Is a fee-only financial advisor really worth the money?

Yes, absolutely. Do you want to do two jobs … go to work and be a part time portfolio manager for yourself?

However the answer also depends on the financial advisor you are talking about.

The longer answer to this question: Can you justify the fee you pay for a haircut from your barber or the wheel alignment from your car mechanic? If the service improves your life, and you don’t overpay, then it’s justified. The same goes for financial advisors: if they’re improving your life and you’re not overpaying, then they’re worth it. If you pay more than one-percent for financial advice or portfolio management, then you had better be getting a lot in return.

It has long been held that investing is only for the wealthy or the few, but it’s a service that has become very important to each person’s quality of life. Whether you’re invested in a 401k at work or an IRA, saving for retirement has become a touchstone of modern life. Pensions are uncommon and social security is no longer secure, so saving for one’s future has become the responsibility of the individual.

What we’ve found is that after an average of 30 years of saving, people who rely on income alone for retirement generally have about 2/3 less than people who rely on income and investing. So, to utilize a fee-based service that can help you reclaim 2/3 of the money that you might have left on the table is worth it.

There are many aspects to investment management, and the asset manager is just one part.

(Credit: Gaurav Chakravorty)

Financial advice is like any other expert advice – the price you pay for good advice can be a fraction of the value you receive. And, similar to other advice, unfortunately, it can often be difficult to determine in advance the value of the advice you are paying for. Worse, within the financial services industry it can be difficult to even determine how much you are paying, as the industry often buries its fees inside the products and legalese.

Nevertheless, as Eddie includes in his response, a good financial advisor can be worth the money. As Dalbar notes in its annual survey, most DIY investors underperform the market by a significant percentage. They buy high, sell low, and, generally speaking, try way too hard, resulting in excess fees and time spent chasing value destructive strategies.

And this is just one slice of financial advice, among a range of financial planning, personal tax, investments and a host of other topics that must be blended to provide expert, individually customized counsel. Further, not only do each of these topics require significant outside knowledge, they also require ongoing study to stay abreast of the latest laws, products and changing market conditions. Much the way Certified Public Accountants (CPAs) must obtain a certain number of hours of continuing professional education (CPE) credits to maintain their licenses, Certified Financial Planners (CFPs) must do the same.

While in general I think most people could benefit from periodically talking with an expert on a few core areas – money, health, home improvements, nutrition, etc. – there is an even stronger case for business owners to check in with a financial advisor. Unlike employees, who may have complex planning requirements but a fixed income, business owners have cash flow as yet another variable to consider.

Business owners must routinely decide what to do with the “excess” cash their operation generates. Sometimes the best decision may be to reinvest it, while other times it may be appropriate to diversify their personal holdings, perhaps dividending the cash and investing elsewhere. It should come as little surprise that UBS, Merrill Lynch, Morgan Stanley, Wells Fargo, Pictet and other large financial advisories market their sophisticated solutions to business owners, as there is much to consider. For my part, I saw it while an investor at the Carlyle Group, where we would meet with founders and owners who were considering a partial or complete sale to achieve their diversification objectives.

In terms of the engagement itself, as Eddie includes in his answer it is likely a better approach to pay for financial advice through a “fee-only” arrangement. Commissions and revenue share arrangements, the stock and trade of the financial services industry, can make financial product recommendations appear ridden with conflict. I steer friends and family to Vanguard’s financial products, as they are usually the lowest cost for their category, and likely to remain so given their unique ownership structure (Vanguard is owned by its customers). Vanguard recently launched a captive advisor offering, called Personal Advisor Services (PAS) that may be of interest. PAS charges 30 bps, so the very low end on the spectrum of advisor fees.

Finally, I suspect this question will continue to surface partly because of the rise of the “robo-advisors,” the Betterment’s, Wealthfronts, Personal Capitals, LearnVests, etc., who offer a more transparent and flat fee version of financial advice, coupled with some semi-customized algorithms. Employees have an increasing array of choices within their employer-sponsored retirement programs (e.g. 401k, 403(b)), and even their health benefits (Health Savings Accounts or HSAs), making these managed account-like solutions important options, both inside the employer environment and out. That said, there is a limit to the breadth and depth of information the latest software can digest. Further, nearly all of these newer businesses rely on a live advisor at some point in the planning cycle.

For now, it would seem, the industry has placed its bets on human advisors remaining in the chain of customized financial advice. For someone in your situation, as a business owner, I would guess it would be doubly important to meet with a qualified advisor to discuss your long-term goals.

(Credit: Aaron Benway, CFP, EA,  Fmr- CFO, Carlyle Group)

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