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Are Financial Advisors Worth The Cost?

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:

What is 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.

What do financial advisors do?

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:

  • Money management: The root of financial security begins with managing your money in the first place. A financial planner will work with you to create a failproof budget by tracking your expenses, minimizing your discretionary expenditure, and ensuring every dollar spent has a defined purpose and creates optimum value. Further, the advisor will help you set a savings target and use your funds optimally to achieve your long-term financial goals, such as saving for retirement, sponsoring the education of your child, buying a house, etc.

  • Debt management: Financial planners also support you to reduce your liabilities and become debt-free. These advisors analyze your financial situation, including your assets and liabilities, and create a personalized plan to help you pay off your debts, especially high-interest debt. Your financial advisor also works with you to identify additional sources of income to bridge the gap between income and expenditure.

  • Investment management: Your financial advisor also offers sound investment advice. These professionals create an investment portfolio aligned with your risk tolerance, financial preferences, investment approach, financial goals, and investment horizon. Financial planners give you advice on which securities to pick and manage your portfolio and other monetary assets. These advisors also apprise you of developments and investment portfolio performance. The objective is to reduce your investment risk and maximize your profits through professional expertise.

  • Tax optimization: Taxes can consume a big chunk of your income and savings. A competent financial advisor can help you minimize your tax burden and optimize your savings. The professional will advise you on how to best use tax-deferred retirement accounts or utilize tax-saver educational savings plans like the 529 college plan. Further, the advisor will help you use effective tax optimization strategies to lower your taxes. These include charitable donations, giving gifts, setting up trusts, tax-loss harvesting, etc. In case you received an inheritance, your advisor can help you minimize taxes on the received benefit.

  • Retirement planning: One of the most critical things a financial advisor can help you with is retirement planning. Financial advisors understand your retirement needs, retirement income goals, aspired lifestyle, and accordingly, create a sound retirement plan. The professional will assist you to identify retirement income sources, determine retirement expenses, implement savings plans, invest wisely in retirement plans, manage retirement plan contributions and withdrawals, etc., to ensure you are financially secure during retirement.

  • Insurance planning: Apart from supporting you in direct monetary matters, financial advisors can also assist you in taking care of your healthcare expenses. Your advisor will ensure you invest in the right insurance plans that can adequately fulfill your needs and also help you diversify your portfolio. The idea is to secure your family, assets, health, business, estate, etc. The advisor will also enable you to have long-term care insurance that can support you during the golden years of your life.

  • Estate management: Estate planning is not only for the rich. Anyone who owns assets requires sound estate planning. Financial advisors have expertise in this space too. These professionals can assist you in important estate management tasks, such as preparing a will, setting up a trust, appointing trustees, and more. The advisors also keep a tab on your estate taxes and penalties and identify ways such as donations, charitable contributions, etc., to reduce your estate penalties. If you require succession planning or philanthropic planning support, your financial planner can assist in that sphere too.

How much do financial advisors charge?

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:

  • Percentage of assets: In this fee model, the professional charges you a specific percentage of the assets they manage on your behalf. This is also known as Assets Under Management (AUM). Typically, in the AUM method, an advisor charges 0.50% to 2% per year of the market value of assets they manage. As the value of your assets increase, your financial advisor will likely lower the percentage fee. As per financial experts, a financial planner that charges 1% of $1 million AUM will likely reduce the charges to 0.50% at $10 million AUM.

  • Hourly fee: In this method, the professional will charge per hour for the services they offer. The more help you need, the more you will pay the financial advisor. The average pay for advisors in this method is $120 to $400 an hour. This fee model can work for you if you have uncomplicated financial planning requirements.

  • Flat fee: Also known as the fixed fee model, this fee structure requires you to pay a one-time charge to the professional for their help. For instance, if you contact a financial advisor for tax-related purposes, you would most likely be paying a fixed sum for their support. The fee in this model depends on the type of service you need, the advisor experience, complications involved, etc. The pay scale in this model is between $700 and $3,500.

  • Retainer fee: In a retainer model, the financial advisor will levy a flat fee at a defined interval – monthly, quarterly, and annually – for their services. The retainer fee requires you to pay a flat fee for retaining the advisor for a specific duration. This type of model works best if your financial situation changes frequently and is more complex than others. The exact fee depends on the experience level of the advisor you are hiring. The average pay for such advisors is between $2,000 and $10,000 per year.

  • Commission-based remuneration model: These types of advisors earn their remuneration through the financial products you buy through them. These professionals do not levy any specific fee or hourly charges. However, they get a commission from the financial products they sell. The more financial instruments you buy through them, the more commission they earn. For instance, a financial advisor asks you to invest $3,000 in a mutual fund scheme that levies a 5% commission. In this case, you would be paying $150 as commission to the advisor and investing $2,850 in mutual funds.

  • Fee-based remuneration model: Some financial advisors might combine fee-only and commission-based remuneration structures to charge for their services. Specifically, they charge clients primarily through a pre-stated fee, while a small percentage of their revenue is earned through commissions from financial products of mutual funds, brokerage firms, etc. Each type of fee mode has its advantages and disadvantages. You can choose a fee structure that suits your needs and financial budget and assess if the advisor agrees to the same fee model.

What are the hidden costs involved in hiring a financial advisor?

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.

Is a financial advisor worth the cost?

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.

How to find a financial planner who is worth the money

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:

  1. Identify your financial needs; specifically, the areas where you need expert advice, such as retirement planning, tax management, estate planning, debt management, etc.
  2. Take suggestions from peers, family, and friends, or use the WiserAdvisor’s advisor match tool to find a capable professional as per your needs.
  3. Shortlist the candidates based on their educational background, employment history, licenses, authorizations, credentials, work reviews, investment philosophy, fee models, ethics, etc. You can find this information on FINRA’s BrokerCheck tool.
  4. Interview the shortlisted candidates and ask them relevant questions regarding their qualifications, certifications, licenses, expertise, services, clients, investment philosophy or financial planning approach, fee model, team, mode of communication, etc.
  5. Based on the above questions, you can find an ideal professional. You can assess the fee model of the advisor and cross-verify it with other financial planners, and choose one that fits your budget. You can also negotiate the fee with your chosen advisor.

To summarize

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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