The age-old question is, is it worth using a financial advisor? Well, undoubtedly, when it comes to your hard-earned money, it might feel counter-intuitive to use a part of your income to pay for expert advice. However, a good financial advisor is worth the investment. According to a study, financial advice can potentially improve your investment returns by 3% each year. This additional return is also known as the ‘The Advisor’s Alpha’. Another study specified that hiring a skilled financial planner can boost your investment returns by nearly 3.75% each year. Alternatively, an average financial planner costs you 1% of your assets under management (AUM) each year. When you compare the absolute value of these returns with the fee you pay to your financial planner, you can determine - whether a financial planner is worth the money you’re spending.
However, merely answering the question – are financial advisors worth it – based on the investment returns and costs involved would be a narrow view. Financial planners offer more than high investment returns. According to a survey, people who work with a financial advisor are more happy, confident, and stable in their financial and personal lives. Further, the survey pointed out that 92% of people said nothing makes them more confident in life than having their financial security in order. Over 85% of the survey participants who work with a financial advisor said their life is moving in the right direction.
Financial advisors offer skilled professional advisory services related to personal finance and wealth management. Whether it is about your budget, savings, debt management, investment portfolio, retirement savings, healthcare management, tax optimization, estate planning, or succession planning, a financial advisor with the right expertise can help you with anything you need. A good financial planner can help you accumulate wealth, increase net worth while also reduce stress, save time, and safeguard your retirement.
If you are still struggling to answer the question – is a financial advisor worth the cost, here is everything you should know about financial planners, how they add value through their services, and if it is worth using a financial advisor:
A financial advisor, also known as a financial planner, is a professional who offers expert advice on wealth management and matters related to personal finance. Financial advisors provide counsel in return for compensation according to the pre-decided remuneration method.
Financial advisors offer significant value, confidence, and peace of mind by helping you deal with complex tax issues, investment choices, retirement decisions, estate plans, and emotional decision-making. A certified and competent financial planner can help you with simple financial needs, such as creating a budget and even with complex financial matters like retirement planning, tax optimization, debt management, estate planning, and more.
A competent financial advisor can help you with all money-related matters. However, some advisors may specialize in specific services like retirement planning, tax management, estate planning, etc. Overall, here are some of the things a financial advisor can do for you:
To answer the question - are financial planners worth it? - you have to know how much these professionals charge for their services. Different financial planners charge differently for their support. Broadly, these fee structures can be categorized as fee-only and fee-based models. In a fee-only structure, the professional earns their remuneration directly from you. Popular fee-only structures include percentage of assets, hourly fee, flat fee, and retainer fee. Alternatively, in the fee-based model, the financial planner earns indirectly through commissions by selling you targeted financial products. However, in some fee-based models, a financial advisor levies a specific fee with commission.
Fee-only remuneration models:
The fee model used by your financial advisor is not holistic, and there are several other expenses you might have to pay apart from the fees they charge for their services. Some people also refer to these additional costs as hidden costs. However, these are expenses that you would incur even when you do not hire a financial advisor and make your investment and financial decisions. For instance, brokerage payable for mutual funds, custodial charges, mutual fund expenses, third-party fees.
When you consult your financial advisor, it is advisable to know their fee structure and understand other charges that you would be liable to pay.
The best way to answer the question is by examining the value these professionals bring to the table. You can evaluate the cost involved in hiring a financial planner against the benefits the professional offers. If a financial advisor has successfully helped you improve your investment returns or enhance your net worth, and the rise is lower than the fee they charge, then the professional is worth the money. For instance, if the professional charges you $500 per year for their services and helps boost your net worth or investment performance by $2,000 annually, then engaging with a financial advisor is beneficial for your cause. However, solely judging a financial advisor based on quantitative parameters may not be justified.
Financial advisors add more value than the increase in returns or net worth. Financial advisors help you create an effective budget, increase your savings, get freedom from debt, invest wisely, minimize taxes, create a retirement corpus, evade penalties, establish an impenetrable estate plan, minimize estate taxes, draft a succession strategy, and do so much more. Further, financial advisors offer you much-needed peace of mind regarding your financial security. As per Northwestern Mutual Planning & Progress Study, 67% of the people who use a financial advisor have more clarity on how much to spend in the present and save for later. The survey also suggests that people without a professional financial planner are twice as likely to say they are not confident regarding their savings and spending. This is also why people without an advisor prioritize debt reduction and make it a priority. Apart from augmenting your savings and spending, financial advisors also impact your retirement readiness. The study reports that 59% of the Americans who engage with a financial advisor believe they are on the right track for retirement. And, if they work past their official retirement age, it will be out of choice rather than necessity. Contrary to this, 6 in 10 people without a financial advisor feel they will work past their retirement age because it is their necessity.
Even if you do not require the holistic band of financial services, you can choose a fee structure that suits your current financial situation. Later, when your financial situation becomes complicated (for instance, you receive an inheritance, you are near retirement, etc.), you can hire a more experienced and qualified financial planner.
If you want to find a financial planner who is worth the money you spend on him/her and offers sound advice as per your needs, you can follow these simple steps:
There is no direct or a short answer to the question – is a financial planner worth it? You have to take a holistic view and evaluate if the chosen financial planner gives you quantitative and qualitative worth. You can use the cost versus benefit method as the first step for this. However, a sound decision to know if it is worth it to use a financial advisor is based on a comprehensive assessment. Engaging with a professional financial advisor can give you the full worth of your money and also assure you of your financial security.
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The blog articles on this website are provided for general educational and informational purposes only, and no content included is intended to be used as financial or legal advice.
A professional financial advisor should be consulted prior to making any investment decisions. Each person's financial situation is unique, and your advisor would be able to provide you with the financial information and advice related to your financial situation.