At first, I thought so.

 

But he then explained.  If one of his clients has $50 million in assets but my friend only has $1 million in assets, he doesn’t find it wise to invest both portfolios the same way.  On top of that, if his client is 80 years old and he is only 35, of course, they have different financial goals.  

 

It made much more sense once my friend explained those different scenarios.  Maybe I should tweak my list of questions to ask a prospective financial advisor

 

The Value of Comprehensive Financial Advice

financial advisorHe continued to tell me that investment advice probably isn’t worth 1% to most people.  But how much is financial advice worth if you gain more of a total picture?  Most of my friend’s clients don’t want to read Boglehead forums for fun to learn the material on their own.  Instead, they choose to pay an advisor to do all the research for them and provide sound financial advice accordingly.

 

Before my conversation, I really didn’t consider how much extra my friend does as an investment manager.  I had assumed his role started and ended with investments, but he clearly does much more.

 

So readers, how much is a financial plan worth to you?  Did you differentiate between a financial plan and an investment plan before reading this?  Share your thoughts below.

Mustard Seed Money

Welcome to the website. A mustard seed is a very small seed but astonishingly grows very large over time. My hope is that through your financial journey that your small investment in time, money and faith will grow beyond anything that you could ever imagine.

44 Comments

  1. I have not met a financial planner who provides estate and trust planning as part of their standard fee. Maybe they provide advice but they frequently require an attorney to draw up papers which adds significantly to the cost.
    Financial planners suffer from a credibility gap. There have been too many cases of financial planners receiving undisclosed commissions from mutual fund companies, churning their clients’ accounts to generate transaction fees and not acting as a fiduciary. The fact that many financial planners opposed the Fiduciary Rule only makes me more suspicious.
    I only know one person who has been fully satisfied with his financial planner. He used them on a one-off, fixed fee project. He wanted them to run multiple scenarios of stock market, bond market and real-estate returns to stress test his portfolio. Even then, I don’t think he was impressed with the results. As you refer to in your post, my colleague was looking for independent confirmation that his portfolio was large enough & diversified enough to handle an immediate retirement. He had done some rudimentary spreadsheet calculation that he wanted confirmed as plausible. I told him he could have done most of the work himself for free through tools available on the internet. He could have bought software cheaper than what he paid his financial advisor and then he could run his own scenarios in the future when his retirement date was certain. However, he was looking to a) offload the work to someone else and b) confirmation of his calculations and he was willing to pay for this.
    The next time you meet with your friend, ask him these questions: How much of his revenue came from investment related fee pre-robo vs. post-robo? Are revenues at his firm up or down since the robos became well known? Are they providing more or less non-investment planning advice since the robos? Are they charging more or less for non-investment planning advice since the robos?
    To be honest, your friend sounds like he is whistling past the graveyard. All of those services he is providing can and is be provided by robo advisors and other website. Human financial planners are dead men walking. Even today, their ranks are being thinned. By the time your children retire, only the wealthiest people (top 0.5%) will need a financial plan complex enough to not be handled by a computer. Today, financial planner exist because retirement age people came of age pre-computers. Young people today prefer to use a robo vs talking to a human. The robos seeing the increased profit in reducing human staff will program the formulas and rules of thumb for insurance needs and healthcare options. They are going to squeeze the financial planners to death within a generation. Think travel agents from 20 years ago. A few human travel agents still exist but it’s a niche. The vast majority of people buy a travel package or use a website to plan their own travel.

    • Thanks as always for stopping by Dan!!! My friend deals a lot with private equity deals that I’m not sure that robo advisor have jumped into yet. He mainly deals with the 0.01% of the US wealth. So he seemed unconcerned at this point but he’s prepared like any industry that can get disrupted to pivot if need be.

  2. I am not a big fan of financial advisors. I have attempted to work with two but couldn’t stomach the fees. They charge 1-2% to invest your money and most of them have you buying these A-Share Mutual Funds. They try to get super technical and talk over your head to make you think they know something super secretive.

    My take on advisors is to only use them on an as needed basis. I would rather pay someone a one time fee of a thousand dollars than 1-2% every month.

    Also, I’m sure you friend is an honest guy or else you probably wouldn’t be friends with him. It would be interesting to have him do a guest post showing what his typical 30 something age client with kids portfolio looks like and a detailed breakdown of all fees.
    Grant @ Life Prep Couple recently posted…Stop Saying “I Don’t Have Time”My Profile

    • I’ll reach out to him and ask. Although admittedly his average clients are pretty high net worth individuals but last time we talked fees he said was pretty low compared to the high net worth industry, whatever that means.

  3. I took a one week staycation two summers ago. I found it to be better for recharging my batteries than taking a long trip. A financial planner who charges by the hour is a good option for people who are not passionate about investing and personal finance. I hope everything goes smoothly with your new baby.

  4. That’s such an interesting perspective from a financial advisor. I have heard about Robo Advisors a lot but haven’t tried it yet. My husband and I haven’t invested a lot in retirement or the stocks market, so I’ve been thinking about asking a professional. At the same time, the frugal side in me wonders if paying for a professional is really worth it or if I should just take the time to do my own research. So far, I have been paying attention to advice from other fellow bloggers and my tireless mentor – Google.

    I’m glad you had a great staycation. I also have mixed feelings about staycations since I always end up doing more housework and less work than I hope. 😉
    Ms. Frugal Asian Finance recently posted…Aug 2017 Food Expense Report – $844.26My Profile

    • I’m personally a huge fan of doing the research myself but if you really don’t have time there are some great robo advisors as well as some good/bad advisors out there. You’ll have to share what you end up doing.

  5. Probably most of the people that read this blog are financial nerds and don’t need or want a financial adviser. I’m one of those nerds. 🙂

    I do have a friend who does wealth management for high net worth ($20 million and up) clients. I suspect there is some wealth threshold where even a tiny percentage reduction in taxes or increase in returns would more than offset the management fees especially if those fees are fixed. For instance, increasing the return on $100 million by a tenth of a percent equals an additional $100,000.

    I am FIREd, but I don’t have $100 million yet 🙂 so this is all hypothetical for me.
    Mr. Freaky Frugal recently posted…Books for free!My Profile

  6. I prefer to roll my own but agree with your friend. In every case true financial and investment advice need to start with a specific question: what are your goals? There is no such thing as a one size fits all solution. That’s why I’m not a big fan of robo-advisors. They don’t ask the question.
    FullTimeFinance recently posted…My First Investment, A Mistake to Learn FromMy Profile

  7. First of all: staycations are the best. I love them.

    As for your question…I prefer to DIY. I’m decently educated, hungry for information, and absorb everything I read like a sponge. I just can’t get enough. I don’t personally think it’d be worthwhile to hire a financial advisor in our current situation. I think as we prepare to actually retire in the future and focus on that part of the journey I might change my mind. At the same time, though, I’ll just shift my reading habits to better align with what my goals are.

    I think that financial advisors are great resources for the right type of people. I don’t really consider myself one of those, though.
    Dave @ Married with Money recently posted…Personal Capital: My Favorite Net Worth, Retirement, and Cash Flow TrackerMy Profile

    • Thanks for sharing Dave!!! I definitely agree that each situation is slightly different. If you have the time and resources I definitely encourage people to learn on their own. If not, there are good/bad advisors out there so be thorough if you run down that road.

    • I’m right there with you Jeff!!! Investing isn’t that scary when you understand what you are doing. Although I do question my times when the market hits an all time high if I should pull some money of the table to cash from time to time 🙂

  8. A financial advisor’s value is pretty subjective and it really depends on the service that you need from your advisor. With any types of service, it’s best to do your research to find out the average cost for the service that you require.

    Regardless of how much you spend on your advisor, it best to protect your assets by have basic financial knowledge and be prepared to ask hard questions. Even if you hire the best financial advisor, you won’t benefit if you are not communicating your need to your advisor correctly and setting the goals that fits your personal situation.
    Leo T. Ly @ isaved5k.com recently posted…Do You Want To Be Your Own Boss?My Profile

    • Great points Leo!!! If you don’t know the right questions to ask, how can you hold your financial advisor accountable. Which is why it’s so important to understand what is going on before you hand your money over to them 🙂

  9. Hi MSM,

    I would say for most people a financial advisor probably isn’t worth it. I think I am one of the few “finance nerds” out there who do use an IFA. Why? A lot of the reasons you state above, but primarily:
    – Tax planning. He can help steer me in the best way to minimise my tax bill both now and in the future
    – Portfolio balance. He works with me to make sure that the portfolio (or portfolio’s) are doing what I want each of them to do
    – Sorted out our mortgage so we told him what we wanted, he gave us the options and we signed the relevant one – none of the hassle justifying to the banks etc. he handled all of that
    – Advice on alternative investments (that can also come with some interesting tax nuances)

    I also believe him when he says he is in it for my best interests not his own – for example he knows I run my own ISA portfolio (UK Tax free account) and has never tried to take that away from me and enjoys the healthy competition around who can get the best performance.

    For most, no it is not worth it, for me, yes it is!
    Cheers,
    FiL
    FIREin’ London recently posted…Predicting the FutureMy Profile

      • Hi MSM,

        For me it is worth it, although it also took me a while to get a good one (I went through at least 3 and interviewed far more!).
        One other additional benefit I forgot to add – its a barrier before I do something stupid 🙂 If I want to withdraw money from an account or invest something through him he gets to give it a sanity check – helps as a great barrier to making silly mistakes or flipping in and out of strategies!
        FIREin’ London recently posted…Aug ’17 Income and ExpensesMy Profile

  10. Does the staycation come with babysitting? Then, yeah, I’ll sign up for that all day long. Put my phone in a drawer and not touch it? Happy to do it!

    I thought of the investment plan as a subset of your overall financial plan if that makes sense. Your buddy raises some good points, especially the different ways people should invest depending on asset amounts and age. Obviously, they will (and should) have different goals.

    Sure, Robo Advisors will take market share, but there’s still a market for human interaction and ability to pivot. AI just isn’t there … yet,

  11. I spoke to a couple financial advisers in the past as part of a free consultation. They gave my financial picture a very macro look and offered pretty general advice. There was not much out of the box information that I didn’t know beforehand so thought to myself it may not be worth it to hire one. I wish there was a way to check how my investments would have performed if I did though, just to compare. Glad you enjoyed your staycation 🙂
    SMM recently posted…Why You Should INVEST – In Your HomeMy Profile

    • Thanks for sharing SMM!!! There are a ton of great resources out there but sometimes it takes a little bit of digging to get there. I think the best thing that I’ve done is work backwards to see if I am getting closer to my goals. If so, then it’s a success if not, then I know I’m far away 🙂

  12. Personally, I’ve gone back and forth on this one for years. Coming from a family with no PF background . . . I used an advisor as soon as I started saving . . . looking back, there was a bit of teaching that the service provided, but it would be hard to say that the advisor relationship yielded significant more money from my plan. So for the last number of years I have been going solo . . . constantly learning on my own . . . and I’ve done well (better actually) . . . that said, I do have a fee-only advisor that I have met with a couple times to get an objective evaluation of my plan(s) . . . I am a big proponent of that . . . and looking forward to retirement . . . I expect that is a time where I would rely on the expertise of an advisor . . .

    Great post. @TeacherInvestor

    • Thanks for sharing Teacher Investor!!! I definitely agree if you have questions early and can find someone to help teach you that it’s well worth the cost if you derive the benefits of your goals. If not, it can be overwhelming to jump into the market without knowing what you are doing 🙂

  13. Most of the advice you might receive from a financial advisor can be self-sourced…but that doesn’t mean it will be. It feels like a robo-advisor has a place, and a fee-only CFP (who must study estate planning and other stuff a robo-advisor doesn’t cover) does too. I’m not as sure about the “advisors” charging 1-2% – they may provide less service than a robo-advisor, and they can end up costing way more than a fee-only CFP.

    Rock on for the staycation – if you religiously defend that it is indeed a vacation and act accordingly, it can be pretty fun!
    Paul recently posted…Back In the SaddleMy Profile

    • I tend to agree with you Paul that there is a time and place for both. In the future that might change but I think people like the face to face contact and the reassurance that comes from someone telling them that they are doing well with the investment portfolio.

  14. I have considered going to a financial advisor so I could listen from a professional on what I need to with my financial outlook. But with the use of robo-advising a few of my investment accounts, researching online and reading from our fellow PF bloggers I believe that I am okay on my own. Once you know what your financial goals are you should have a good idea what you need to do(how much to contribute, open retirement accounts,etc.).
    Kris recently posted…I Need to Open a 529 Account, Right?My Profile

    • I think that’s exactly right. Once you have figured out what your goals are, that it makes it that much easier and I’m definitely a big fan of doing your own research and learning on your own 🙂

  15. I suspect like a lot of the people who have personal experience with a financial advisor, there are good experiences and not so good experiences. For me, I consulted a wealth management advisor a number of years ago who came recommended from a friend. This was a one time consultation fee for about an hour. I had already provided him with all my info about what I was doing, where my investments were at, what my goals were, etc. At the end of our meeting, I came out no further ahead than I was… he basically said “keep up the good work”. So for $300, I pretty much wasted my time and money.

    My wife also has a portfolio that is under management by an advisor. Over the last year he has made 0 trades in her account, so I really don’t know what we are paying a 1% management fee for. He’s not worth the money he is paid.

    I like the idea of a robo advisor for those who don’t want to do all the research themselves or have a financial advisor, but I am uncertain how they will perform in a market downturn. To my knowledge robo advisors are untested in a market downturn or recession.

  16. I was a Financial Advisor at Edward Jones for six years, and here are some thoughts:

    -Whether or not the service is worth it is up to each person to decide. I -LOVE- doing research. 95% of my clients did not and would not do that research, and wanted someone who they could see in person and make a relationship to do it for them, help them decide, and then support them on an ongoing basis. It was very worth it to them.
    -The vast majority of FAs I knew were ethical, and my firm was outstandingly ethical. I can’t speak for others, but unfortunately the horror stories are the ones most loudly spoken and passed around. And yes, the turds exist (like in every other occupation).
    -Robo Advisors seem fine for people who want a little advice, but I think they serve a niche market between DIYers and people who want a relationship. For instance, I love my chiropractor. If he moved 50 miles away, I’d likely keep seeing him due to the relationship. Some advisors do just that, and most clients will stay with them.
    -I thought I “knew everything” about investing before becoming an FA. I was very, very wrong :). When I look at the (weak) financial advice and info passed around online I often shake my head and chuckle because that would have been me had I not advised. You don’t know what you don’t know! (and I still don’t know a lot in the world – but investing is one of the few things I do)
    -During the 2008 crash I fought hard to keep my clients from making knee jerk reactions and selling investments. Most listened. The ones that did listen are likely in excellent shape. That’s where a lot of the value comes in.
    -I find most people who are vehemently against FAs have never actually experienced one themselves. A bit like chiropractors. Again, you don’t know what you don’t know!

    I’m happy to discuss (not argue) this further or answer questions. It’s always interesting to Listen, Think, and then Talk with others about different viewpoints!

    • I feel like I know a lot about investing and the stock market but I feel like there is always something new to be learned and by no means would consider myself an expert. I think there is definitely a role in society for financial advisors that provide value. I think that robo advisors are going to help weed out some of the “turds” as they won’t be nearly as able to attract people that are ill informed.

  17. Not a big fan and have not had great experiences in the past. Yes they probably like helping people, but at the end of the day, they are their to make money too. On paper things sound great, but in reality it usually isn’t.

    Example: Back when I know basically nothing about personal finance, I knew it was a good idea to invest but didn’t know where to start. Spoke with a financial advisor and they recommended a Roth IRA. Solid advice absolutely. Then they said they could get me into one. Ok what do I have to lose right? They put me into one where the mutual fund had a 5% load fee and higher than average expense/ management fees. So every time I was putting money in, I was starting behind and just kept going down. One month of that was all it took to take personal finance into my own hands for good. Become quite knowledgeable since then and found it to be a passion of mine.

    So even if they know more than you, it is still important to do your own research. Can’t trust them all 100% which is sad to say the industry has gotten that way. I know they aren’t all like that. But like Warren Buffet said, just put your money into a low expense S&P500 fund and you will be fine long term if you don’t know how to invest. Don’t need to pay an advisor to tell you that.
    Dividend Daze recently posted…Dividend Update – August 2017My Profile

    • I’m really sorry to hear your experience was so poor. I feel like with any industry there are some bad eggs but it especially feels true in the financial industry. Seems like there are few and far between good people unfortunately.

  18. Great post, I am definitely in the camp of pro-advisor. Ia m great at what I do on a daily basis, but put a lot of my financial stress on the advisor to figure out – re-balancing, tax harvesting, making sure my beneficiaries are correct and updated etc etc.

    I am happy to pay for great service and will continue to do so. If I am hitting my goals, at or before the deadline, it doesn’t really bother me that I have to spend a few dollars for the peace of mind.
    Church recently posted…Investment Risk: When You Think You Know, You Don’tMy Profile

    • Thanks for sharing Church!!! There are definitely things people are willing to pay for and not pay for. If it helps you sleep at night and take off your burden it sounds like a great expense for you 🙂

  19. This is an incredibly interesting conversation. I think one thing that is largely missing from the discussion is that a really good financial advisor will also help you really pinpoint and quantify your financial goals and help guide the behavioral aspect as well as the financial aspect.

    That being said, if I were to hire a financial advisor, they would need to be fee-only and on a retainer basis and provide comprehensive financial advice well beyond just investments.

Leave a Reply

Your email address will not be published. Required fields are marked *

CommentLuv badge