Financial advisors can do lots of different things. However, the most common task is investment guidance. While some advisors can help you build an overall financial plan or make financial decisions, investing is what most people seek.
You have many choices when it comes to how you want to invest your money. And, there are no overall right answers, but there is probably a solution that is right for you.
So, can an advisor help you? Should you pay an advisor to help invest your savings? Maybe. Maybe not. Whether you know it or not, you can probably do a perfectly good job investing on your own.
Below are 6 questions to help you figure out whether you need an advisor to help you invest and, if yes, what kind.
When it comes to investing, advisors can perform different functions. These functions break into two main categories:
An advisor can help you determine an investing strategy. The strategy might be determining your ideal asset allocation percentages and guide you to an Investment Policy Statement (IPS) — a set of guidelines meant to define:
- Investment goals
- Strategies for achieving those objectives
- A framework for making intelligent changes to your plan
- Options for what to do if things don’t go as expected
In addition to setting strategy, an advisor can also make the investments, manage, and trade for you.
If your advisor is investing for you, it is important to understand if they are doing “active trading” or “passive investing.”
Oftentimes, goals for active investing are to outperform the financial markets as a whole or at least how well you might do if you were investing your money yourself.
Active trading means that the advisor is actively buying and selling investments in your accounts — ideally in a way that is consistent with your investment goals, risk tolerance, and investment strategy. Active investing involves rebalancing to keep target allocations across sectors and risk levels. And, active investing usually involves analysis of market dynamics, sectors, news, and how anything might impact future possibilities.
Ideally, an active investor is also taking into consideration tax consequences, income considerations, and other financial goals besides returns. But, this is not always the case.
- Active trading is not foolproof. In fact, a recent analysis found that 88.4% of actively managed equity funds underperformed their respective benchmark over the last 15 years.
Passive investing is more of a “buy and hold” strategy. Instead of actively trading, you buy investments to achieve a prescribed asset allocation target and hold them for the long term.
Passive investing generally leans into buying indexes (owning a whole market index that represents the S&P 500 or the Russell 3000) and holding it over a long period of time. Instead of trying to invest in a single company or sector with the most potential, you simply buy the whole market.
Passive investments in index funds can be a relatively simple but also an extremely effective way to invest — especially for money you don’t need in the short term. Index funds can outperform actively managed portfolios over medium to long time horizons. They are also one of the most economical ways to invest money as these funds typically have very low fees associated with them.
- If your investments advisor is merely investing in index funds or has a buy and hold strategy, then they may not be adding value — this is something you could potentially be doing for yourself.
If you choose to work with an advisor, choose one that offers a fee structure you are comfortable with and is compatible with the type of services you need.
Common fee structures include:
When an advisor is paid on commission it means that they are getting paid for the financial products they sell you. This means that they are not completely aligned with your goals — they are often more of a salesperson than an advisor.
Assets Under Management (AUM) is the fee structure used most commonly by advisors who are managing (investing) your money.
The advisor will charge you an annual fee equivalent to a percentage of your assets — ideally no more than 1% but ranging from 0.25-2% or more. Even on the low end, these fees can add up.
If you have $500,000 and are paying 1% in AUM, you would be paying the advisor $5,000 a year. However, another way to think of the AUM fee is that it reduces your overall investment returns. If you are paying a 1% fee and you are earning an overall 9% return on investments, you are actually only getting an 8% return — your $45,000 return is essentially reduced to $40,000. And, that is just over one year and does not even factor in the cost of inflation.
Not only do you lose how much you spent on fees, but you lose the interest that money could have made if reinvested.
Over the span of 30 years, the difference between getting a 9% return and losing a percent due to AUM fees (i.e. getting 8%) on a $500,000 investment is just over $1.5 million. A million and a half lost due to fees. Yes, you read that correctly.
Pro: If your advisor is actively investing for you and you think that they are making better returns than the fee you are paying, then this can be a good tactic for growing your money.
Con: If you need financial advice beyond growing your assets — like turning assets into income for retirement, then an AUM advisor may not be the right fit.
It can be difficult to find an advisor willing to offer investment advice for an hourly or flat fee. Most advisors would prefer to manage your money for an AUM fee.
However, if you can find it and are willing and able to follow an advisor’s strategy, paying for hourly advice can be highly cost-effective. And, it may be helpful in many ways beyond investments.
An advisor being compensated at an hourly rate can give you an investment strategy as well as advise you on other financial matters that may have a greater financial reward than your rate of return.
Advisors compensated by a flat or hourly fee advisors can help you with:
- Roth conversions and other tax planning strategies
- Social Security claiming strategies
- Estate planning
- IRMAA reduction
- Insurance needs
- And more…
NOTE: The NewRetirement Planner, a 360-degree planning platform, helps you with the above-listed functions as well. Beyond powerful technology, NewRetirement can also connect you to a planning coach or a fiduciary certified financial advisor to help you feel more confident with your plans.
Sometimes the best reason to employ an advisor is to help you make logical — not emotional — decisions about your investments.
You might not realize it, but money is emotional. Fear, greed, frustration, euphoria, and impatience are all emotions that can negatively impact your wealth.
Use an advisor if you think you could use coaching when the market takes a dive or if you need help getting motivated to invest.
As Kenneth posted on the NewRetirement Facebook Group, “I’ve found that the most important aspect of investing for me is what I do during the once, twice, three in a lifetime black swan events (always negative). I get a little loopy in the head. The Corona Crash, I came damned near this close to pulling the plug but he talked me down. And that’s completely unlike me. But losing 6 figures in a week will rattle many, even those who think they’re ‘high risk-tolerant.”
Married? If you are married, an advisor can potentially be beneficial in a few additional ways. They can mitigate differences of opinion between spouses. Or, if only one spouse is active with the household finances, the advisor can provide a continuum if that spouse dies before the other.
When you are accumulating — working and saving money — your investment goals are relatively simple: grow the assets. This can be done with an advisor or on your own.
However, as you near retirement and are planning for how to decumulate (withdraw) your money, things can get a little more complicated. And, the scales might tip in favor of working with an advisor.
On Facebook, Lawrence highlights the challenges of managing money in the decumulation phase. He said, “I [invested] my whole life until about age 55 or 56. I now have an advisor that does it all and I can focus on the fun things to do in retirement. Building wealth is easy. Managing it along with Social Security strategies, Roth conversions, RMD management, market shifts, and rebalancing is way more time-consuming.”
The NewRetirement Planner can help people with many of these decisions. But, some find it reassuring to get additional advice and expertise from an advisor. Just be sure that you work with an advisor who understands the complications of investing after retirement. Many advisors lack that specific know-how.
After retirement, you want an advisor who can help with an investment strategy that takes into consideration taxes, guaranteed income, risk mitigation, drawdown strategies, and more.
Investing is not rocket science. There are ways to keep it simple.
Exploring bucket strategies and index fund investing are two great places to start.
And, of course, using planning software like the NewRetirement Planner can enable you to model investments as well as all of the other aspects of a strong financial plan.
As Rebecca recently wrote, “The reason I am a NewRetirement enthusiast is because for a very reasonable sum I can model my potential future scenarios and I don’t have to rely on someone else to do it for me because the software is locked behind a provider. I feel more in control of my decisions and I feel I am given the knowledge directly rather than having to get through a gatekeeper.”
When it comes to who should manage your investments, there is no right or wrong answer. It is completely a matter of personal preference.
Some people like washing their own car in their own driveway. Others prefer outsourcing the service. They all get the car clean. Investing is no different. There is a solution for all types of goals and preferences.
However, if costs are a concern, here are a few tips:
Set Up Your Strategy with an Advisor for an Hourly or Annual Fee: If you aren’t up to it yourself, do hire an advisor for an hourly fee to help you set an investing strategy.
Use Software to Make Assessments for Yourself: While it won’t help you with an investment strategy (yet), use the NewRetirement Planner to discover ways to do better with taxes, retirement income strategies, drawdowns, budgeting, Social Security, Roth conversions, and more…
The system can also be used to help you visualize specific recommendations from an advisor. Assess their ideas in the context of your overall plan. See the impact on various aspects of your finances.
Look for Low-Fee AUM Investment Advice: Vanguard’s Personal Advisor services come highly recommended by many people who use NewRetirement. It is a low-cost — 0.3% option for getting fiduciary investment advice.
Low-cost Planning: NewRetirement has live planning support and fiduciary financial advisors. Because these professionals work with the NewRetirement software, the costs are lower than other similar hourly-based services and the recommendations can be more effective since they are based on your goals, resources, and values — not those of the advisor. Learn more about NewRetirement support services.
