I have been writing about investments, retirement plans and the economy for decades. As you might imagine, I have received a lot of comments and emails from readers.
The vast majority of your emails are kind, caring and gentle. Thank you for sending them. I read every one and respond to all that contain questions.
Over the years, some common themes have emerged. Key among them are questions about the value and necessity of hiring a financial advisor. Many of you feel there is enough information out there to allow anyone to invest successfully on their own.
Below, I will explore whether it is worthwhile to hire a financial advisor to help guide an investor’s retirement savings strategy. We will first explore the “No one really needs one” approach.
Why No One Needs To Hire A Financial Advisor
Most of the reasons I have heard not to hire a financial advisor have come from you, the readers.
Whatever you pay an advisor decreases your returns
You aren’t surprised by this argument, right? Although some people feel that paying anything for advice is a waste of money, the more you have in investable assets, the weaker this argument becomes.
Generally, the first million in assets is the most expensive because nearly all advisors have a declining rate fee schedule. So those of you with $10 million in assets will pay a much lower overall percentage fee than investors with $1 million or less.
But, let’s face it, there are many more investors with less than $1 million compared to those who have many millions. These sub-million dollar investors are often fortunate to be able to save anything at all, so any additional expense may significantly affect their overall result.
And this analysis is really meant for the average investor, who, according to a 2017 survey, has just over $100,000 in retirement savings. So, yes, for the average investor, this is a major issue.
Another argument I hear relative to fees is whether advisors really earn their keep each year. Many of you are frustrated by annual advisor fees of 1% or more, especially when it appearsyour advisor didn’t do a heck of a lot for you this year.
If you feel that way, hire an advisor or financial planner at an hourly rate periodically to review your portfolio and savings strategy. There is more than one approach to obtaining good advice!
Remember, good financial advisors will easily cover their fees each year in either investment cost savings or additional returns.
Investors can just use index funds
Many of you have said that investing is super simple and easy because there are plenty of wonderful, low-cost index funds at Fidelity, Schwab, Vanguard and many other mutual fund companies.
And by the way, Bob, in case you haven’t noticed, passive investment management has beaten active now for as long as anyone can remember. As a result, it makes no sense to pay an advisor to pick mutual funds when I can just place my entire retirement balance at Vanguard and leave it alone until I retire – just like Warren Buffet says. And isn’t Warren pretty smart?
A good argument, but unfortunately, investing has never been quite that simple.
How many of you would have bet 10 or 20 years ago that passive investing would consistently beat active in a number of asset classes over an extended period of time? How many of you were able to predict the market crash in 2008-09?
We tend to look in the rear-view mirror when investing, rather than out the windshield, because, “…we certainly don’t want to experience that again” and we tend to assume what has been successful in the past will continue to be in the future.
However, it has historically been risky to adopt a single approach to investing. A diversified approach to asset selection as well as strategy is probably a much safer and more fruitful path to ensuring you retire rich (or with anything at all).
So, has passive investing been successful over the past 10 years? Yes. Is it likely to be just as successful over the next 20, 30, 40 or 50 years you are going to have to work and save? I would bet not.
I also hear from many of you about how well you have done investing over the past 10 years. You have received a lot of help from the 10-year bull market we have experienced since the 2008-09 crash. It is smart to keep in mind that all boats rise when the tide comes in.
One true story before moving on.
I knew a 401(k) plan participant who accumulated a large balance thanks to generous company contributions and a long, strong bull market in equities. This individual felt he had accumulated enough to retire at 45.
When I asked him what he planned to do in retirement, he proudly said he would continue to manage his retirement plan account.
Shortly after he retired, one of the periodic market crashes that are characteristic of U.S. equity markets occurred (I believe it was the tech-wreck of 2000) and I heard that his account balance had diminished by more than 50%. I later learned he lost his house, marriage and had to declare bankruptcy.
I am not saying an advisor would definitely have changed this outcome, because this person has a strong personality, but it may have. I do know this: 1. This individual credited the rise in his account balance to his own abilities rather than a strong market environment, and 2. He assumed that the market conditions that allowed him to build his balance would continue forever.
All advisors are dishonest anyway
Unfortunately, there is more to this argument than I would like to admit. As an investment adviser myself, I am not proud to say that my profession is one of the least trusted. And it is not hard to find reasons why.
We have all heard about the Ponzi schemes, pyramid schemes and outright fraudsters who have taken money from honest, hard-working people and selfishly spent it on their own lavish lifestyles. I would like to say that you don’t have to worry about this, but you do. Especially if you are fortunate enough to have accumulated millions in assets.
However, for the average investor, this is not as much of a problem as…
It is hard to get an advisor’s attention if you have a small balance
It is difficult to find an experienced, qualified advisor to pay attention to you if you have less than $1 million. I would go even further and say that it is hard to get good investment advice if you have less than $5 million.
It shouldn’t be that way, but the economics of the business mean that an advisor is going to be able to do a much better job (and make more money) with 20 clients having an average balance of $3 million than 100 clients having an average balance of $600,000.
Reasons To Hire A Financial Advisor
You have a job
Unless you are blessed with abundant funds (and I am not sure that I have ever heard anyone say they have enough money) you probably have to work each day (and maybe on weekends as well). That can make it difficult for you to spend enough time managing your savings and investment program.
You may wish to spend off hours leisurely rather than grinding through prospectuses and market performance reports. I know many of you view investing as a hobby (and a disproportionately high percentage of you appear to be engineers). However, investing, the markets and the economy are complex.
Making a significant mistake with your retirement savings program can sink your retirement hopes. Most of us should not take that risk.
It is good to hear an objective voice
Nearly everyone I know has a theory about investing. Many of you have come up with formulas and even algorithms to guide your savings and investment program. My hat’s off to you -- I don’t know where you find the time to do it.
For most of us, it will be beneficial to hear an experienced, objective voice offer suggestions about how we can improve what we are doing. That voice will often introduce thoughts and ideas we haven’t considered that may really help us.
You are going to need someone to reassure you
Every market, I don’t care what it is or what country it operates in, goes through boom and bust periods. The media are very adept at making these times seem even boomier or more nerve-racking.
When all the news is bad and your retirement savings has dwindled by 30%, a key to maintaining your sanity may be an advisor who has seen times like this before and is urging you not to abandon your plan by selling everything.
Remember, the main reason most investors experience performance well below that of the funds they invest in is because most of us get scared and sell at market bottoms (I didn’t want to lose everything Bob!) and get greedy at market tops (I know that fund returned 50% last year Bob, but how can it not have the same performance this year?).
You don’t know as much about investing as you think you do
No one knows what is going to happen in the U.S. equity markets tomorrow, next week, next month or next year. The experts have ideas, thoughts and theories, but no one really knows.
Could President Donald Trump initiate a new trade war tomorrow with a country you never realized was a significant trading partner, with virtually no warning? Absolutely. Will it impact U.S. equity markets? No question. Think you don’t have any exposure to that? You are likely incorrect.
Market experts spend a lot of time talking to other market experts and reviewing data. It is like reading tea leaves. Some are better at it than others. You probably have heard that economists have predicted 15 of the last four recessions. These are the smartest, best-informed people out there.
In a fast-moving, dynamic field where so much money is at stake, your knowledge base is unlikely to compare favorably with the experts. The best you can probably do is discern a major trend or two and hope to profit from it. Advisors have access to many higher quality sources of information than average investors could ever hope to acquire on their own.
What if something happens to you?
Most of us are sailing though our lives supporting people we care about (of course we need to include ourselves in that group). If you get sick, super busy, distracted (think marriage, divorce, children, death) or just plain tired of doing it, who is going to keep your retirement savings program on course?
It can be nice to know that someone is backstopping you.
Sometimes it’s a no-brainer
If you have a complex financial situation, or a spouse with a complex financial situation, significant assets (at least $2 million investable), a high-earning job, are close to retirement, no interest or aptitude for financial stuff, are emotional when it comes to money or have no extra time, then it is a no-brainer -- hire an advisor to help you. Take a look here for help.
If you have very little in retirement savings, are not able to save much, have a high level of interest in financial stuff, have a simple financial situation or are just starting your career, then it is probably a no-brainer as well -- don’t hire an advisor right now.
For everyone else, I hope you found some answers here.
