I’m certain I’m not the only financial advisor who has faced the inevitable “But why exactly should I pay for financial advice” question.
The hard answer to that question is that financial advice, like any other expert-provided advice, doesn’t come free. Not the good advice, anyway.
And no matter how much you might be told you’re not really paying for an advisor’s time as long as you buy a product from them, the truth is, you are. Some advisors choose to make the margins transparent, while others don’t. But when you see that add-on service fee, you might feel better paying it when you know what you’re getting for it.
Financial advice is a service that has often been regarded with some degree of skepticism, and it’s perfectly understandable why.
When you know what you want to do with your money, you have set financial goals to focus on, your accounts look pretty healthy right now and for the foreseeable future, why should you bring someone else in to advise you on how you spend and invest your money?
Why should you dish out that “one percent” to an advisor? And open up about something as personal as your finances? To a stranger, nonetheless…
Now let’s consider this: Studies over the years have shown a quantifiable financial advantage in working with an advisor. Vanguard, an established financial services firm, has been studying the advantages of working with an advisor for over 15 years.
They identify the financial advantage at a 3% increase in returns on a portfolio managed by a financial advisor, as opposed to a self-managed one. The experts at Vanguard call this advantage the ‘Advisor’s Alpha’.
I know, I know. I’m a realist and a bit of a skeptic too, so I’m bound to believe that this evaluation might come with a weighted bias, having been conducted by a financial advice firm. Similarly, I too, as an advisor, stand to gain from convincing you that financial advice is something you should pay for, so I’m not going to do that.
What I will do, instead, is share with you a list of my ‘services’ per se, as a financial advisor. I’d like to tell you what you pay for when you sign up with an advisor, and then leave it up to you to decide whether or not it’s a service worth paying for.
Your finances are, after all, a personal affair and your decision to manage them with or without an advisor would rely completely on your financial goals, your ability to assume risk, your current portfolio or financial standing, and your understanding of investment.
Here is a consolidated list of what you essentially pay for when you pay for financial advice:
Unbiased, straightforward advice and action plans
I have seen even the most seasoned self-directed investors come to a grinding halt in their financial decision-making after they have been burnt by a bad investment once or twice. Money is just one of those things – nobody takes losing it well.
Financial advisors help to keep the emotion out of it, face losses headlong and advise you on measures to recover and then keep growing.
An educated approach to optimally managing your finances and your estate
As many of you would have experienced first-hand, the math isn’t as simple as cash-in-cash-out when you’re managing your finances and your estate. It gets a little more complex when you start to think about maximising your estate.
Your financial advisor will help you create a holistic approach to managing your finances including budgeting, addressing short and long-term financial goals, contingency planning, estate planning and more. Ultimately, your advisor’s goal is to lead you to complete financial independence.
Monitoring and restructuring your portfolio regularly
Portfolio reviews are important to ensure your money is working for you, and optimally so. Even your most stable investments exist in dynamic markets that are constantly shifting. While long-term investments need less frequent audits, it’s still advisable to check on how they are performing once or twice a year.
Your advisor shares feedback with you on the performance of your investments, recommends restructuring investments for better returns and helps draw your attention to new and lucrative investment opportunities to further your portfolio. Again, this is all deeply tied in to your financial goals. If and when your goals change (and they should, it’s healthy), your portfolio undergoes a few changes, too.
Analysing your willingness and ability to assume risk
This objectiveness is probably one of the most important roles of a good financial advisor. Money matters are emotional matters. Investing on a ‘gut feeling’ is only a good idea when the gut feeling is based on a few solid financial projections, and a clear, objective assessment of your willingness and ability to assume risk. This is key.
In a previous article, I had written about how high-risk investments are not for the faint-hearted. The ride along the peaks and the dips of a graph, especially when it’s your money that is riding the curve, can be a gut-wrenching experience – and one not worth it, if it puts you under a great deal of emotional stress.
Your financial advisor helps you to assess your willingness, your financial position and your emotional ability to assume risk. They would also help you to re-focus on your financial goals, and assess whether or not it’s worth taking the shot.
Every advisor’s approach is different and their specialisations, areas of focus and strategies might vary, too. With all my clients, I am also particular about a few more aspects including:
Helping my clients to see and understand what they might not recognise as important
Clients might not realise that a particular asset or investment is slowly draining them of their money, or might miss the fact that another is multiplying the small amount of money invested into it. Being trained to identify, analyse and capitalise on trends and patterns, I keep a close watch on my clients’ portfolios to make sure that we are making the most out of annual patterns, trends and other market movements.
Addressing financial problems or challenges a client faces with their current finances and investments
A strong financial portfolio is based in a secure financial foundation. I work with my clients to gather a clear understanding of their current financial position, address their problems and challenges and approach those with a clear plan. Only once a client is comfortable with their current financial position is it worth exploring growth opportunities.
Creating awareness of opportunities that might be passing clients by
It takes a constant finger on the pulse of the market to identify and make a move on the right investment opportunities. Unless they are full-time investors, clients are likely to miss a few lucrative investment opportunities that come their way. Based on my understanding of a client’s portfolio, their financial goals and their investment ‘personalities’, I make sure to turn their attention to opportunities that they might want to consider.
Mobilising resources in the form of advice, product information and connections that might be helpful to clients
As most advisors will tell you, it is only natural that you end up offering a support system that extends beyond just portfolio advice as the client-advisor relationship grows. In addition to making available any product information, market insights and other relevant information to their investment or business interests, I also support my clients with relevant contacts and connections where possible.
What an Advisor Is Not
Since we’re talking about what an advisor is and what you can expect one to do for you, it might also be helpful to establish a quick understanding of what an advisor is not. An advisor devises an overall solution and a strategy for your finances and investments. They advise you on the roadmap to financial independence. The products that an advisor recommends to you are available across the market, and through many other advisors, too.
The differentiator here isn’t the financial product, but it’s application as a solution within your portfolio. The differentiator is your advisor’s expertise. Your financial advisor should not typically be just a ‘broker’. Your relationship with your advisor ideally goes beyond just transactional. It involved working towards a much deeper, more ‘invested’ solution than a commission-based transaction.
If you’ve never worked with a financial advisor before, I hope this has helped you form a better understanding of what exactly you are paying for when you hire one.
If you already work with an advisor, you might find that you’re not taking complete advantage of the expertise that you have access to. In that case, set up a meeting and ask your advisor what more they can do for you.
Here’s another quick tip, too, to make the best out of your financial advisor’s time and knowledge: Try and make sure you’re not working with a ‘Yes Man’ (or a Yes Woman). By this I mean that you want an advisor that sometimes challenges your decisions, disagrees with you and helps you with a fresh perspective when you need one. Someone that nods along to everything you ask for, and simply pockets a commission is doing just that – pocketing a commission and not much more. So welcome a little feistiness!
A lot of investors that I know like flying solo for the most part – they like studying the market, making financial projections and thrive on the anticipation involved in watching an investment as it grows (or doesn’t) over time.
While it is an exciting space, not many of us are wired to treat our finances and investments objectively. Not many of us are able to keep a close watch on the markets, seize the right opportunities and make the most out of them. Moreover, not many of us are able to face the consequences of those investments not working out, and kick into recovery mode after a loss.
For these and other reasons I have discussed in this article, people choose to pay for financial advice. It’s not a question of whether or not hiring a financial advisor is a good or bad idea. It’s a matter of whether or not it’s the right approach for you.
