Brad Tinnon

Brad Tinnon

Does It Pay To Pay An Advisor? Part I

Today marks the beginning of a 3-part series on Does It Pay to Pay an Advisor.

In today’s article, I’ll discuss why some people choose to handle their own finances, why they’re hesitant to pay an advisor, and that avoiding an advisor fee doesn’t always equate to saving money. 

Next week I’ll talk about the growing number of inexpensive investments (such as index funds and ETFs) as well as the inexpensive investment management solutions (i.e. robo-advisors) that are popping up and how this has created a recent fallacy that “cheaper is better”.  

In the final week I’ll wrap up with a discussion about several research papers that have actually quantified the value of using an advisor and how this could add extra return to your investments and net worth. 

If you’re not subscribed to our e-Content then sign up here so you don’t miss the next article in the series. Now on to today’s article.

You may be wondering if it is financially beneficial to pay the fee of a financial advisor. There is a saying that goes something like this, “Fees are only an issue in the absence of value”. Recently, I was playing around with an app that I was thinking of incorporating into my website. This app costs about $225 per year, but it is so complicated, time consuming, and error prone, that I took the company up on its 100% money back guarantee. In this case there is virtually no value, so I cannot justify paying their fee. But how does that tie in to a financial advisor? Is there value in such a relationship?

DO-IT-YOURSELFER

Before answering that question, it’s important to understand that there are two main reasons why people choose to manage their own finances: Trust and Fees.

Let’s start with Trust. 

Perhaps you paid for a service in the past and had such a horrible experience (much like I did with the app for my website) that you decided from now on that you would just take care of the issue yourself.

You don’t have to look very far these days to find companies that truly provide horrible service; they’re everywhere!! The financial industry has seemingly been filled with “professionals” who have taken advantage of people over the years: Bernie Madoff and his ponzi scheme. Insurance salespeople selling someone an expensive product they later regretted only to find out there are steep penalties to get out. Professional athletes, actors, and actresses suing their financial advisors. And the list goes on… There have been numerous articles written on fraud, deception, and questionable selling practices within the financial services industry. It’s no wonder people have a distrust of financial advisors.

The other main reason that people choose to manage their own finances is to avoid a fee. But is this a great way to go about it? Should you handle things yourself just to avoid a fee?

In a prior blog post titled Is a Financial Advisor Worth It, I indicated that if a person has the time, desire, and knowledge then it is perfectly acceptable for them to handle their own finances. But if just one of those components is missing then some consideration should be given to hiring a professional – obviously one that elicits a lot of trust. 

Let me make a less-than-obvious point here: saving a fee does not necessarily mean that you’ll be saving money. You may actually be better off financially by paying a fee. Let me give you some examples.

Time is money. If the money you earn in your job ends up being more than you would save in fees, then you should likely spend your time working instead of managing your finances. Time is one of the only commodities you can’t get more of. We’re all allocated the same amount.

Emotions. People naturally make emotional decisions when it comes to their money. A long time research project known as DALBAR’s Quantitative Analysis of Investor Behavior shows that emotional behavior can cause disastrous results.  From 1997 to 2016 the stock market (S&P 500) averaged 7.68% per year; however, the average investor earned only 4.79% per year. This is due to investors making emotional decisions with their money. 

Missed Opportunities. I’ve seen situations where people have missed out on tax savings strategies that could have literally saved them tens of thousands of dollars over their lifetime. Some tax strategies have to be incorporated in the calendar year and if not done so it results in a missed opportunity.

Lack of Knowledge. Financial planning is more than investing. There are so many moving parts to a person’s financial life that it can be hard to stay on top of the many planning opportunities that may be available. And simply not being aware of various techniques can be costly.

I encourage you to check out Is A Financial Advisor Worth It for other ideas of when hiring a financial advisor may make sense.

As you can see, paying a fee doesn’t necessarily mean that you will be worse off. You’ll have to ultimately determine if you have the time, desire, and knowledge to handle your own finances. And if you decide to outsource to a professional, then make sure that a great degree of trust exists.

Stay tuned for next week’s article where I will discuss the growing number of cheap investment alternatives and the rapidly advancing phenomenon that “cheaper is better”. See you next week!

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Brad E.S. Tinnon
CERTIFIED FINANCIAL PLANNER™
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