The Pros & Cons of Paying for Investment Advice
So, you want to get your retirement and future plans under control this year, but there's a question that may seem easy to some: do you really need to pay for a financial planner? The question may be a resounding "no" or "yes" depending on who you talk to.
Depending on how much money you have to work with, you may or may not even need to ask this question, however I thought it would be helpful to go over the pros and cons that need to be considered when determining if you should shell out cash to an advisor for help planning for your financial future. More information can be found from Investopedia HERE.
Should I Get A Broker or Advisor?
It definitely helps to understand the difference between a broker and an advisor, especially since many individuals who have help with their finances seemingly use the two titles interchangeably. Brokers are paid by investors to execute trades that the broker determines are appropriate for the individual investor; actions are made to reflect the clients goals, assets, and risk tolerance, but the trades are all at the discretion of the broker. This really is like a picture of the investor's situation but it is not ongoing. An advisor on the other hand, must act as a fiduciary and the advisor is required to not only look at the investment's suitability at the time he or she enters the order, but also is obligated to provide on-going advice. It is more like a movie than a picture (relative to a broker).
Is the Advice Solid?
If the Trump administration does not find a way to shut it down, this April all financial advisors will have to register as fiduciaries and will be held to the legal obligations associated with this title. "Fiduciary" comes from the Latin term "fiducia" which means "trust." In other words, the advisor has the power and obligation to act for another (often called the beneficiary) under circumstances which require total trust, good faith and honesty.
Many think that higher prices mean higher quality - we would think so if you look at how we choose to buy things on Amazon, etc. - but in investing higher prices do not necessarily mean better quality. If the advisor is a fiduciary (and in the future they all have to be) then they are under a legal obligation to act in your best interest. Do you feel comfortable and confident with the advisor, and are they able to work well face-to-face and on the phone? If this is the case, it should provide you with all you need to know about solid advice.
What About Fees?
Oh fees. The magical thing that discourages everyone from taking a leap into financial advice, when they can grasp fees just fine if they did a little homework. According to a study in 2016 from RIA, advisor fees generally ranged from 0.25% to 2.0% per year. This year, the average investment advisor fee was 0.99% with about 90% of all advisors showing fees at or below 1.33%. There you go! Now you have a range to see what's considered normal!
However, depending on how much money you can afford to invest, it helps to see what those costs look like on an annual basis. Here is a chart from RIA showing based on having $250,000 invested and paying .25%, .50%, 1.00%, 1.50%, and 2.00% per year. Worth making a mental note:
What's so great about working with a Financial Advisor?
Working with an advisor, as opposed to without, will give you the best start possible when it comes to planning for the future. According to the Insured Retirement Institute, only 55% of baby boomers have retirement savings of any kind. Put another way, 45% of Americans aged 53-71 have absolutely no retirement savings. Amazingly, of those boomers with retirement savings, 90% of them work with a financial professional and 8 out of 10 of those individuals believe the decision worked well in their favor. Is it a good idea? You bet.