Investors often wonder whether it’s worth hiring a financial advisor, or whether they can go it alone.
Part of the dilemma is due to a misunderstanding of what advisors actually do. In the distant past, brokers picked single stocks for clients and didn’t do much else.
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That’s changed dramatically, though. Today’s financial advisors and planners take a holistic view of client portfolios, aligning investments with client goals, time horizon and risk tolerance, rather than constantly trying to swing for the fences with stock picks.
Advisors also offer services such as planning for retirement, financial planning for divorce, education expenses, tax strategies, long-term care, charitable giving and more.
Value of an Advisor
In a 2022 white paper, “Putting a Value on Your Value: Quantifying Vanguard Advisor Alpha,” asset manager Vanguard expanded upon a 2001 study that outlined how advisors could add value, or alpha, through relationship-oriented services rather than by trying to outperform the market.
Vanguard identified the seven areas where advisors following a set of best practices could add value for clients:
— Asset allocation. Asset allocation refers to the percentages of a portfolio invested in asset classes such as stocks, bonds or cash.
— Cost-effective implementation. This is the process of tracking an investor’s gross return minus costs, such as fund expense ratios.
— Rebalancing. Once an allocation is selected, it’s important to maintain that allocation over time. As investments produce different returns, the portfolio likely drifts from its target allocation. The primary goal of rebalancing is to adhere to an investor’s risk-return tolerance.
— Behavioral coaching. Although many people believe investing is purely logical, advisors know that emotion plays a big role. Part of an advisor’s job is to help his or her clients maintain a long-term perspective and a disciplined approach; this can add a large amount of potential value.
— Withdrawal order for spending from portfolio. The order in which investors make withdrawals from their portfolios has tax implications and affects portfolio longevity. This is an area where financial planners and advisors can help an investor have a greater chance of a successful retirement outcome.
— Asset location. Advisors can help clients place investments in taxable or tax-advantaged accounts strategically, minimizing tax liabilities and maximizing after-tax returns.
— An eye on income investing. As interest rates eventually come down and yields on fixed-income portfolios trend lower, retirees counting on the traditional stock and bond portfolio may not be able to live off the proceeds from income-producing securities. Advisors routinely review client portfolios to be sure they’re on track with the income they need, rather than simply making an assumption.
[READ: Women Investors Are in the Driver’s Seat, But Many Still Seek Financial Security]
How Advisors Help Clients
Some investors who haven’t worked with an advisor question whether it’s worth paying a fee to have their assets managed, rather than simply doing it themselves.
However, other investors understand factors such as those identified by Vanguard and hire an advisor to help them stay on track.
Hiring an advisor can help investors develop a hand-tailored plan and investment strategy, rather than going it alone. While some do-it-yourselfers try to determine a “number” they will need to retire, that approach overlooks many other nuances of planning.
“Saving for retirement is daunting, but it’s imperative to plan ahead,” said Melissa Murphy Pavone, a certified financial planner and director of investments at Oppenheimer & Co.
“There is no one-size-fits-all answer for how much you need to save for retirement,” Pavone said in an email. “There are many factors to consider: Desired retirement age, expected lifespan, lifestyle goals and anticipated expenses, just to name a few.”
Pavone pointed out that the top concern for retirees is outliving their assets, particularly as medical technologies increase life expectancies. Advisors are acutely aware of this and pay close attention to how investment returns and other income sources balance out with spending and clients’ lifestyles.
For example, Pavone says, “Retirees often overlook the impact of health care costs in retirement. This added expense, if not accounted for, can quickly deplete retirement savings.”
Ask Yourself These Questions Before Hiring an Advisor
While there are plenty of checklists for investors interviewing advisors, introspection is also part of the process.
Chris Urban, founder of Discovery Wealth Planning in McLean, Virginia, says investors should ask themselves some questions if they are on the fence about hiring an advisor versus trying to do their own planning and investing.
Those include:
— Do you have the time, confidence and interest to manage your own financial life?
— If you have a spouse or partner, do they have the time, confidence and interest to manage their own financial life if something happens to you?
— What, specifically, would you be looking for in an engagement with a professional financial advisor?
— Can you afford to pay for the services of a professional?
“There are so many different engagement types and offerings these days for consumers to get help with their financial life,” Urban said in an email. “Asking yourself the above few questions is a good first step to see if it’s something you should consider for you and your family.”
More Than Just Number Crunching
Many investors today understand that a financial planner doesn’t have the same job as their grandparents’ stock pickers, but they still balk at paying a fee.
A 2023 report from brokerage and asset manager Fidelity identified several advantages for investors who work with an advisor:
— Investors who work with an advisor are generally more confident about reaching their goals.
— Industry studies estimate that professional financial advice can add between 1.5% and 4% to portfolio returns over the long term.
That finding tracks with Vanguard’s data, which shows that advisors can potentially add 3% or more in net return.
However, factors such as confidence and peace of mind from having an objective second opinion are often more valuable than a higher portfolio return.
“Financial advice is more than just numbers and investments. It’s a process that can help you make a plan, chart your progress, and hopefully achieve your personal and financial goals, while feeling more confident along the way,” according to the Fidelity report.
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Are Financial Advisors Worth It? originally appeared on usnews.com
