Who REALLY is better off with an advisor?

[Midpack]

When people post here asking for recommendations on financial advisors, many member immediately respond with

'you don't need an FA..."I" don't use advisors...long term investing is not rocket science...the fees don't justify/offset the drag on net returns.'

I haven't used a paid advisor in over 25 years and then it was a stock broker (no way to avoid them back then) - and I am at least as guilty about providing the pat answer above as anyone here.

That said, many/most people might be better off with a good*** financial advisor. Though long term investing methodology isn't rocket science at all (and what most replies here address), having the discipline to stick with a plan is probably where most amateur investors fall short (and is often overlooked in replies here). How many times have we seen claims of 'I haven't recovered from the 07-08 meltdown' - that's overwhelmingly a discipline issue, where methodology has gone out the window. From what I've read, even many advisors will say their biggest challenge is to convince clients not to panic and do something (clearly) stupid when the market and/or economy periodically and inevitably starts making big moves up or down.

Yes it's pretty easy to recognize the willfully/obviously investing novices who would be better off with an FA. I am not asking about those cases.

But in the interests of a better response, how do you recognize when/if an investor is better off with an advisor - that big gray area between the obvious yes or no? Those folks who are their own worst enemy, where "a (too) little knowledge" is dangerous?

A good answer might even be a good sticky/FAQ.

*** choosing a good advisor is another big issue in itself, let's set that aside for purposes of the this thread/question.

[pb4uski]

I have a friend who is an advisor with Wells Fargo - and you are correct that much of his work is "hand holding" - helping clients stick to their plan and not panicking during challenging times.

Since many of those who post here are disciplined I suspect that we presume that anyone can be if they chose to be - but the fact is that some people are nervous nellies when it comes to their investments and for those people an advisor can be worth their cost.

That said, I was golfing with a fried who is also ERd yesterday and he indicates that he has a local bank manage his investments to the tune of ~1% a year (for just the FA I think) and I had all I could do to bite my tongue. His concern is more what would happen if something happened to him that his DW would be ok.

I just said that I was a DIY investor and that my total costs were ~0.19%.

[Ready]

Financial advisors can be a tremendous benefit to those people who just don't want to take the time to learn how to invest their money. In addition, advisors can help with tax planning, social security planning, college savings, debt reduction, and a number of other issues outside of deciding which funds to invest in.

I never hesitate to encourage a financial advisor to someone who is concerned about their situation and needs help, as long as they are a CFP, and they only charge hourly for their time.

However, when I hear that someone is paying an ongoing 1% or greater fee for a financial advisor, I can't help but think they are getting scammed. Nevertheless, there are quite a few advisors out there collecting their 1%, and quite a few investors who seem happy to pay it, and for those who do, there is little that seems to convince them to stop, so I generally don't even bother to try anymore.

[Texas Proud]

I see a lot of problems either way....

If you are disciplined and have a little smarts.... you can figure out a good plan that works for you.... it might be as simple as the couch potato plan.... or even a target date fund.... if you want to do more slicing and dicing, you can without much problem...

The people that are not in the above category is where you question falls...

There are some people who like to gamble.... you know, the shoot for the moon investors who seem to pick the worst investments.... they would benefit from an advisor, but probably do not have the temperament to listen to one...

Then the nervous nellies.... they could use one... but I suspect that they are difficult clients to the advisor.... and their investments will probably be in low volatility funds which means they are not getting the benefit of the market....

The last that I can think of right off the bat is the "I don't want to deal with it" group... I know a few of them that work here.... they just do not 'have the time' to deal with their investments and think that the cost of an advisor is worth freeing them time...

Well, I guess there is another group, but not many in it.... the super rich... let's say you just got a check for $80 million for winning the lottery.... the cost of one is small potatoes to your portfolio, so having one is not a problem....

[pb4uski]

Interesting article on the topic:

The True Role Of An Investment Adviser

[Midpack]

Quote:

Originally Posted by pb4uski Interesting article on the topic: The True Role Of An Investment Adviser

Thanks, good summary. If I had to turn everything over to DW tomorrow, I'd probably send her to Ferri - he'd be well worth the 0.25%± for her.

[ER Eddie]

I'm a noob in the financial area, so I really needed a financial advisor in the beginning. She's been very good about not "selling" me, leaving everything up to me, and giving me direction that would eventually cost her quite a lot of business (e.g., encouraging me to learn how to invest myself, pointing me toward mutliple resources ... which resulted in me investing a large chunk on my own through Vanguard, rather than through her). I've also noticed that her performance with a portion of my money is better than my own self-directed performance with the other portion. So, bottom line, she's earned my trust and her .025%. Plus, I like her; she's a good egg.

[pb4uski]

Quote:

Originally Posted by Midpack Thanks, good summary. If I had to turn everything over to DW tomorrow, I'd probably send her to Ferri - he'd be well worth the 0.25%± for her.

Interesting that he charges less than Vanguard (0.70% for first million, 0.35% for 2nd million and then 0.20%).

https://personal.vanguard.com/pdf/s177.pdf?2210071330

[haha]

Quote:

Originally Posted by Midpack That said, many/most people might be better off with a good*** financial advisor.

isn't that just saying I (we) am/are clever and well educated, I can do it without an expensive and often useless advisor. But you other guys, less clever, less educated, better just pay up.

I'd say let each person decide for himself. After all, it is his affair. I don't believe that I have ever tried to talk anyone into or out of hiring an advisor, but I may be forgetting something.

Ha

[Texas Proud]

Quote:

Originally Posted by Midpack Thanks, good summary. If I had to turn everything over to DW tomorrow, I'd probably send her to Ferri - he'd be well worth the 0.25%± for her.

I think it is a bit higher (unless you have a big stash)... but still probably worth it for someone who will not learn (like my DW)....

Portfolio Solutions® charges a management fee of 0.37% on the first $3 million in assets under management, and 0.20% for assets greater than $3 million. For accounts with less than $1 million, a $925 quarterly fee is charged in lieu of the 0.37% management fee.

[Which Roger]

Investing is relatively simple,but there's a big learning curve in understanding that investing is simple. Things that most on this forum understand pretty well (that passive investing usually outperforms active investing, buying an asset class that has fallen in value rather than one of the "winners", etc.) are counter-intuitive unless one studies them closely, especially given all of the sound bites and salespeople telling us how they can "help" us.

And members of this forum are far from a representative sample of the population. A lot of us think that reading about investing and doing the math is actually interesting, and we are generally well educated and able to do the math.

I don't need a financial advisor now, but I sure could have used one (not a salesperson) when I was younger and held things like Magellan and company stock in my 401k. Then I would have "seen the light" much sooner, rather than waiting until I accidentally stumbled upon the bogleheads sometime in my 40s.

[Rustward]

Quote:

Originally Posted by haha isn't that just saying I (we) am/are clever and well educated, I can do it without an expensive and often useless advisor. But you other guys, less clever, less educated, better just pay up. I'd say let each person decide for himself. After all, it is his affair. I don't believe that I have ever tried to talk anyone into or out of hiring an advisor, but I may be forgetting something. Ha

+1

[DJRR]

Quote:

Originally Posted by haha isn't that just saying I (we) am/are clever and well educated, I can do it without an expensive and often useless advisor. But you other guys, less clever, less educated, better just pay up.

I think that is exactly right. If you are not willing to put in the effort to be clever and educated in a particular area then it seems wise to hire an expert. I have experts for auto repair (zero interest in anything automotive), lawn care (done sweating in the yard ), home repair (I am all thumbs), etc. It is the beauty of specialization. I can make a lot more money at what I am good at and hire other people who are good at what they like. I always hire people who are smarter and more clever than me in that area and pay up.

For me, while finance is a hobby and I have no need of an advisor, I have one because my wife has below zero interest in finance and wants someone she can call in the event I make an untimely departure It is a dead loss for me, but happy wife = happy life

However, this topic has the potential to be much more impactful than lawn or care care, so it behooves everyone to at least learn enough that they are not taken advantage of by scams etc.

[target2019]

Quote:

Originally Posted by pb4uski I have a friend who is an advisor with Wells Fargo - and you are correct that much of his work is "hand holding" - helping clients stick to their plan and not panicking during challenging times. Since many of those who post here are disciplined I suspect that we presume that anyone can be if they chose to be - but the fact is that some people are nervous nellies when it comes to their investments and for those people an advisor can be worth their cost. That said, I was golfing with a fried who is also ERd yesterday and he indicates that he has a local bank manage his investments to the tune of ~1% a year (for just the FA I think) and I had all I could do to bite my tongue. His concern is more what would happen if something happened to him that his DW would be ok. I just said that I was a DIY investor and that my total costs were ~0.19%.

Good idea to bite your tongue. Not only does he pay 1%, he probably is in funds that charge another 1% or more. In the end his costs are 2% or greater, meaning 10X's your costs.

But you can't get involved, as the result is not predictable, and could damage the friendship.

[target2019]

Who really is better off with a financial advisor?
From my own experience, I think someone with higher earning power and substantial wealth is comfortable with the fee and experience.
Another situation which works is AUM with a trusted company, where the couple simply cannot grasp enough about investments.

[ERD50]

Quote:

Originally Posted by Midpack *** choosing a good advisor is another big issue in itself, let's set that aside for purposes of the this thread/question.

To my POV, that restriction makes the entire discussion moot.

It can't be separated, because if we say a financially under-educated investor now has to pick an advisor - on what basis will they make this pick? Suddenly, they are now educated enough to pick an advisor? OK, then go back to square one, and they are educated enough to manage their investments. Problem solved.

It's a bit like asking someone if playing the lottery is a good idea, if you set aside the chance of picking any losing numbers.

-ERD50

[imoldernu]

Of course it depends on the individual, current circumstances, risk tolerance, goals, age, needs and perhaps a dozen other factors that can affect the the decision.
Will the advisor be able to incorporate the "needs" with the wants?
Can he/she know the life expectancyof the husband or wife, and whether or not the undelying hope is to fund the grandchildren education? What about any expected inheritances, or hidden debt or genetic conditions?
What about possible future support from children in the declining years?
Does the advisor know the closeness of the intrepersonal relationships between mates, and whether one or the other may be uncomfortable with high risk or low returns. What about the advisor/client relations? Daily, monthly, yearly?
What about losses.

We started out 25 years ago with a financial advisor and a 30 page mechanically generated plan with multiple scenarios, that attempted to forecast our future financial health. We chose not to use the advisor. Nothing wrong with him or his planning, but our own plans changed, dramatically in a rapidly changing economy. Illness, unplanned early retirement, closing of a new start-up self employe business, changes in interest rates, tax liabilities and sale of the house, plus some income uncertainties, saw us late night at the kitchen table, planning and replanning. Priorities changed, almost by the day. Downsizing, reallocating assets for safety purposes,deciding on age for SS, and ways to manage health coverage in the interim before medicare were all decisions that brought us directly into the planning process with spreadsheets, and an endless list of "what ifs".

When it came to spending money, we learned what LBYM meant... first hand.
Some failures, but as we went along through our fifties, into out sixties, then seventies and now nearing our eighties it was a matter of edging towards safety and financial security. From risk where it was necessary, and into the relative safety of today.

Friends of my age have much more and much less. Some who bought at the "bottom" did very well... others who held on have recovered, after years of worry, and others who bowed out at the lows are still working.

And so, in our case, no advisor, and quite frankly, totally lost when it comes to investment in entities or funds of any kind. We have retreated into an ultra conservative position, covering with government IBonds, a small annuity, home ownership, Long Term Care insurance, and relatively higher paying long term IRA funds.

So no, no advisor, and more than likely many lost opportunities, but some relative confidence that we can continue our resource mangement, and most important of all, we do not talk about, worry about, or lose sleep because of money worries. Discovering that there are two distinct phases of retirement... (early and late) is working for us. Thusfar, I haven't seen this approach in any of the better known retirement plannning websites.

No judgement here, just personal experience.

[ER Eddie]

Quote:

Originally Posted by ERD50 To my POV, that restriction makes the entire discussion moot. It can't be separated, because if we say a financially under-educated investor now has to pick an advisor - on what basis will they make this pick? Suddenly, they are now educated enough to pick an advisor?

It's possible. You can know the basics of financial self-management but be lacking in a particular area. If you have a good referral source that you trust to point you in the right direction, you can find a good advisor.

That's what happened to me. I know the basics of financial self-management (budgeting, avoid debt, simplify, LBYM, save, pay off your debts/mortgage, emergency fund, etc.), but had never known about investing in stocks and bonds. It was a blind spot for me, in part because I didn't have a whole lot of money and in part because I had simply neglected it. Suddenly, I inherited a decent amount of money. I knew it needed to be invested, and I didn't have sufficient knowledge of the market to do it myself.

I found an advisor through Dave Ramsey's referral service. It worked out reasonably well for me.

[ERD50]

Quote:

Originally Posted by ER Eddie Quote: Originally Posted by ERD50 View Post To my POV, that restriction makes the entire discussion moot. It can't be separated, because if we say a financially under-educated investor now has to pick an advisor - on what basis will they make this pick? Suddenly, they are now educated enough to pick an advisor? It's possible. You can know the basics of financial self-management but be lacking in a particular area. If you have a good referral source that you trust to point you in the right direction, you can find a good advisor. That's what happened to me. I know the basics of financial self-management (budgeting, avoid debt, simplify, LBYM, save, pay off your debts/mortgage, emergency fund, etc.), but had never known about investing in stocks and bonds. It was a blind spot for me, in part because I didn't have a whole lot of money and in part because I had simply neglected it. Suddenly, I inherited a decent amount of money. I knew it needed to be invested, and I didn't have sufficient knowledge of the market to do it myself. I found an advisor through Dave Ramsey's referral service. It worked out reasonably well for me.

But the bolded parts are the point I was making. How can you know 'it worked out well' for you? Wouldn't that take some understanding of how to measure the performance of this advisor against some benchmark? What is that benchmark? And when you have determined that benchmark, why not just invest directly and save the fees? Something like the "couch potato portfolio".

There might be special cases, like complicated tax issues, trusts or some pending future payments. But for most people who want to retire on a portfolio with maybe some help from SS and pensions, it is pretty straightforward.


edit/add: I don't consider "pay off your debts/mortgage" to be one of the basics of financial self-management. Debt is a tool, basic financial self-management is to recognize if/when using that tool is appropriate, and how much.

-ERD50

[samclem]

The quality of the advisor is the huge variable. In answer to the original question: There's >nobody< that is well served by paying a high fee, being put into load funds, and having their account churned.

If we assume that there's an FA / company out there that charges low rates and hews close to the Bogle/Bernstein/Ferri principles, then I'd feel good recommending that firm to anyone who didn't have the time and temperament/discipline and interest in doing things themselves. But I don't understand such people (some of whom, like my DW, are wonderful). And I wonder why they'd take our advice on the matter: having no ability on their own to judge "smart" from "stupid", they will be susceptible to every radio advertisement and "suggestion from a friend" that comes along, forevermore.