Is it worth paying a financial advisor to manage retirement funds if you are confident in your own financial investment strategies? I feel I have a good understanding of long-term investment strategies. And as such, I believe that the approximately 1% of assets under management I would pay for outside advice would exceed the profits I could see. It’s true that it’s important to get outside opinions to compare investment best practices, but Warren Buffett’s famous investment bet — in which he pitted a low-cost index fund against an actively managed portfolio of hedge funds — makes me leery I owe the trust of any professional. investor.
-Mike
You are absolutely right to ask this question. If you’re comfortable investing on your own, what’s the point of working with a financial advisor whose 1% fee on assets under management could erode your investment returns?
I reached out to a network of advisors for their thoughts on this question. They were quick to emphasize that the services a financial advisor can provide can justify the costs. But many of them also suggested that clients consider whether 1% for simple wealth management is worth the fee.
“Managing investments is (or should be) just 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 pay too much.”
This way you can determine whether it makes sense for you to work with a financial advisor.
(Note: The advisors quoted in this article speak only for themselves. Your own experience may vary, and not everyone will find working with an advisor worth the cost, depending on their situation.)
You are right to charge 1% for Just Investment Management
Ask an advisor: I have a “solid understanding” of investment strategies. Why do I have to pay 1% to a financial advisor?
The 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 just to manage a diversified indexed portfolio if you are a seasoned investor – without additional services like financial planning and taxes – would most likely not be worth the fee,” says Brian Schmehil, certified financial planner and managing director of asset management at The Mather Group.
He adds that this is “unless the advisor uses tax loss harvesting, direct indexing and asset class location.”
The many services that (can) justify the compensation
Ask an advisor: I have a “solid understanding” of investment strategies. Why do I have to pay 1% to a financial advisor?
However, if you’re looking for more holistic financial planning services, want to manage taxes, donations and other aspects of your financial plan, or are struggling to keep your emotions in check during times of market volatility, your calculus may change. Clients may find that 1% fee worth it, depending on their specific situation and the advisor’s services. This is what an advisor can offer you.
If you’re ready to be matched with local advisors who can help you achieve your financial goals, get started now.
Rest during periods of volatility
Even confident investors panic or deviate from their financial plan.
Investors who divest from 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 components,” says Anna Sergunina, certified financial planner, president and CEO of MainStreet Financial Planning.
Structure and coordination
A financial advisor can act as the quarterback of your financial team. They can coordinate tax planning strategies with accountants, monitor estate planning strategies with attorneys, and help update risk management products in collaboration with various insurance professionals and retirement specialists.
“We help clients decide Social Security strategy (and) how to structure Medicare,” said Crystal J. Cox, senior vice president at Wealthspire Advisors. “There is literally so much we do outside of investing.”
Tax-conscious 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.
“One of my clients was very surprised to learn the income tax impact of investing in a target-date retirement fund in a taxable account,” says Tammy R. Wener, certified financial planner with RW Financial Planning LLC. “Given when they bought the fund, the capital gains distributions and the client’s income tax bracket, it was an expensive lesson.”
Experience
A financial advisor with a calm “been there, done that” attitude can be worth the price when the markets get rough.
“There’s also no substitute for experience,” says Kenneth B. Waltzer, certified financial planner, co-founder and principal of KCS Wealth Advisory. “Research has shown that younger investment professionals fared worse than older ones during the global financial crisis, largely because they have not yet experienced a serious bear market.”
Use this free tool to match with up to three fiduciary financial advisors.
A second opinion
“It’s important to have an objective second opinion on your portfolio in terms of diversification, risk and tax management,” 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 complete financial picture can provide valuable insight and objectivity to even the best investors.”
A second opinion can also help break ties over financial disagreements between spouses. Or it can ensure that the preferences of a less money-secure spouse are on equal footing in a relationship.
In short
Advisors are quick to point out the services they can provide in addition to investment management. But some also note that 1% is a high fee for services that don’t go beyond investment tips. However, if you’re looking for advice, coordination, and a way to combat hasty investment decisions, a financial advisor may be worth the cost.
Tips for investing and retirement planning
If you have questions specifically related to your investment and pension situation, a financial advisor can help you. Finding a financial advisor does not have to be difficult. SmartAsset’s free tool matches you with up to three vetted financial advisors serving your area, and you can interview your advisors 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, get started now.
When planning your income after retirement, keep Social Security in mind. Use SmartAsset’s Social Security Calculator to get an idea of what your benefits might look like in retirement.
Susannah Snider, CFP® is a SmartAsset financial planning columnist answering reader questions on personal finance topics. Do you have a question that you would like answered? Email AskAnAdvisor@smartasset.com and your question may be answered in a future column.
Please note that Susannah is not a participant in the SmartAdvisor Match platform and is an employee of SmartAsset.
The post Ask an Advisor: I Have a ‘Solid Understanding’ of Investment Strategies. So why should I pay 1% to a financial advisor? appeared first on SmartAsset Blog.
