Are Financial Advisors Worth the Fee?

12088644_sI recently read an article on how to save $1 million. The answer: “Fire your financial advisor.”

As a financial advisor and the father of four young children, it got me thinking: Do I need to switch careers? And, more broadly, do financial advisors and financial planners really add so little value that clients would be better off without them?

To the author of that article, the answer was yes, but it challenged me to dig a little deeper for the real answer.

Just what is a financial advisor?

Many different kinds of professionals offer financial advice or sell financial products, so it’s important to understand what a financial advisor is. A true financial advisor should take a comprehensive, holistic view of your entire financial picture, looking at investments, tax planning, debt management, cash flow, insurance, college planning, estate planning and more.

All these elements are important to your financial life and should work together. For example, you could have an excellent investment strategy, but if you’re not saving any money it might not matter. Or, you might make mistakes in designating beneficiaries on your IRA or 401(k) accounts that could materially increase taxes for your children.

As you can see in these examples, focusing only on your investments — as an investment manager or wealth manager would do — is not taking a holistic view of your situation.

However, the financial advisory industry has not done a good job of educating consumers on the difference between a holistic financial planner whom you can trust and someone who only manages money. A recent study by Cerulli Associates found that 166,000 financial advisors self-identified as members of a financial-planning-focused practice but that only 38% of them actually provided holistic financial-planning advice.

People are wary of paying for advice

It’s not surprising, then, that people are wary of paying for professional advice. Ric Edelman, a well-known author of financial books and owner of an investment advisory firm, commissioned a study in 2014 to determine why people do not hire financial advisors. What he found is that the vast majority of individuals wanted and needed advice but did not want to pay for it.

I understand this. I’m a frugal consumer who tries to save money whenever I can. But at what point does not spending money actually end up costing you money?

For example, Vanguard released a paper in 2014 that found a financial advisor can add as much as approximately 3% of value in net portfolio returns per year through smart financial decisions. A study by Morningstar found that advice from a financial planner can add 29% more wealth through retirement. And a recent study by John Hancock Retirement Plan Services found that 70% of those who work with a financial advisor or planner are on track or ahead in saving for retirement, compared with 33% of those not working with an advisor.

How can one author state that firing your financial advisor will save you $1 million, while these studies suggest the opposite?

The reason is that many people don’t understand what a good financial advisor does. Many people think a financial advisor is a stock picker or someone who sells investment products that may or may not be in the best interests of the client. True financial advisors who uphold the fiduciary standard — putting the client’s interests first — perform a far more transparent, holistic and client-centered role.

What a true financial advisor does

Below are a few examples of how good planning in conjunction with a financial advisor can leave you with more money rather than less.

A true financial advisor can help you:

  • Stick to an investment plan to avoid panic selling and buying at market tops — moves that impact your long-term wealth much more than an advisor’s fee. Vanguard estimates that just two or three major decisions over a 30-year relationship can make up for the annual fees.
  • Track your contributions to and withdrawals from your accounts and compare them with your goals, helping you reach or exceed those targets.
  • Adjust your investment strategy to account for major life changes such as buying a house or starting a new job.
  • Determine when and how to claim Social Security benefits.
  • Maximize financial or tax aid when your children go to college.
  • Determine how much life insurance you should have.
  • Use tax planning to determine which accounts to save in during your working years and withdraw from during retirement.
  • Allocate assets across all your accounts and rebalance your portfolio regularly.
  • Maintain peace of mind about your retirement savings.
  • Buy a new or second home.
  • Minimize taxes after your death by assisting with the proper beneficiaries titled on your retirement accounts.
  • Review your tax returns to maximize your savings through tax credits and deductions.
  • Review all these items and others regularly to optimize your financial situation.

One of my favorite sayings is “penny wise, pound foolish.” I could try to draft my own estate documents or use an online tool, but are the savings worth the potential repercussions of not having my estate set up properly for my wife and four kids? Everyone pays for medical or home insurance in case of an emergency, but many don’t consider paying for financial advice, even though not making smart financial decisions can lead to a financial emergency. If you needed major surgery would you find the cheapest doctor?

How to find someone you can trust

As you review your financial situation, ask yourself if you can do better on the items previously listed than a trusted professional. If this article has persuaded you that having a financial planner’s help would be valuable, you may still wonder how to find someone you can trust.

After you make a list of potential financial planners through trusted relationships or online sources, here are some questions to ask them:

  • Are you a fiduciary?
  • Do you provide comprehensive financial planning services?
  • Are you fee-only (meaning they work for a set fee and do not earn commissions based on which investment vehicles they place you in)?
  • Are you a certified financial planner?
  • What are your fees? Fees are important, but as the studies by Vanguard and Morningstar have noted, a few important pieces of financial advice can offset many years of the fee.

If you don’t have the knowledge or time to create a well-rounded, lifelong financial plan on your own, I recommend you work with a professional financial advisor. We aren’t all as bad — or expensive — as you think.

This article was originally published on NerdWallet.com.
Copyright: auremar / 123RF Stock Photo

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