Why do smart people use financial advisors?
What is the real value to hiring a financial advisor, and who uses them? What is the value proposition? What makes one car with four doors and wheels worth $300,000 and other $30,000? Although we might have an answer, the answer differs from person to person.
People use financial advisors for many reasons. Some use them because they absolutely need them, others because they want them. Paying a fee for advice and guidance to a professional who uses the tools and tactics of a CFP™ (CERTIFIED FINANCIAL PLANNER™) and an experienced Registered Investment Advisor who is a fiduciary can add meaningful value compared to what the average investor experiences.
Many middle-class investors are anxious about their finances and are not interested in learning the details of managing their money. This anxiety often results with money left on the sidelines because they don’t know what to do or are afraid of making mistakes. That means earning a fraction of 1% at the bank when the Dow Jones Industrial Average (DJIA) is up over 25% in the last 12 months.
There are others who are interested in learning about investing and may want to hire an advisor to “look over their shoulder.” They want to hire an “investment coach.”
A third category are people who hire professionals because they are busy doing things that are more important to them: building a career or a business, being with family, or living an active retirement. They hire an expert to manage their money the same way they hire a lawyer for estate planning, a CPA to prepare their taxes, and a doctor to keep them healthy.
A fourth category is people who were making their own investment decisions but ended up making a huge financial mistake. This leads me to a story about a really smart, highly paid high tech executive who is very knowledgeable about investing; but he hired an advisor:
It’s not because he lacks the knowledge or interest, obviously. Rather, he figured out he had behavioral blind spots and understood he was at risk of great financial loss. He’s paying someone just to take that risk off his plate.
Determining your goals, controlling risk, managing portfolios well, and knowing your limitations – knowing you have “blind spots” – has led many smart people to hire an advisor.
Vanguard, the hugely successful purveyor or no-load mutual funds (that appeal to do-it-yourselfers) estimates that a financial advisor is worth about 3% net in annual returns. They attribute this to the seven services that a good advisor provides:
- Creating a suitable asset allocation strategy.
- Cost-effective implementation.
- Behavioral coaching
- Asset location
- Spending strategy.
- Total return versus income investing.
If you have an advisor but he is not meeting your objectives, ask us for a second opinion. If you don’t have an advisor but may want one, we offer a free one-hour consultation to see if we are compatible.