Are Financial Advisors Worth It?

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Editor’s note: This story comes from Wellthramp.

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To know whether you’re getting your money’s worth from your financial advisor, the first thing you need to know is how much money you’re actually paying your advisor — and rest assured that you’re paying.

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I took a walk to the beach on the Cape last Sunday with some friends here, where I live. We were talking about how COVID-19 has added to the economic stress of the people. A friend of mine commented, “What I love about my financial advisor is that he’s a fiduciary,” and then added, “I don’t have to pay him anything for his ongoing advice.” She said her advice is “free”.

I again asked how he gets paid. He told me that the mutual fund he recommends is paying him. When she invests she gets commission. She said she’s “okay with that arrangement because she has so many investments to choose from.” I asked him who is paying the fees for the fund compensating the advisor?

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He didn’t connect those points. He never realized that those management fees and embedded expenses were actually coming out of his pocket.

Many people are like my friends. As long as they don’t know or see the fees, they are good to go. With today’s stock market volatility and underlying economic uncertainty, it may be more important to consider your financial advisor’s business model now and question whether it really suits your interests.

Then consider whether your advisor is a sales representative, which qualifies him or her to provide comprehensive financial advice?

It matters how a financial advisor makes money. Here’s a look at common models, and how you know if your advisor is worth the money.

commission based financial advisor
clever sellerPathDoc /

Some advisors, like my friend, get paid commissions or have a revenue-sharing arrangement to sell certain funds or annuities. This means that given two investments where a fund may perform better, have lower fees, and be more appropriate for your situation, the broker is paid more by recommending a more expensive, less suitable option. can go.

Ultimately you are paying for all of these fee arrangements. But when you ask, you’re likely to get a less-than-transparent answer. This is because these advisors are not legally held to the fiduciary standard.

Even as mandated by the Securities and Exchange Commission to ensure that brokers act in your best interest and abide by their “best interest rule,” they still need to break down and pay every fee you pay. does not need to be disclosed. Sometimes, the brokers or insurance agents themselves do not know the internal fee structures.

fee based financial advisor
investment advicewavebreakmedia/

Other financial advisors are labeled “fee-based,” which means they get paid in one of two ways: You can pay them a fee for their advice, but they don’t pay for the investments, insurance or insurance you sell. You can also get commission from annuity.

Fee Only Financial Advisors
financial advisorpotstock/

There is only one fee model which is really reliable. “Fees-only” advisors must be 100% transparent because they are held to a fiduciary standard by regulators.

Fee-only means that they are paid only by you and not by commission from an investment firm or insurance company. They may work for you on retainer, by the hour, or they may base their fee for you on a percentage of the assets they manage.

Overall advisor fees should generally not exceed the equivalent of 1% of the total assets that you ask them to view. Fee negotiation is a conversation you will have with a fee-only advisor at the beginning of your relationship, and ask you to walk through every fee and expense when you decide to engage.

What is your financial advisor actually doing for you?
worried senior manAJP /

This is the first question I ask any financial advisor as it helps you understand the value proposition. Getting a complete picture of what you’ll get and how much that advice will cost means you have the facts you need to evaluate a cost-benefit relationship.

A recent report by financial research firm Cerulli found that 77% of investors believe their advisors are worth the cost. Trustworthiness, dedicated relationships and personalized advice are the main drivers of investors’ satisfaction with their advisors.

Even though you may pay practically nothing to work with a “robo advisor” that provides computer-generated investment advice, about 66% of the investors surveyed use the latest technology tools rather than humans. like to chat with.

An excellent financial advisor offers more than just investment selection. Vanguard is studying the added value that a financial advisor can provide over 15 years, and has concluded that advisors adhering to certain standards can add on average about 3% per year to investment returns.

This “advisor alpha” is not just because they choose better investments, but also because of the additional support they can provide – such as investment allocation strategy, tax efficiencies, clearance advice, and behavioral coaching to ensure that You don’t get panic and make short-term financial decisions that can jeopardize your long-term goals.

A good mentor prevents you from making costly mistakes that can add up over time. A study by Dalbar, an investment-research firm, found that those who invest on their own perform more than 3% worse than the market. This is not because of the investments they choose, but because they jump in and out of the market at the wrong time.

For example, in 2018, the S&P 500 index lost 4.38%, but the average investor actually lost 9.42%, as investors reacted with fear, according to a Dalbar study.

How to find out what your advisor is worth
woman meeting with financial advisorMonkey Business Image /

At the end of the day, to assess the value of a financial advisor, you need to consider the performance of:

Are you getting the return that the market is giving? Are you investing in a tax-efficient manner? What are your total returns after fees and taxes? Do you sleep better at night because you’re not investing all your money?

In addition to choosing investments, a competent financial advisor or planner can also help you step back and determine your financial priorities.

You can collaborate with your advisor on money decisions as they come – big or small. You may need help figuring out how to save for retirement and your kids’ college, or wonder if you can buy a new home or help out your aging parents.

Your advisor can also help you reduce the risk of running out of money in retirement and make a plan to leave an inheritance. These are complex decisions that come from an ongoing, trusted relationship versus one based on the transactions you make.

The decision to hire a financial advisor is important and comes with consequences. Like money, good advice compound over the years.

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