The Value of Financial Advisors

In My Humble Opinion
1

I have retirement accounts (IRA, Roth) with an advisor we’ve had for about 20 years. It was a collection of loose ends, 401ks etc. my wife and I had at the time consolidated to one place. The portfolio is automatically balanced based on our age, so we don’t have to do much, we review our statements a couple times annually, and we meet with this person about once a year.

I also have an inheritance portfolio for about the past dozen years. It’s not much, but it is with another firm my dad was using. I talk with an advisor there about quarterly and they recommend changes or just sitting tight. I have more contact with this advisor by far, and this portfolio has performed much better than the other over the past 10 or so years.

A friend asked me if it was worth having a financial advisor, since all this money management could be done without one, and avoid paying his/her fees (the friend does it without a FA). For me it seems worth it, as I am knowledgeable about the market, but no expert for sure, and I don’t have time or capacity to handle all the details. Maybe after I stop working I’ll have time and interest in it, but for now I am okay with paying someone else to do it.

Opinions? Do you think paying a financial advisor to manage your investments is worth it?

2

I’m a former advisor. I believe that the single greatest service an advisor provides is in being a firewall to making bad decisions. People are incredibly irrational beings, and make terrible financial decisions all the time. The moment the market so much as sneezes, people want to ignore every instance they’ve heard the phrase “buy low, sell high”, and try to pull money out of the market.

For those people, paying an advisor 1% a year saves them twentyfold in stupidity.

Another value-add is for higher net worth accounts who are looking for higher income during retirement. Higher balances equals lower fee rates - and I’ve seen good advisors that specialize in options that generate a really good income stream - but those advisors typically don’t bother with small accounts.

3

This more than anything. I’ve had the same financial advisor for 30 years, and I don’t follow what’s happening in the markets close enough to make good long-term strategic decisions. That’s what I rely on her for. The chances of me getting it right is almost nil.

4

I’m always getting harebrained ideas - “We’ll pay for our daughter’s graduate school! We’ll buy her a house with cash and she’ll reimburse us when she gets a mortgage!” and my financial advisor is there to say, “No, you’re not doing that with your retirement accounts.” It helps to have somebody whose “permission” I need before I access the money.

5

The industry is rife with people who charge 2% to put you in a portfolio of funds that also charge 2% and pay the advisor much of that. Oddly enough your performance suffers greatly from that 4% drag.

There are also honest advisors who are able to more than earn their (smaller) fee.

The whole industry is undergoing ferment with the rise of the so-called robo-advisors who will do a lot of this for nearly no cost. As well there is a big regulatory push to clearly delineate between the people who are salesmen, and the people who have a so-called fiduciary duty to consider your interests before their own. Most of the consumer investment industry has been fighting this regulation tooth and nail since it would expose who they really work for: themselves. I’d say the odds on this sort of consumer-friendly regulation being effectively implemented in the next 4 years to be … low.


Having said all that, I use an RIA from a small firm. I’m invested entirely in exchange traded mutuals or ETFs with negligible expense ratios, or in US treasuries, pay no transaction costs, and also no AUM fees. No proprietary BS at all. Would I keep him if he charged 2% AUM? No friggin way. I’d be on my own or with a robo-advisor the next morning. As @Munch said, I view him as my “conscience” to offset me doing something stupid or rash.

My now ex-wife (yaay) came into our mercifully short marriage with her own small-firm RIA for her smaller asset pile. All invested in pokey low-yielding proprietary non-traded funds with high expense ratios. And paying 2% AUM to boot. She trusted this guy completely and would not listen to any thoughts to the contrary.

IMO one of us was/is doing it right and the other was/is a victim of industry scamistry. Both our advisory firms appeared interchangeable if you just looked at their websites. The devil (or angel) is in the details.

6

It can be worth it if you don’t feel like you are informed enough to do it yourself or you are worried you would make compulsive bad decisions.

There are also advisors that will do your years checkup or initial portfolio setup for a fixed fee rather than a percent of assets.

Personally, I would never give an advisor a set percentage of my assets every year to basically do nothing other than keep me from doing something stupid. But I trust myself to stick to the plan that we initially created, and perhaps update that plan every couple of years or when circumstances change.

Even one percent a year is a very big hit on your lifetime returns.

7

When I retired the first time, I had no idea what to do with my TSP (equivalent to a 401k, I think.) Our credit union has a financial advisor available, so we went to him, and we’ve been going since 2013. We told him we want relatively safe investments due to our age and our cautiousness. Neither my husband nor I have any financial training, nor much interest in learning, so Dave has been a life saver.

My initial account more than doubled, and even tho I’ve been drawing on it for over a year, it’s still increased in value above what I’ve taken out. Plus it has some sort of floor, so it’ll never drop below whatever its value was last June (I think??) Spousal unit’s money was put in a different account (also with a floor) a bit after mine, but it nearly doubled also. My 401k from my post-retirement job went into a 3rd account in a higher-risk/potentially higher return investment that will be for our grandkids’ education down the road, so we don’t need to be as conservative for the moment.

Without Dave, who knows what stupid decisions we might have made. I’m pretty sure he gets a commission from the products he’s recommended to us, but like I said, our annuities have grown nicely. Maybe we might have made more in other accounts, but we’re happy. So for us, having an advisor was more than worth it.

In fact, we’re getting ready to meet with him to deal with MIL’s CD that’s about to roll over (she’s way more conservative than we are!)

We’ve seen this with former coworkers who panic without understanding anything about finances (as in understanding even less than we do.) We almost made a stupid decision ourselves, thinking to use my TSP to pay off our mortgage, till Dave pointed out why that was a stupid idea (OK, he was more diplomatic than that.) So for us, there has been great value in our advisor.

8

10 posts were merged into an existing topic: Goodkitty Posts

9

I don’t think it’s worth it, and I’m not willing to pay someone 1% a year when low cost index funds really can’t be beat. Someone to actually do the rebalancing might be worth something, but absolutely no 1%

This, this, this.

For 30 years I’ve just been funding three basic funds, S&P 500 index, Total Bond index, High Yield Bond index. I did recently add a Russel 2000 index, since I am a little concerned about overexposure to the Mag 7.

I’ve never sold a single share in any of them, and just let them ride through good times and bad. Early on I put money in when I had it, and now I do so on a monthly schedule ($X on the 1st and 15th of every month, adjusting for weekends).

It has served me very well.

10

I found a guy a few years ago who works independently out of his home office. I see him once a year, pay a flat fee, and consider it one of the best decisions I’ve ever made.

My only concern is that he will retire at some point (he is in his early 70s).

mmm

11

We soured on financial advisers, after ours dropped the ball on monitoring a trust investment account, allowing trust execs’ failure to file necessary annual documents with the state to go unnoticed, basically invalidating the trust and the protections it offered. No negative repercussions, but it was a wake-up call.

Mrs. J. has been a very efficient and dependable investment manager, while I’ve managed not to blow our retirement funds moving stuff around.

12

Related to this, financial advisers who work for a bank are heavily incentivized to sell you products that are good for the bank but not for you, like mutual funds that combine high management fees with substandard returns. They know where their salary, bonuses, awards, and job promotions come from, and it ain’t from you.

13

Thank you for this thread. I’ve been thinking about this too.

Now admittedly someone to rebalance for me would be worth something. I know I should, but it’s one of those chores I just keep putting off. OTOH I am risk level comfortable with the more equity heavy position my account has returned to over the last eight years and feel no urgency to do it.

But dang. I generally agree with the idea that one of the key mantras is to keep expenses low by way of a reasonable basket of mostly index funds and ETFs and I see fairly little value to adding an ongoing expense drag every year. On the plus side I don’t get spoked. Maybe a one time consultation? Then discipline myself to do the rebalancing.

My concern is more that I don’t know what I don’t know?

And I am at a point of wanting to keep working but slow down a bit, pulling out of retirement funds as needed to not worry about what my work income is. Retirement with going to work full time as my hobby for fun, and to supplement my retirement income, especially before I start pulling social security at 70.

@Munch and other experts here, assume a 65 year old … hypothetical … person with a fairly high amount in retirement accounts. How much should a fiduciary (an I assume that is who should be hired) be paid?

14

Specifically, you’ll want to hire a CPA. There are advisors who can run a plan for you and do a good job, but I think a CPA is both more qualified and tend to be more sales-neutral. Also, since you’re in retirement, they’ll be more tax-sensitive, which is what you need. Assuming you don’t have any complicated assets or other situations, I think $1000 would be a starting point.

15

You’re the (ex-) pro, not me. But did you mean CPA or CFA? Accountants often know bupkiss about investing. Yes, they’re not commissioned salesmen for certain investment vehicles, but that may be the only useful thing to be said about them.

17

Both, actually. A CFA is perfectly fine and will absolutely get the job done. You can find CPAs who have a CFP (certified financial planner) who will do your taxes every year, and every 5 years provide a full financial plan for you. It’s a good relationship to build.

18

Yeah I need to find one. My accountant is fair to middlin but at least knows the few special circumstance items we have. And overcharges for what they do. Not someone I’d ask for planning guidance. My wife has been on me to replace for years. The places where the major 401K resides have someone sending me messages offering services. I am skeptical of that being a good choice.

I’ll ask round I guess.

I’m only in retirement in mindset. I do still work full time and have no plans to stop.

Doubling back to this:

Depending on specifics I’m not thinking of that as harebrained.

Assuming I have enough that I know I will be passing something on to the kids, ISTM that paying for education and reducing any debt they start off with after completing all education is a very efficient means of intergenerational wealth transfer. If I need to dig into the funds to pay for the youngest’s graduate school I will. And I will maximally fund any future grandchildren’s 529’s if my kids ever get busy. :slightly_smiling_face:

Again after first being sure that won’t risk having us run out if we, either of us, happen to live exceptionally long.

If I get an advisor I want them to be on board with that way of thinking. I worry that advisors have their rules and just try to press you into them.

19

The latest thing seems to be using scare tactics to convince retirees that taxes on RMDs are the worst thing ever. Of course, their advice seems to be to pay the taxes now rather than paying them later, which is something I don’t want to do.

Back to the OP, I suggest heading to the Bogleheads forum and read that for a month or two. You will learn a lot, and may decide that you don’t need to pay an advisor to manage your money.

20

OTOH, I intend to do exactly that. For sound reasons that are quite likely to save me considerable money. But may not save you anything.

Which indirectly brings up a point relevant to the OP individually, and to the rest of us individually.

Appropriate advice for someone approaching retirement with a net worth of 100K, 300K, 1M, 3M, 10M, or 20M is very different. Especially as it applies to taxation decisions such as RMDs.

You want an advisor (or robo-advisor) who aims their practice at your net worth band. And you want to take advice from random internet strangers and websites that are aiming at your situation, not a very different one. There are lots of rules of thumb that people (and website authors) know and repeat. What they often don’t know is what logic underlies those rules and when they are, and more importantly are not, applicable.

21

We’ve got a guy (apologies for using the word “guy.” I’m sure there are plenty of capable gals.) We pay him a flat 1% of the funds he controls. For us, that 1% is worth us not having to be “the experts” about our money.

When I retire in 3 years, I’ll have my IRA to either keep where it is, convert it myself, or give it to him or someone else. Not sure which we’ll do.

For all practical purposes, one could likely do just fine picking 3-10 funds from Vanguard or Fidelity and rebalancing periodically. But I was looking at their list of funds recently, and it quickly made my head spin. So I could either ignorantly just say, “Hmm, S&P500, and whole market, now a bond fund…” And that would likely be “good enough.” You could look up various recommendations to guide which percentages to keep in stocks/bonds/cash given your stage in life.

One of the benefits with diversifying within one family of funds is you get 1 statement. How complicated do you want your records to be?

I’m nearing retirement, and keep getting invites from money guys who have seminars and give some consultation - wanting my IRA. We’ve been talking with 2, mainly to attain their expertise re: my government retirement - an area that is not my current guy’s expertise. And what they say is completely different. The one guy is strongly in favor of annuities, and generally wants 2.5%. The other guy urges VERY active management - switching in/out of stocks/cash/etc - even several times a day. Both claim they greatly beat the market. Our current guy is more of a conservative buy and hold guy. (We like to keep transactions limited, because my job requires ongoing transaction disclosures of every purchase/sale.)

I tend to like our current guy, but when we look back, we took a big hit in 08 when we had 3 kids in college and failed to move $ out of stocks. So I don’t know how much I really trust him should there be any huge volatility in the future… But he has us buy individual stocks, funds, bonds, bond funds, preferred stocks… He has his reasons, but I would never have heard of some of these things I own shares in. And over 15-20 years, the balance has been growing nicely.

EVERY guy you talk to will say they beat the market. Color me dubious. Is that like Lake Woebegon where all of the children are above average? :wink:

The other thing I’m having problems with is - how much does it matter? Hear me out here. We succeeded in being frugal, such that we now have a comfortable amount of savings/investments - and I stuck with a soul-sucking job which will provide a pension. EVERY guy we speak with projects that we can continue our current lifestyle, and will die with significantly more than we currently have.

But - if you have $1 million now, and everyone says you’ll die with $2 million - should you try to make that $3 million (or more?) How much risk are you willing to take on? Ad what recourse do you have should things not turn out so rosy?

So how much does it matter which guy I go with? How important is it for me to leave my kids 10, 20, x% more than the tidy amount I would leave them with any approach? Meanwhile, I’m trying to figure out the value of Roth conversions, guessing what my minimum withdrawals will be at what tax rates… I’d rather be cleaning toilets than try to figure out that shit.

Then, there is the issue of - if you want to go with a guy, how do you pick the RIGHT guy? How long will you need to sit down with someone before you can decide whether you trust them with a significant portion of your wealth and security? How many guys do you need to talk to before you find THE RIGHT ONE. I’m going thru the process right now, and I’m not sure how to make the decision, or how much more thought and effort I ought to put into it.

One thing that I like about my guy is that he IS associated with a bank. He moved to this bank after his old association - Merrill/BoA - was pushing him to sell their services. But, if a guy is NOT backed by someone bigger, what is your protection if he steals your $ and then steps in front of a train (which happened to a friend of ours.)

Sorry for the lack of a clear opinion. I find my money guy worthwhile, because I HATE dealing with investments. And, he likely is not perfect or the best, but he has more expertise in investments and planing that my wife and I have or care to attain. Worth 1% to me. YMMV.