Is A Financial Advisor Worth Paying For?

If you’re hiring an advisor to pick investments that will outperform the market, the answer is probably no. There’s no evidence that financial advisors’ recommendations add value in this way even if their advice were free. Add a 1% advisory fee and you’ll probably underperform the market. There are also now a host of “robo-advisors” that will help you put together and manage a customized portfolio of low cost index funds for a much lower fee. However, here are some services that may be worth paying a financial advisor for:

1) Financial planning. Financial planning involves a lot more than just picking investments. It’s also about helping you determine and prioritize your goals. There are online calculators that you can use to figure out things like how much you need to save for retirement or college expenses but they’re prone to the “garbage in/garbage out” syndrome, especially if have unrealistic assumptions or an atypical situation that may not conform with how a particular program works. Many online programs also don’t sufficiently address tax planning issues that you may have.

2) Taking action: This is probably one of the most undervalued services that an advisor can provide. You can have the best possible plan but it’s worthless if you don’t actually take action. One reason might be fear. In those cases, an advisor can help give you the confidence you need.

Another problem is that financial planning is a lot like dieting and exercise in being easy to procrastinate because the work comes now and the benefit typically comes later. One study on procrastination found that the most effective way to overcome it is with external deadlines from another human being. (Email reminders from a computer help but not as much.) Like a personal trainer, advisors can walk you through the steps to implement your plan and help hold you accountable if you don’t.

3) Preventing mistakes. On the other end of the spectrum, an advisor can also play a crucial role in making sure we don’t do something stupid, especially when emotions are involved as they often are with money. Preventing you from buying an “investment” that sounds too good to be true or bailing out of an investment just because it’s in a temporary decline can more than justify an advisor’s fee. Even if you’re well-versed in personal finance, sometimes it helps just to have a second opinion from someone whose judgment isn’t clouded by emotions.

4) Saving time. Even if you have the knowledge and emotional capability to plan and manage your finances, your time may be better spent somewhere else. After all, you not only have to get a basic understanding of financial planning but also keep up to date with changes in the law, innovations in financial products and services, and new research on best practices. This can easily start to feel like another job, especially if you have a complex financial situation.

Of course, not all financial advisors are equally helpful in all these areas. To get your money’s worth, you want someone who’s competent, unbiased, and not afraid to tell you something you may not want to hear. But that’s another whole story…

 

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