Is it worth paying a financial advisor to manage retirement funds if you are confident in your own financial investment strategies? I feel like I have a solid understanding of long-term investment strategies. And as such, I feel the roughly 1% of managed assets that I would pay for any outside advice would exceed the gains I might see. True, it is important to get outside opinions to compare best practices with investments, but the famous Warren Buffett investment bet – in which he pitted a low-fee index fund against an actively managed portfolio of hedge funds – makes me leery of trusting any professional investor.
You’re absolutely right to ask this question. If you feel comfortable investing on your own, what’s the point of working with a financial advisor whose fee of 1% of assets under management could chip away at your investment returns?
I reached out to a network of advisors for their take on this query. They were quick to stress that the services a financial advisor may provide can justify the cost. But many of them also suggested that clients consider whether 1% for bare-bones investment management is worth the fee.
“Managing investments is (or should be) only a small part of what financial advisors do for their clients,” says George Gagliardi, financial advisor at Coromandel Wealth Management. “If your advisor is only managing your assets and charging 1%, find another advisor. You are overpaying.”
Here’s how to determine whether it makes sense for you to work with a financial advisor.
(Note: The advisors quoted in this article are only speaking for themselves. Your own experience may vary, and not everyone will find working with an advisor worth the cost, depending on their situation.)
You’re Right to Question 1% for Just Investment Management
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 to just manage a diversified indexed portfolio when you’re a seasoned investor – without any additional services like financial planning and tax – most likely would not be worth the fee,” says Brian Schmehil, certified financial planner and managing director of wealth management at The Mather Group.
The Many Services That (Might) Justify the Fee
If, however, you are looking for more holistic financial planning services, want to manage taxes, gifting and other aspects of your financial plan or have trouble controlling your emotions during times of market volatility, your calculus may change. Clients may find that 1% fee worth it, depending on their particular situation and the advisor’s services. Here’s what an advisor may offer.
Calm During Periods of Volatility
Even confident investors panic or stray from their financial plan.
Investors who offload investments during a bear market, or invest too conservatively for their time horizon may be missing out on valuable returns.
“A financial advisor helps the investors stick to the strategy and navigate the decisions without emotional components,” says Anna Sergunina, certified financial planner, president and CEO at MainStreet Financial Planning.
Structure and Coordination
A financial advisor can act as the quarterback of your financial team. They may coordinate tax-planning strategies with accountants, keep an eye toward estate-planning strategies with attorneys and assist in updating risk-management products in coordination with various insurance professionals and retirement specialists.
“We help clients decide on Social Security strategy (and) how to structure Medicare,” says Crystal J. Cox, senior vice president at Wealthspire Advisors. “There is literally so much we do outside of investments.”
Tax-Conscious Investing Decisions
Investing wisely goes beyond deciding which mutual fund meets your financial needs.
A financial advisor can help identify more tax-efficient ways to invest, gift 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 at RW Financial Planning LLC. “Given the timing of when they purchased the fund, the capital gain distributions and the client’s income tax bracket, it was an expensive lesson.”
A financial advisor with a calm “been there, done that” attitude may be worth the fee when markets get rough.
“There’s also no substitute for experience,” says Kenneth B. Waltzer, certified financial planner, co-founder and managing director at KCS Wealth Advisory. “Studies have shown that younger investment professionals did worse during the global financial crisis than older ones, primarily because they had not yet been through a severe bear market.”
A Second Opinion
“Having an objective second opinion of your portfolio in terms of diversification, risk and tax management is important,” says Lisa A.K. Kirchenbauer, certified financial planner, founder and president at Omega Wealth Management. “We all have blind spots and those of us who look at a client’s entire financial picture can provide valuable insights and objectivity to even the best investors.”
A second opinion may also help break ties on money disagreements between spouses. Or it can allow the preferences of a spouse who is less money-confident to have equal footing in a relationship.
Advisors are quick to point out the services they may provide in addition to investment management. But several also note that 1% is a high fee to pay for services that don’t go beyond investment tips. If you’re looking for advice, coordination and a way to counteract knee-jerk investing decisions, however, a financial advisor may be worth the cost.
Investing and Retirement Planning Tips
If you have questions specific to your investing and retirement situation, a financial advisor can help. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can interview your advisor matches at no cost 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.
As you plan for income in retirement, keep an eye on Social Security. Use SmartAsset’s Social Security calculator to get an idea of what your benefits could look like in retirement.
Susannah Snider, CFP® is SmartAsset’s financial planning columnist, and answers reader questions on personal finance topics. Got a question you’d 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.
Photo credit: ©Jen Barker Worley, ©iStock.com/fizkes, ©iStock.com/Courtney Hale