Are financial advisors worth it, really?

Independently managing your finances takes extreme concentration, strict attention to detail, and a healthy dose of luck. This might be why two-thirds of Americans acknowledge that they need to step up their financial planning game. However, only 37% work with financial advisors, even though professional advisors are Americans’ most trusted sources for financial advice.

So, are financial advisors really worth it? They are if they help you save more money than they charge. If you’re spending $1,500 annually on financial advice that helps you save an additional $2,500 for your retirement, then they’re likely worth it.

We’ll dig deeper to explore the pros and cons of working with an advisor and comparing it to robo advisors and individually managing your finances.

What do financial advisors do?

Financial advisors are professionals licensed to offer expert guidance and assistance in managing various aspects of your personal finances. Their primary role is to help individuals, families, and businesses make informed decisions to achieve their financial goals.

In a nutshell, a financial advisor is your trusted financial partner, providing personalized advice tailored to your unique financial situation. Naturally, their services are not free. Not having one may simply come down to individual budgets or personal preferences.

There are a few different types of financial advisors, but their services often include:

• Financial planning to help clients create comprehensive financial roadmaps. They analyze your current financial situation, assess your future goals (like saving for retirement, education, or buying a home), and develop a plan to achieve them.
• Investment management by selecting and managing investments to grow your wealth. This involves choosing appropriate stocks, bonds, mutual funds, or other investment vehicles based on your risk tolerance and objectives.
• Retirement planning so you can head into your golden years with financial security. They calculate how much you need to save, recommend retirement accounts like IRAs and 401(k)s, and create a strategy to ensure you reach your retirement goals.
• Risk management by evaluating your insurance needs to protect against unexpected events. His includes life insurance, health insurance, disability insurance, and more.
• Tax planning by optimizing your tax strategy to minimize tax liabilities legally. This can involve tax-free investment choices, deductions, deferments, and credits.
• Estate planning by structuring your estate to minimize your estate taxes and distributing your assets according to your wishes.
• Debt management to help you manage and reduce debt efficiently, making sure your financial obligations align with your long-term goals.

Not all financial advisors deal with all of the above, so you’ll want to research what a particular advisor offers in terms of services before you decide to hire them.

Typically, there are a few ways that financial advisors make their money, including:

• Charging a fee for their services.
• Earning commissions by selling financial products.
• A combination of fees and commissions.

No matter how they earn a living, financial advisors usually have the same goal: making your money earn you even more money.

Pros and cons of hiring a financial advisor

Many financial advisors won’t work with you if you have less than $100,000 to invest, so that could determine whether an advisor is worth it for you right off the bat.

Similarly, financial advisors typically charge fees between 0.25% to 1% of all your assets under management each year. (that is, 1% of your total invested assets), but they might charge higher fees for the extra labor involved with managing smaller investment accounts. 

Financial advisors come with benefits and drawbacks, and there are many other opportunities to help you reach your financial goals without shelling out for professional advice.

Pros

Advisors can help you hit the fast track toward your goals and leave financial woes in the rearview mirror.

• Expertise: Advisors possess in-depth knowledge of financial markets, tax laws, and investment strategies to make informed decisions for your financial goals.
• Time saved: The expertise that financial advisors hold could save you time that you’d need to spend researching countless investment opportunities if you manage your finances independently.
• Personalized advice: Some advisors tailor their recommendations to your specific financial goals and risk tolerance, ensuring a customized approach.
• Goal achievement: Financial advisors help you define and prioritize your objectives, making it more likely that you’ll reach them sooner rather than later.
• Diversification: They advise creating diversified investment portfolios to manage risk and potentially enhance returns.
• Financial education: Advisors educate clients about financial concepts and strategies, empowering them to make informed decisions when needed.

Cons

The biggest disadvantages of using a financial advisor are how one can cut into your investment earnings.

• Variable Fees: They’re typically compensated with fees (often called an assets-under-management or AUM fee), commissions, or both. These can eat into your investment returns or financial planning budget. They also may require a minimum investment of $100,000-$500,000 or more.
• Conflicts of interest: Advisors may have incentives to recommend specific products or strategies that generate higher commissions or fees for their own firm. This can lead to recommendations that may not align perfectly with your best interests.
• Variable quality: Not all financial advisors are created equal. Differences in experience, expertise, and qualifications can vary significantly. Some may lack the necessary skills or ethical standards to provide sound financial advice.
• Limited control: When you hire an advisor, you’re entrusting a significant portion of your financial decision-making to someone else. While this can be beneficial in terms of expertise, it also means you have less direct control over your investments.
• No guaranteed returns: Financial advisors can provide valuable advice but cannot guarantee investment returns or completely shield you from market fluctuations. Investments inherently carry risks, and there are no foolproof strategies.
• Complexity: Some advisors may recommend complex investment strategies that are difficult to understand. This can lead to confusion, which is the opposite of a simple approach to managing your finances.
• Time and effort: Finding the right advisor can be time-consuming. You’ll need to research, interview, and compare advisors to ensure the best fit, which can be daunting.
• Limited services: Depending on the advisor’s expertise and focus, they may not offer a comprehensive suite of services. This could leave gaps in your financial plan if your chosen advisor doesn't cover specific areas, like tax minimization or estate planning.

Financial advisors vs. robo-advisors

Robo-advisors are like financial advisors that inform your investment decisions with algorithms.

These apps and services typically have lower fees than standard financial advisors since there’s less (or no) human involvement with your finances. Many will charge a percentage fee that adds up to less than you’d pay a human advisor, such as  0.5% of your total invested assets.

Robo-advisors can make investing easier, but they don’t typically support a holistic financial plan. There are financial planning apps that begin with an airtight plan and then automatically invest in a similar manner. Some of these services even offer flat fees rather than a variable AUM fee, which keep your costs fixed as money grows. 

Financial advisor vs. self-investing: Can you DIY great returns?

So, you’ve got that entrepreneurial spirit, and you’re thinking, “I can totally do this on my own!” DIY investing means you’re calling the shots: It’s you, your computer, and a world of investment options at your fingertips.

Going DIY with your investments can:

• Save costs by dodging advisory fees. This can compound into real money over time.
• Satisfy your inner control freak – no one’s pushing products your way or making calls without your say-so.
• Boost your knowledge like an advanced crash course in finance by tracking your own portfolio.
• Give you the flexibility to pivot your strategy on a dime since you’re not locked into someone else’s game plan.

However, the drawbacks of a DIY approach are real. Investing is a time-consuming and risky business that takes significant research and strategic analysis. And let’s face it – most of us aren’t finance gurus. Without expert guidance, you might miss out on savvy opportunities or worse. Plus, following the ups and downs of the market can feel like an emotional roller coaster.

On the other hand, financial advisors answer your questions with their know-how and act as an emotional buffer between you and your money, preventing you from making rash decisions.

DIY investing isn’t a great option unless you’re a studious pupil of Wall Street. Even then, it might pay to have additional expertise in your corner to help you make the right moves. That’s what makes automated investing services so valuable – most people don’t have the time or base knowledge to dig into investment theory and watch markets day-in and day-out. 

Invest without blowing money on high fees

Financial advisors can be a great asset to anyone looking to grow their investment portfolio, retire earlier, or worry less about their money. However, financial advisors aren't cheap and their expertise and quality varies. Do your research to find the right type of advisor for you and consider low-cost alternatives like robo-advisors for your financial planning.