Is it worth paying a financial advisor to manage retirement funds if you are confident in your own financial investment strategies? I feel like I have a solid understanding of long-term investment strategies. And as such, I think the roughly 1% of assets under management I would pay for any outside advice would outweigh any gains I could see. Sure, it’s important to get outside opinions to compare best practices with investing, but Warren Buffett’s famous investment bet – in which he pitted a low-cost index fund against an actively managed hedge fund portfolio – makes me doubt to trust any professional investor.
-Mike
You are absolutely right to ask this question. If you feel comfortable investing on your own, what’s the point of working with a financial advisor whose 1% fee assets under management could cut into your return on investment?
I contacted a network of advisors for their advice on this issue. They were quick to point out that the services of a financial advisor can provide can justify the cost. But many also suggested clients wonder if 1% for simple investment management is worth the fee.
“Investment management is (or should be) only a small part of what financial advisors do for their clients,” says George Gagliardi, financial advisor at Coromandel Wealth Management. “If your advisor only manages your assets and charges 1%, find another advisor. You are paying too much.”
Here’s how to determine if it makes sense for you to work with a financial advisor.
(Note: The advisors listed in this article speak for themselves only. Your own experience may vary, and not everyone will find working with an advisor worthwhile, depending on their situation.)
You are right to ask the question 1% for Just Investment Management
Advisors we spoke to generally agreed that paying 1% doesn’t make sense if you’re only getting basic investment management services.
“Hiring a financial advisor to only manage a diversified index portfolio when you’re a seasoned investor — without any additional services like financial planning and tax — probably wouldn’t be worth the expense,” says Brian Schmehil, Certified Financial Planner and Managing Director. of wealth management at The Mather Group.
He adds that it is “unless the counselor uses tax-loss harvest, direct indexing and location of the asset class.”
The many services that (could) justify the fee
However, if you are looking for more holistic financial planning services, want to manage taxes, donations, and other aspects of your financial plan, or find it difficult to control your emotions during volatile market times, your math may change. Clients may find the 1% fee worth it, depending on their particular situation and the advisor’s services. Here’s what an advisor can offer.
Quiet during periods of volatility
Even confident investors panic or deviate from their financial plan.
Investors who unload their investments during a bear market or who invest too conservatively for their time horizon may miss out on valuable returns.
“A financial advisor helps investors stick to strategy and make decisions without emotional elements,” says Anna Sergunina, Certified Financial Planner, President and CEO of MainStreet Financial Planning.
Structuring and coordination
A financial advisor can act as your financial team’s quarterback. They can coordinate tax planning strategies with accountantskeep an eye on estate planning strategies with attorneys and help update risk management products in coordination with various insurance professionals and retirement specialists.
“We help clients decide on Social Security strategy (and) how to structure Medicare,” says Crystal J. Cox, senior vice president at Wealthspire Advisors. “There are literally so many things we do outside of investing.”
Tax-Driven Investment Decisions
Investing wisely goes beyond deciding which mutual fund meets your financial needs.
A financial advisor can help you identify more tax-efficient ways to invest, donate and manage investment losses.
“A client of mine was very surprised to learn of the tax impact of investing in a target date retirement fund in a taxable account,” says Tammy R. Wener, Certified Financial Planner at RW Financial Planning LLC. “Given when they bought the fund, the capital gains distributions and the client’s tax bracket, it was an expensive lesson.”
Live
A financial advisor with a calm “been there, done that” attitude can be worthwhile when the markets get tough.
“There’s also no substitute for experience,” says Kenneth B. Waltzer, Certified Financial Planner, Co-Founder and Managing Director of KCS Wealth Advisory. “Studies have shown that younger investment professionals fared worse during the global financial crisis than older ones, primarily because they had not yet gone through a severe bear market.”
A second opinion
“Having an objective second opinion of your portfolio in terms of diversification, risk management and taxation is important,” says Lisa AK Kirchenbauer, Certified Financial Planner, Founder and President of Omega Wealth Management. “We all have blind spots, and those of us who look at a client’s entire financial picture can provide valuable insight and objectivity to even the best investors.”
A second opinion can also help sever ties in the event of financial disagreements between spouses. Or it may allow the preferences of a less secure spouse to have an equal footing in a relationship.
Conclusion
Advisors are quick to point out the services they can offer beyond investment management. But many also note that 1% is a steep fee to pay for services that don’t go beyond investment advice. If you’re looking for guidance, coordination, and a way to thwart impulsive investing decisions, however, a Financial Advisor may be worth the cost.
Investment and retirement planning advice
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If you have questions specific to your investment and retirement situation, a a financial advisor can help you. Finding a financial advisor doesn’t have to be difficult. SmartAsset’s free tool connects you with up to three approved financial advisors who serve your area, and you can interview your advisor for free to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, start now.
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When planning retirement income, keep an eye on Social Security. Use The SmartAsset Social Security Calculator to get an idea of what your retirement benefits might look like.
Susannah Snider, CFP® is SmartAsset’s financial planning columnist and answers readers’ questions on personal finance topics. Do you have a question you would like answered? Email [email protected] and your question might be answered in a future column.
Please note that Susannah does not participate in the SmartAdvisor Match platform and is an employee of SmartAsset.
Photo credit: ©Jen Barker Worley, ©iStock.com/fizkes, ©iStock.com/Courtney Hale
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