Does It Pay To Use A Financial Advisor? This Is A $15,000 Question!
If you ask a landscaper if your yard needs landscaping, they’ll say it looks a little shabby and overgrown.
If you ask a barber if you need a haircut, they’ll say your hair could use a trim.
If you ask a car salesman if you need a new car, they’ll be more than happy to show you the newest models on the lot.
My point is – people are incentivized to convince you that you need the things they are providing as a service. And I’m no different. I’m in the business of giving people as much financial advice as I can and to manage their investments. While there are definitely some people who are fine on their own with a DIY approach, I think most people would benefit from having a financial advisor. And I have the numbers and studies to back it up.
Value Of A Financial Advisor
If you’re hiring a financial advisor to manage your investments, you want to make sure you are getting value from this decision. There are many studies pinpointing the value an average advisor brings compared to the average investor. A study by Vanguard puts this number at an extra 3% in net annual returns. A study by Envestnet also landed around an annual value add of 3% returns.
Those are some pretty solid studies showing the benefits of using a financial advisor; but, according to a study by CNBC and Acorns, 75% of those surveyed manage their own money. I’d say this number is a little high as people taking a survey through CNBC/Acorns are likely to be more financially savvy than the average American. The real number is going to be lower than 75%; but, it paints the picture nonetheless. At Vanguard, the median 401k balance for those age 65 and older is only $58,035. This means the majority of people are handling their own investments and the majority of people will not have enough to live a comfortable retirement. The average American needs help!
If you are an average DIY investor, and the Bell curve says you probably are, you are leaving so much wealth on the table. This not only has an impact on when you can retire but what your retirement looks like. It has an impact on the wealth you’ll leave your family and their family. The decision to go DIY has a huge impact. I’m not saying every single person is going to be better off with a financial advisor. There are definitely those who are plenty capable of handling it themselves. And technology has made it to where investing yourself is easier than ever before. What I’m saying is - the probability you are one of these people is not likely so it would benefit you to at least look into using a financial advisor. There are certain things in life worth paying someone else to do on your behalf, and financial planning/investment management is one of them. This is why.
The Impact Of A Financial Advisor
The table below shows the impact using a professional and going DIY has on a portfolio. For our example, we will assume the investment time frame is 30 years. We will also assume the advisor managed investments returns an average of 9% annually and the DIY managed investments return an average of 6% annually. The 3% difference coming from the studies listed above. We’ll also assume inflation is 2.5% so all numbers in the future will be in “today’s dollars”. Each investor will start with $50,000 and contribute $6,000 every year.
The Professional has an ending balance of $820,116 and the DIY investor has $442,329. A 3% difference per year might not seem like that big of a deal, but over 30 years it certainly is!
And here is a graph showing the difference between the two.
What 30 years of compounding interest can do for you.
Having a professional in this scenario almost doubles the value of the investment! Using the Rule of 25, this is the difference between being able to spend $32,805 and $17,693 each year in retirement. About a $15,000 per year difference. So yes, it does pay to use a financial advisor!
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About The Author
Shaun Melby, CFP® provides fee-only financial planning and investment management services in Nashville, TN through his company Melby Wealth Management. Shaun has over 15 years of experience as a financial advisor in Nashville. Shaun created Melby Money to educate the public about finances.