Is it worth having a financial advisor?

Is it worth having a financial advisor?
Royalty-free stock photo ID: 1039584070. Portrait of couple counting money while sitting at table at home.

Trying to decide whether to hire a financial advisor is a difficult decision, and unfortunately there’s no one-sized-fits-all solution.

First, it’s important to know that investment advisors can take away from your future wealth. This is because they usually charge a fee that amounts to roughly one percent of your assets every year. It may not sound like a lot, but every percentage point you lose is money you won’t have for retirement.

If you have some basic investment knowledge — which might entail buying pieces of the market in mutual or exchange-traded funds, like the S&P 500 — you may not necessarily need an investment advisor. If you have a 401k, and you choose funds that are targeted toward your retirement date, or if you have a handful of funds that represent the US stock market and a portion of international markets, you may be fine.

Investment advisors are probably most useful for three types of people: individuals who think they can predict the future, individuals with a lot of investment anxiety and individuals who are rich.

Individuals who think they can predict the future have a tendency to buy individual stocks that are en vogue — say, Tesla or Amazon. This isn’t to say Tesla or Amazon are bad companies, or even bad investments, but their future earnings are already priced into the value of the company’s shares. This means if they fail to meet the market’s lofty expectations, their shares may lose value even if they continue to grow. 

If you’re overconfident and select specific stocks, you can miss out on the overall market’s performance. Selecting specific stocks also exposes you to diversification risk; if a company goes bankrupt or has a particularly bad year, you can be more impacted that if you just bought a fund that represented the market as a whole.

Ninety five percent of investment professionals failed to beat the market over a 15-year-period. (This might be another reason you might not need a human financial advisor.)

If you have a lot of investment anxiety, having a financial adviser might be worth your while simply for the peace of mind. The counter-argument to paying someone one percent of your assets every year is that one percent a year may be worth your peace of mind.

If you’re rich, with at least a million dollars of liquid assets (excluding the value of your home), the value of an investment adviser can involve finding and handling complex investments like private equity, which isn’t easily managed by someone without market experience or connections. Alternative investments like private equity often involve minimum outlays of $250,000 and typically require your money to be tied up for five to seven years at a time. (The debate is out on whether private equity beats the overall market.)

One alternative to a human investment advisor is a robo-advisor. Robo-advisors are computer-driven platforms that manage your money. Bankrate provides a list of their favorites here.

Wealthfront, for example, charges a low fee of 0.25%, a fraction of what you’d pay for a human advisor. Robo-advisors have received strong reviews by financial news outlets, and help you diversify your money so it’s invested in a variety of different areas.

For service, Bankrate recommends Betterment, which charges 0.25% to 0.4% depending on the level of attention you require.

Whether you choose to have a financial advisor or not, the keys to success generally are saving at regular intervals, low costs, and diversification. It’s not necessary to have an investment advisor to achieve a secure retirement, but saving enough and ensuring your retirement portfolio is invested in a diverse enough array of stocks and bonds are key.

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