It crosses everyone’s mind – should I pay for a service that I can do myself? It’s a decision we are all faced with. Should we fix our own car, do our own taxes, mow our own lawn, handle our own financial planning, manage our own investments, and the list goes on…
These are very valid questions. And, the reality is, if you have the time, desire, and knowledge to handle a certain task, then there is no need to hire a professional. However, if any one of those components is missing, then hiring a professional may be the right thing to do. But in relation to financial planning – Is A Financial Advisor Worth It?
If you want more time to hang out with family, go on vacation, play golf, etc… then hiring a financial advisor may be appropriate. If you absolutely hate dealing with finances then hiring a financial advisor may be appropriate. If there’s a chance that you may not have the necessary knowledge, then hiring a financial advisor may be appropriate. After all, “you don’t know what you don’t know”.
Following are some of the benefits of hiring a financial advisor:
- Second Opinion: Financial planning professionals serve as a second set of eyes for their clients. For example, we’ve reviewed clients’ tax returns and in some cases recommended that their tax return(s) be amended, which has resulted in unexpected additional tax refunds – sometimes in the thousands of dollars.
- Average Investor Return: Many people think that paying an advisor fee will cause investment returns to suffer. However, the average investor annual return over the 20 year period ended 12/31/2011 is only 3.49% whereas the stock market returned 7.81%. The reason for the disparity: the average investor moves money around much too often usually due to emotion. A good financial planning professional can help to protect a client from themselves.
- Do It Yourselfers May Be Paying More in Fees Than They Realize: This goes back to the principle of “you don’t know what you don’t know”. Virtually every non-IRA mutual fund has the following expenses: expense ratio, trading expenses, and tax costs. According to Morningstar the average retail mutual fund expense ratio is 1.33%. According to “The Little Book of Common Sense Investing, the average mutual fund has trading costs of 1.00% and tax costs of 1.80%. Add it all up and you could be paying over 4.00% and not even realize it. A financial planning professional can help you to understand what costs you are currently paying. Also they should be able to fully disclose to you all fees if you choose to work with them.
- Stock Overlap: Owning a bunch of mutual funds does not mean that you are diversified. In some cases each of your mutual funds could own the exact same stocks. This is known as stock overlap. A financial planning professional can help you to determine if your portfolio has stock overlap. The portfolios at our firm have virtually no stock overlap. Each investment owns distinctly different stocks or bonds.
- Style Drift: Many mutual funds often times stray away from their intended objective. For example, you may purchase a mutual fund with the objective of owning U.S. stocks; however, you may be surprised to learn that the mutual fund manager purchased some International Stocks. This is known as style drift. This is generally not a good thing to have happen if you want to make sure you have your money invested in different categories. Essentially your risk could be increasing without you even knowing it. A financial planning professional can provide a second opinion on your portfolio to determine if you have style drift. The portfolios at our firm have no style drift.
- Asset Allocation: Choosing the appropriate mix of stocks, bonds, cash, and alternative investments is vitally important. This is known as asset allocation. This mixture determines how much risk you will be taking. We’ve dealt with people who came to our firm and we discovered that they were taking on way more risk than they realized. This is not good if you plan to retire soon or if you’re risk averse. A financial planning professional can be of guidance in determining the appropriate mix of investments specifically for you.
- Financial Advice: Probably the greatest advantage of a financial planning professional is their ability to give advice. I’m not just talking about investment advice. Investments are just one component of a person’s overall financial plan. There are other components to consider such as minimizing taxes, protecting your assets, planning for children’s college, building a retirement plan, preserving wealth, charitable planning, determining whether to have a Will or a Trust, etc… And it’s only in the context of comprehensive planning that effective recommendations can be made regarding these components. A financial planning professional can guide you through this process.
- Tax Deductibility: You may be able to lower your investment costs and get a tax deduction by engaging the services of a financial planning professional. Update: The Tax Cuts and Jobs Act of 2017 eliminated the tax deductibility of investment advice fees.
As mentioned earlier, if you have the time, desire, and knowledge to handle your own financial planning matters then hiring a financial advisor may not be right for you. If any of those components is missing, then now may be the time to start a relationship.
The majority of our practice is centered around providing financial planning advice to our clients. In addition, I am a CERTIFIED FINANCIAL PLANNER™ and would be happy to answer any questions you may have or provide you with a second opinion regarding your current strategy. You can locate our contact info here. Here’s to making you a more “informed investor”.
Brad E.S. Tinnon
CERTIFIED FINANCIAL PLANNER™
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