Should You Be Paying An Advisor to Manage Your Nest Egg?

For most people who invest their own money, there comes a time when they consider whether they should turn it over to a financial advisor instead. Maybe you’ve been investing your money in low-cost index funds and have been satisfied generating the same returns as the stock market; so why should you pay someone else the extra fees or commissions? Actually that’s a very good question to ask a financial advisor to learn what extra value you should expect before handing over your nest egg. You need to know what a good financial advisor can bring to the table that will be worth the money you spend on fees.  Here are a few important reasons why you might consider paying a financial advisor.

When You Don’t Have all the Answers

In the digital age, investors have as much information available to them as the investment pros. You can do all of the research necessary to make investment decisions, but how confident are you in making those decisions? How certain are you of your asset allocation strategy? When the markets fluctuate, is your asset allocation strategy still on target or does it need adjusting? Does your strategy match your risk profile? Is it too conservative or too aggressive? Most importantly, is your investment strategy on track to meet your financial objectives for retirement?  Most people can’t answer these questions on their own; yet having the right answers at any given time is absolutely critical.

When You Lack Confidence in Your Future

If you’re a do-it-yourself investor with the time and inclination to stay on top of those questions, you might be fine. But most people have neither the time nor inclination to do what is necessary to stay on top of their investments let alone make the right decisions along the way. One of the biggest reasons people don’t meet their financial goals is a lack of confidence in their investment strategy. When your confidence falters, you are more likely to break from your strategy and start making costly decisions.

When You Want to Get More Bang from Your Buck

A good financial advisor is your financial coach, keeping you focused on your objectives, guiding your decision-making based on your objectives and keeping you from making bad decisions. A Vanguard study done in 2014 found that an effective financial advisor can enhance your annual return by as much as 3% – outside of investment returns – simply by helping you make smart decisions. So, even if your advisor continues to invest in passively managed index funds, his or her ability to properly construct your asset allocation around your objectives and risk profile can add value. Helping you find more tax-efficient ways to invest your money or withdraw at retirement can certainly add value. Keeping you from following the panicking herd when the market turns volatile can add tremendous value to your long-term returns. If, after paying an advisor a 1% annual fee, you can net 2% in additional value (net of investment performance), you have more than covered your cost. 

When You Have Life-Critical Decisions to Make

There’s more to a financial advisor than just investing.  A good financial advisor helps you zero in on your most important financial goals and helps you better understand your tolerance for risk. As life events unfold, your financial advisor can guide you in critical decisions based on his understanding of your goals, needs, preferences and priorities. Knowing your financial situation, your financial advisor can advise you on when to take Social Security benefits; which retirement accounts to draw from for the greatest tax efficiency; when to adjust your asset allocation; how to maximize your estate for your children. These are all life-critical decisions that, if made poorly, can cost you considerably more money than you pay in fees.

For the Most Value, Choose the Right Financial Advisor

Unquestionably, having a solid financial advisory relationship can improve your financial position and instill the confidence everyone would like to have in securing their financial future. However, it is important to understand the difference between a true financial advisor and a financial professional who is more of a salesperson, offering investment or insurance products for a commission. The former is typically an independent practitioner who is bound to act in the best interests of their clients, while the latter is more of a product sales person who is paid by a brokerage firm. A true financial advisor answers only to his clients, offering objective, conflict-free advice. Do not settle for anything less.