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Create Your Vision

Updated: Jul 20, 2023

Is it worth it to pay for a financial advisor? For the vast majority of people, the answer is an emphatic yes.

There is a natural skepticism about paying for advice that I totally understand. I mean, let’s face it-- portfolios are pretty much free these days. Asset allocation is now free, as are mutual funds.

And, of course, the freedom to make poor decisions has always been free.

In my experience, most advisors and their clients wrongly think that the advisor’s primary function is to pick good investment vehicles. However, financial planning is much broader, involving far more than just portfolio management. It involves budgeting, goals, appropriate insurance, comprehensive planning for lifestyle, retirement and legacy, Social Security planning, broad and granular risk management, crisis management, asset location and withdrawal planning, tax efficiency, tax planning and more.

There are numerous studies on the subject, and most of them arrive at similar conclusions. By looking at the full value equation of an advisor’s services— annual re-balancing, correcting behavior mistakes, investment management, planning and ancillary services, and tax-smart investing, Russell Investments calculated the value of an advisor in the U.S. in 2019 at 4.63%. Vanguard has provided their measure of advisor alpha since 2001, and they determined it to be 4% in 2019.

Moreover, research shows that our financial literacy declines by almost 2% each year after the age of 60. Despite that decline, our self-confidence in our financial abilities remains undiminished (or even increases) as we age. That’s a scary combination that a good advisor can guard against. That measured linear decline happens regardless of your sex, wealth and even your education and experience with the stock market, and I submit that it would be helpful for us as a society to acknowledge that this is normal.

When it comes to engaging an advisor, it follows that it would make sense to establish your advisory relationship before your financial literacy begins its decline. Consider that, in a recent study of teachers by AXA Equitable Life-- which spanned 20 different financial institutions, not just AXA-- those educators who worked with advisors had nearly double the retirement assets in their 403(b) plans than those who chose to go it alone. Or consider that, from December 2007 to December 2018, investors withdrew more money from U.S. stock mutual funds than they put in, while a constantly invested amount in the Russell 3000® Index well more than doubled in value over that same period. This sort of data suggests that people are on their absolute worst behavior at the worst possible moments.

The reality is that your financial advisor should do a lot more to help you financially than just select investments. They should be building and regularly updating custom financial plans, conducting regular portfolio reviews, and offering ancillary services such as tax and estate planning, college funding, 401(k) optimization, investment & cashflow analysis, Social Security and retirement income planning and assistance with annual tax return preparation.

As you contemplate whether or not to hire an advisor, or evaluate whether or not you are currently with the right advisor for you, you have to determine how much value you put on these services, and that will be different for each person. You may spend most of your waking hours at work, getting to and from work, or otherwise thinking about work and money, yet, someday, when you have the opportunity to create your ideal calendar, you’ll probably fill it with time for family, friends, travel, hobbies and relaxation. A good advisor can help, and for most people, not engaging that assistance because of the fee is like tripping over dollars to pick up pennies.

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