Can you put a value on professional investment advice? In episode 322 of the Dough Roller Money Podcast, we speak with a researcher who did just that. Find out if an investment advisor is worth your money.
With the advent of low-cost index funds, the case for hiring an expensive investment advisor has grown considerably weaker in recent years. As technological advances have given way to robo advisors (such as Betterment and Wealthfront, just to name a few), it’s become harder and harder to justify the cost involved with a one-on-one financial advisor.
Of course, the value that an investment advisor brings to the table for you is truly personal. For some investors, this price tag isn’t justified; between their own knowledge and the automated tools available to them, they’re capable of managing their portfolio. For others, though, an advisor might be the guidance, advice, and peace of mind that’s needed to plan for the future.
What Is An Investment Advisor?
An investment advisor, as the name suggests, is someone who is paid to advise you on your investment strategy. They are able to evaluate your current investments, make recommendations for your portfolio, and in some cases, may even be able to facilitate new transactions on your behalf.
Many investment advisors will analyze not just your investments, but your overall financial plan. By doing so, they are able to gauge how your actions today will affect your future goals–such as retirement–and how you can better strategize.
In turn, they may offer suggestions for how you can get out of debt, restructure your tax plan, build and establish an emergency fund, or even refinance loans like your mortgage or student debt. Of course, developing a secure retirement strategy and building a strong investment portfolio are part of this process.
The title “investment advisor” can actually refer to a number of different professionals, including:
- Registered Investment Advisors (RIAs)
- Fee-only fiduciaries (such as CFPs)
- Wealth managers
Additionally, you may want to lump robo advisors into this category, too.
What You Should Expect to Pay for an Advisor
Different financial advisors have different fee structures, which can run the gamut from “free” to over 2% of your assets under management (AUM). And while the difference between nothing and 2% doesn’t sound like a whole lot, it could mean the difference of hundreds of thousands of dollars in your portfolio’s growth.
The average financial advisor charges about 1% of AUM for their advisory services. If you have a portfolio of $1 million, this means that you’ll pay around $10,000 for your financial advisor’s assistance and advice.
However, there are a few things to keep in mind about this number:
- There are many personal financial advisors that charge well above 1%, especially if you have a smaller portfolio.
- This fee does not include the fees involved with your actual investments, like expense ratios on your funds.
- This fee typically doesn’t include additional management costs, such as transaction fees.
Alternatives to Investment Advisors
If you want the most affordable option but cannot manage your portfolio entirely alone, a robo advisor is a great solution.
These platforms offer investors a “set it and forget it” option; simply indicate your preferences and risk tolerance, contribute funds regularly, and let your robo advisor do all of the work. Robo advisors can often be found for free or at a low cost (such as the 0.25% charged by Acorns once you invest $5,000+), plus the expenses incurred by the funds themselves.
Not ready for a DIY approach, like a robo advisor, but don’t want to shell out for an in-person financial advisor? Consider an online advisor platform like Personal Capital instead. These in-between options give you the best of both worlds, while helping you also avoid the high cost that can come with many personal financial advisors.
Of course, you could always DIY your investments and manage them yourself. While this would save you all advisor fees–no matter how small they may be–it’s important to attempt this path with caution. Do a poor job and you may wind up costing yourself a lot more than the 0.25% that robo advisor would have charged.
What Can an Investment Advisor Do For You?
Hiring the right investment advisor is an added expense, sure. However, when you consider the value that they can bring to your financial plan–and your retirement portfolio–it’s easy to see why so many people are able to justify the cost.
We spoke with Vanguard in episode 322 of the Dough Roller podcast (located at the bottom of this article), about a study that the investment giant released on the perceived value of investment advice. In this study (which you can read here), Vanguard breaks down exactly how investors view the price tag of their financial advisors… and whether this was a worthwhile expense each year.
In the podcast, Vanguard talked to us about some of the more common issues that investors may face, especially when choosing to tackle investing on their own. These involve seemingly simple problems–such as investors not knowing how much cash to hold onto versus what to park in funds–that can wind up costing them a fortune over time.
The Value of Advice
Perhaps the key takeaway of the study, though, was the value of financial advice as viewed by investors. While it’s hard to put a dollar sign on something like this for study purposes, the emotional value was shockingly high among respondents.
For the majority of investors who participated in the study, the “pillar of emotional well-being” was indicated to be the most important factor when determining advisory value. This pillar of well-being includes the investors’:
- Sense of accomplishment for creating a comprehensive and clear plan for their future
- Sense of fulfillment after decluttering their financial approach to create something organized and (somewhat) predictable
- Peace of mind, which comes from delegation of these high-stress investment tasks
This emotional well-being was reported high even among those with complex investment strategies and financial plans. It would seem, then, that pushing the obligation and complexity of an investment strategy onto someone else was enough to significantly boost satisfaction among investors… even if the portfolio itself didn’t see any changes.
Pros and Cons of Hiring an Investment Advisor
As we have already mentioned, there is a notable discrepancy in price between the different financial advice you may choose to receive. Beyond that, though, there are a few reasons that a true investment advisor may — or may not — be the right decision for you.
- A financial advisor can keep you on track: They may be able to help you stay the path, even during times of economic downturn. Since market dips are not a question of if (but rather, when), it can be difficult to stay calm when they happen. Rather than panicking and making a financial mistake, the right investment advisor can offer recommendations and encouragement to stick it out.
- They can educate you: Whether you’re just learning the difference between a 401(k) and an IRA, or have been diversifying your portfolio for years, odds are that there’s plenty you don’t know. A seasoned investment advisor can both guide and teach you along the way.
- Rebalancing won’t be forgotten: If you’re managing your own portfolio (and not using a robo advisor with automatic rebalancing), it can be easy to forget this important, must-do portfolio adjustment as time goes on. Your investment advisor will not only remind you that it’s time to rebalance, but also facilitate the process.
- They can help with things like taxes: There are some robo advisors that don’t offer tax loss harvesting, which can reduce your tax bill based on your investments’ performance. With the right advisor, you’ll never miss this important step.
- You can’t call a computer program: Even the best robo advisors are still, at the end of the day, just web platforms. You can’t call them up for peace of mind or to bounce ideas off of them; and even the companies who offer phone consultations do so for a fee (and it won’t be an advisor with whom you’ve built a rapport).
- You’ll save time: DIY investing takes effort and time, and there is a significant learning curve. Choosing an investment advisor, though, is mostly a hands-off approach–let someone else do the heavy lifting for you!
- They can be costly: The fees charged by investment advisors are significantly higher than you’ll find with most robo advisors, and are definitely more expensive than a DIY approach. You could wind up paying 4x as much to have an advisor manage your portfolio than if you opted for a robo product.
- Fees on fees: It’s important to remember that the fees charged by your hired advisor are not the only ones you’ll incur. Your total costs will also include fees for specific account actions as well as the fees involved with the investments themselves (such as mutual fund expense ratios).
- You’re trusting someone else with your financial future: Investing is always a gamble, and no one can predict how your portfolio will perform over the years. When you hire an advisor, though, you are putting your faith in that person’s advice, guidance, and recommendations for your investments.
Who Investment Advisors Are Designed for
Some investors are primed for a DIY approach to their portfolio. They’re excited about managing their investments, have spent the time doing research and educating themselves, and have a plan for the future.
Others need a bit more help, and a hands-off approach. For these investors, robo advisors fit the bill. With their calculated allocations, target retirement plans, options for scheduled contributions, automated rebalancing, and low fees, they make a great in-between option for future retirees who want to grow their savings without paying much attention to their portfolio along the way.
However, if you have a complex investment strategy, want someone to give your portfolio a personalized approach, or are interested in having a hand in the process but don’t really know where to start, an investment advisor might be exactly what you need.
Advisors are great for investors who have large portfolios, especially when they would benefit from strategic tax planning or allocations.
They are a good choice if you are interested in comprehensive financial planning, and want someone to help guide you through not only investing but also general saving, getting out of debt, diversifying investments (such as buying an investment property), saving for your kids’ college, and the like.
Advisors are a wise choice for investors who want to have a hand in the investing process, but aren’t entirely confident in their skills or knowledge just yet.
Remember, you can always take over your own investment strategy down the line, once you’ve learned more and have your finances in order.
One great option for investors who know they need personalized guidance with their portfolios, but don’t want to pay 1% or more in advisor fees, is Vanguard Personal Advisory Services. There, you’ll be partnered up with an advisor who can help identify your unique goals and create a strategy that best suits you.
They’ll also review your portfolio quarterly, rebalancing as needed. Want to talk with your advisor about your finances? Give them a call, send an email, or hop on a video chat to do so!
The best part of Vanguard Personal Advisory Services is that you’re getting personal investment advisor services at a robo advisor price. With Vanguard, you’ll only pay 30 basis points for the service, which equates to 0.30% of your assets under management. This is significantly less than the 1%+ charged by other advisor firms, and just above the average robo advisor cost of 0.25%.
Another option is SmartAsset, one of the most reputable companies in the personal finance space. SmartAsset has created a service called SmartAdvisor. SmartAdvisor essentially uses a survey (about 25 questions) to ask you all about your investment goals.
Using their algorithm and in-house concierge team, SmartAsset will match you with up to three different highly-qualified financial advisors. The great part is, they’ll already be vetted and matched to your financial goals.
Deciding between an investment advisor, robo advisor, or DIY approach can be tough, especially if you’re trying to save money when investing. Advisory options can be found at any price point, whether you’re looking for a free service to automatically manage your portfolio or an investment advisor to curate a personalized experience.
Determining the right choice for you depends on your own personal comfort level, investment experience, and even the size and complexity of your investments. What could an investment advisor do to transform your portfolio?Topics: Investing • Personal Finance