You have a financial advisor—but why?
For many years the answer was simple: to help you buy investments. Even today the vast majority of stockbrokers and financial advisors say that’s their primary role.
And that means there are only two points of differentiation when choosing an advisor: price and performance. You want to hire an advisor who charges you less than the other guy to buy your investments, and one who recommends investments that produce higher profits than the other guy. If you were to come upon a new advisor who offers lower costs or higher returns, you’d be likely to fire your advisor and hire the new one.
Indeed, price and performance have served as the value propositions for investors for decades. But now you need to throw them away—and if they are your sole reasons for hiring your advisor, throw him or her away, too.
That’s because you don’t need an advisor for either reason. Thanks to innovative technologies, decades of economic research and a society that is far more complex than those experienced by prior generations, the old value propositions offered by financial advisors simply no longer have any value.
Thirty years ago, commissions for stock trades were fixed by the government, and virtually all mutual funds charged you an 8.5 percent sales load to buy. Today you can buy stocks for less than 10 bucks a trade, and most mutual funds now cost nothing to buy or sell. And carrying costs? While the average mutual fund still costs 1.3 percent per year, according to Morningstar, index funds and exchange-traded funds cost 0.2 percent per year—literally pennies.
If you need help choosing investments or building a portfolio, dozens of online sites will do it for you. Like the best advisors, all these sites rely on the latest academic research to create a highly-diversified portfolio. The result is that investors can expect to receive returns comparable to those provided by the global financial marketplace—and they typically charge just 0.25 percent per year. (At least one site does it for free.)
No longer can any financial advisor claim to offer lower prices or investments that generate higher returns—because the Internet will challenge those claims.
This doesn’t mean you don’t need an advisor or that an advisor’s 1.5 percent fee fails to deliver value. Rather, you simply need to make sure you’re getting value from your advisor. So if yours merely helps you pick stocks, bonds or funds, you need to replace your advisor with the kind you really need.
Indeed, the right kind of advisor can increase your wealth—not because he or she is a better stock picker, but because there’s so much more to personal finance than picking investments.
And on the investment topic, even Vanguard admits that advisors are worthwhile. It released a study earlier this year showing that financial advisors can increase their client’s net investment returns by 3 percent (not necessarily each year, as some opportunities are intermittent, such as market fluctuation). This is not achieved by picking good stocks, but by keeping nervous clients invested during periods of volatility. They do this by not selling low (something no Web-based algorithm can accomplish); creating effective asset-allocation models (just like websites do); steering clients away from expensive investments; and by helping their clients liquidate their accounts tax-efficiently during retirement.
Now think about all the other aspects of your life that involve money. Your advisor should be giving you advice about your mortgage, employee benefits, credit and debt, taxes, insurance and estate planning. Your advisor should handle all of your investment record-keeping and tax-reporting chores so you don’t have to.
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It’s hard to put a value on the peace of mind you get from knowing that you and your spouse have a dedicated professional ready to help during life’s most difficult times. When the market crashes or your spouse dies, are you really going to turn to a Web-based algorithm for help and solace? If these benefits were to be translated into “returns,” it’s quite likely that you’d agree your advisor is worth well more than the cost of his or her fee.
There’s no question that today’s top advisors are using technology to help them deliver valuable services to their clients. But if you’re not getting these benefits—if all you get from your advisor is an occasional pitch to buy a stock or a fund—then you need to fire your old-school advisor and hire one who lives and works in the 21st century.