Why should I use a Financial Advisor?
Currently, 85% of North American’s are in debt without anyway of ever getting out of debt if they continue along the same path they have been and the problem is getting worse.
Financial Advisors do more than just invest money for their clients. They help their clients manage their cash flows, their finances, their retirement and much, much more. But, Financial Advisors have come under attack recently because a few Financial Advisors have allegedly been placing client’s in investments that charge seemingly excessive fees which increase the Financial Advisor’s payout. This may have resulted in the Department of Labor’s decision to require Financial Advisors always act in the best interest of their clients as a fiduciary responsibility.
Financial Advisors have also come under attack from new technologies that have eroded many Financial Advisor’s business by automating the process of investing and using low cost Exchange Traded Funds (Index Funds) to navigate through the investment world.
However, many of these attacks don’t fully appreciate the role of a Financial Advisor in their client’s lives. Financial Advisor’s don’t only choose the investments and the asset allocation that fits a client’s risk profile; instead they do much, much more!
Here are some key aspects of the Financial Advisor roles that in our opinion are not being properly considered in the costs when comparing the Financial Advisor role to robo-advisors:
- Budgeting and Budget review and assessment.
- Encouraging additional contributions.
- Financial Decision making and feedback.
- Estate Planning.
- Financial Counselling.
- Career Planning.
- Retirement Transitioning.
With that being said, yes, there are many, many reasons why everyone should use a Financial Advisor.
Interestingly, many comparisons have also popped up between Exchange Traded Funds (ETFs) and Mutual Funds identifying that many Mutual Funds haven’t been beating the Index Funds (ETFs) and summarizing the comparative returns with the complete role that a Financial Advisor plays. Some say that this has caused a paradigm shift in investing away from Mutual Funds into ETFs and placing many Financial Advisor’s careers under pressure. But, what’s missed in this comparison is the true role of the Financial Advisor and the value that they add to their clients.
As an example, take a client that starts with a $1,000.00 investment and decides to invest on his own in an Exchange Traded Fund with a Management Fee of .02% per annum and compare that with the same client that decides to invest in a Mutual Fund (any mutual fund) with a Management Fee of 2% with the help of a Financial Advisor. Then consider that the Exchange Traded Fund does 3% better than the Mutual Fund in the first year. Clearly it seems that the investor investing on his/her own is doing much better.
However, then consider that on his/her own the investor hasn’t been able to put aside any additional funds for the last 10 years and continues this pattern; whereas with the Financial Advisor who creates a budget and contacts the client monthly to follow-up (for the first three months) to ensure that the budget is being followed, the client invests an additional $1000 every month. Then compare the returns after 2 months and compare the cost of the advice and you’ll start to understand why people need to use a Financial Advisor.
Whether it’s to get a better race time, build more muscle or save more for retirement, virtually everyone achieves better results with a coach!
Yes, clearly, costs need to be reviewed and transparent, but don’t fall for the trap and think that you can save as much as you would without a coach as you would with a coach.
Also worth noting is that there are Mutual Funds that are beating Exchange Traded Funds and good Financial Advisor’s don’t only use Mutual Funds, they use all types of investments including Exchange Traded Funds.
Check out our blog post on how to choose a Financial Advisor that’s right for you.