Is getting a financial advisor really worth it? While I’d love to give you a simple yes or no answer, like with many personal finance questions, the answer is it depends.
Let’s take a look at some common reasons why people say you shouldn’t have a financial advisor. After that, we’ll consider some reasons why having a financial advisor may be beneficial.
The Downsides of Having A Financial Advisor
Financial advisors often are portrayed negatively when it comes to the online personal finance community. It seems like you only hear about the bad egg advisors in the industry.
Examples include financial advisors that profit off of their clients through selling loaded mutual funds or whole life insurance to earn quick commissions. Chances are these investments probably don’t fit the needs of their clients. Luckily, not all financial advisors are bad eggs.
Another common argument against financial advisors is the fact that people don’t think they should pay someone else to manage their money. Why? It has been proven that, on average, active management doesn’t beat investing in the market as a whole.
I agree with the fact that you shouldn’t be paying for active management (I’m a passive investor myself) but I do think that financial advisors can provide value elsewhere.
The Amazing Benefits Of Having A Financial Advisor
Unless you’re in the top 1% of people that manage their own personal finances, chances are there is significant room to improve how you manage your finances. This is where I believe the value of financial advisors come in and why I think it’s OK that some people pay advisors.
Most people are completely clueless about how and when they should invest for any goal, let alone a goal as massive as retirement. Financial advisors can guide you through the process. They can show you if you’re not investing enough money and encourage you to invest more.
Yes, some advisors get paid on how much money they manage, but in general most people aren’t saving enough for retirement either so this benefits both you and your advisor in the long run.
Other common errors many people make include panic selling when the markets tank and buying at the top because it seems like the market can only go higher.
You will never know where you are in an economic cycle when you buy or sell a position and a financial advisor won’t change that. However, a financial advisor can coach you to stick with your investment plan. They’ll help you avoid panic selling when the markets enter a downturn. In fact, they can help you find the courage to continue investing through the downturn which is actually one of the best times to buy.
Your advisor may charge a 1% of total assets managed fee, but if you don’t sell when the market tanks and continue buying throughout the year, rather than at the top, you’ll get even closer to reaching that passive investing benchmark. If you didn’t have your advisor to help you, you may end up like many of the other people that under perform every year due to mental errors such as panicking.
Check The Fees Your Financial Advisor Charges
Make sure you find a competent financial advisor that isn’t trying to solely profit off of you if you decide to get one. Try to find an advisor that agrees to be bound by a fiduciary duty to you. Even after you find a solid, reputable advisor, you should still check how much you’re paying in fees.
Run your investments that you have with your new advisor through the FeeX tool to see how much you’re paying in fees. Next time you go speak with your advisor, if you see you’re invested in a product with high fees, ask if there is a reason for this and if there is a cheaper alternative that would work better for you.
Sometimes there are legitimate reasons for paying higher fees so make sure to give your advisor and opportunity to explain. However, if your advisor is one of the bad eggs described above, don’t let them continue funding their retirement with fees out of your account.