Managing your finances and investment performance has become more important than ever, particularly in a period of ongoing economic uncertainty. With so many strategies for managing your investments, from technology-centric solutions (“robo-advisors”) to a DIY approach, you may wonder if financial advisors are worth it. After all, they charge fees for their services, making it crucial for you to make sure you find the right option that makes sense for your financial situation, your assets, and your upcoming goals.
Find out what financial advisors offer and when it’s in your best interest to hire one to optimize your finances and organize your asset allocation.
Curious about what a financial advisor does? Financial advisors are most commonly known for managing clients’ investments and making timely trades to create a diversified portfolio. In reality, however, a financial advisor often does a lot more for each client. Here is a brief overview of some of the different services you may receive when working with a financial advisor.
A large part of financial planning is preparing for retirement. A good financial advisor evaluates your current situation while also listening to your goals for the future. Whether you want to retire early, build your dream home, or simply maintain your current lifestyle, an advisor builds a roadmap to achieve those goals no matter what stage you’re in today.
A financial advisor helps to build a diversified investment portfolio with an appropriate amount of risk for calibrated for your particular financial situation, goals, and age. They should be able to rebalance your assets as needed and respond quickly when you have questions about your portfolio. If you find yourself searching, “What is private wealth management?” or “How and where should I invest my money?”, the best starting point is speaking to a trusted financial advisor.
Many financial advisors provide insights regarding tax-efficient investing as part of your overall financial planning (although such input should be coordinated with your tax advisor). Whether it’s through tax-efficient investment strategies or charitable giving, this service should be integrated into any financial advice offered by your advisor. That way, you can ideally pay less in taxes and potentially increase your after-tax impact on your investments and philanthropic goals.
Financial advisors can work with your estate planning attorney as you develop your estate plan no matter how old you are. Even in your younger years, it’s smart to create a will and other estate documents that fit your needs. As you get older, you may need more complex estate planning services so that you can efficiently transfer assets to your beneficiaries while also minimizing estate taxes.
When trying to figure out whether financial advisors are worth the cost, it’s important to know exactly what that cost is. A financial advisor may charge for services in one or more ways.
When your financial advisor manages your investment portfolio, you may be charged an annual advisory fee calculated as a percentage of your assets under management. The management fee may vary depending on the amount of your assets. At D&Y, we charge 0.85% for the first $2 million with the marginal rate declining after that. As a result, our blended fee drops as your assets grow above $2 million.
In some instances, advisors may just charge an hourly rate, especially if they are just providing you with financial advice rather than actively managing your assets. For example, you may pay hourly to have your advisor help you create a new budget to meet a certain financial goal or create a plan to save for your children’s college tuition.
Another type of fee structure you may see is a retainer fee, which may be charged by the advisor either quarterly or annually. This flat fee usually includes managed investments and an in-depth financial plan. The price reflects the level of service you receive from your financial professional.
Commission-based advisors get paid on the sale of certain investments. While no advisory services are free from conflicts of interest, commissions vary for different investments. It’s important to only work with an advisor whom you explicitly trust to make recommendations based on your best interest, not based on whatever investment will pay the advisor the highest commission.
None of these options is necessarily better than the others. It largely comes down to the services you want from your financial advisor and which structure makes the most sense for those needs.
Are financial advisors worth it? Despite the fees, there are a number of scenarios in which the expertise of a wealth advisor provides immense value. Both crafting a diversified portfolio and a comprehensive investment strategy for your life and goals are complex processes. As you’re ready to invest money, whether for long-term goals like retirement or shorter-term goals like a down payment on a house, an advisor can help. They will help you choose the right investment vehicles to help maximize the tax advantages and weigh the risks based on the time horizon for each of your goals.
You can certainly take a DIY approach to these tasks, but as the saying goes, “You don’t know what you don’t know.” In other words, you may miss out on tax benefits of certain strategies or invest in assets that are either too aggressive or too conservative to successfully reach your specific goals.
Another approach to utilizing a financial advisor is to simply use them on an as-needed basis. Maybe you want some advice on a one-time financial decision, like what type of college savings account to open for your newborn child. Or maybe you’ve recently inherited a large sum and are unsure of how to prioritize debt payoff, savings, and investments.
On the flip side, there are some circumstances in which you may not be ready to use a financial advisor. If you have a lot of debt or are living paycheck to paycheck, you may be better off utilizing a credit counselor or other type of financial professional to help you create a roadmap to financial security.
Alternatively, if you’re passionate about finances and the stock market, you may be equipped to manage your own investments. Just be sure you truly take the time to stay up-to-date on the economy, investment research, and your specific portfolio performance.
If you’re starting to think it is worth paying a financial advisor, make sure you choose the right one. The most important question to ask right away is whether or not the advisor is a fiduciary. A fiduciary is required to put your interests ahead of their own. That may seem like common sense, but non-fiduciaries only need to offer recommendations that are considered “suitable.” They don’t necessarily need to factor in cost when helping you make investment decisions. A fiduciary, on the other hand, operates under strict regulations to put your interests first.
The next question to ask a potential financial advisor is how they get paid. There isn’t necessarily a best answer that applies to everyone, so search for advisors with a fee structure that makes sense for your needs. Also find out if they receive referral fees for recommending other professionals like lawyers or accountants. At D&Y, we work hard to minimize any conflicts of interest and never accept referral fees when recommending other professionals. Always compare a few different options taking into account both price and value.
Also ask about the advisor’s investment philosophy. Answers may vary, but they should have a firm grasp on their decision-making process for clients and how they balance building a diversified portfolio with minimizing your costs.
Finally, ask about your specific goals. Some advisors offer a free consultation and at a minimum, should give you some details on what they would recommend for your financial situation. Asset allocation is a huge component of choosing a financial advisor and well within reason to discuss to get an idea of the type of portfolio they would build for you.
To understand how Dowling & Yahnke answers these questions, view our Top 10 Questions to Ask Your Financial Advisor paper.
A reputable financial advisor provides a great deal of value, but you may also consider other options. Here are two other financial planning methods, along with the pros and cons of each one.
A robo-advisor is a digital platform that automates investment decisions based on details you input surrounding your finances and goals. There are multiple options available that come with a varying degree of services. For entry-level investors, using a robo-advisor you to get started with a small amount of cash and low fees. Like working with a human financial advisor, the marginal fee typically drops as you grow your account balance.
The downside, however, is that robo-advisors can’t offer comprehensive financial planning services. In some cases, you may be able to hire a human advisor from the company for a one-time consultation — but at a price, of course. And in most cases, you won’t have a dedicated individual who is familiar with your situation. While a robo-advisor can automatically rebalance your portfolio, it can’t automate advice based on life events. That’s where a financial advisor typically outshines this option.
With so much information available on the internet today, many individuals are opting to craft their own financial plan and investment strategy. This is certainly possible if you work in the financial industry and have the time to invest in following the markets, IRS rules and regulations, and financial planning techniques. But it can be risky if you don’t have extensive experience and the time to invest in optimizing your taxes, aligning your goals, and building a portfolio that balances risk over time.
A financial advisor is worth it when you find one who understands your financial goals and charges in a way that makes sense for your needs. The best things in life aren’t always free, especially when the cost directly contributes to building wealth and achieving financial security while still living out your dreams. And in many cases, a financial advisor can help with each of those goals.
Contact us today at Dowling & Yahkne Wealth Advisors to speak with one of our experts and learn more about our financial services, including asset management in San Diego.