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When to Use a Financial Advisor

Jeff writes in,

“Until recently, I had a financial advisor who I’d used for several years. He helped me create and manage my portfolio. At least that’s what I thought he was doing. After having my eyes opened by a few books, I now see that he was just recommending expensive investments that paid him a fat commission.

I’ve since moved my portfolio to Vanguard and invested in what I think is a sensible asset allocation.

But given how simple it is to manage a passive portfolio, I’m starting to doubt that I need an advisor at all. What do you think, for passive investors is there really any need for an advisor?”

I think Jeff is right that, at its most basic, the implementation of a passive portfolio is rather simple:

  1. Choose an asset allocation that fits your risk tolerance,
  2. Create a portfolio that meets that asset allocation in the lowest-cost way possible, and
  3. Rebalance every once in a while.

If you’ve taken the time to educate yourself about these things, then it’s likely that you can handle them without an advisor.

Still, you may want to use one.

For instance, you might be having trouble settling on an asset allocation. Or perhaps you have settled on an allocation, but between you and your spouse, you have so many different accounts that you’re having trouble determining the lowest-cost, most tax-efficient way to implement that allocation.

It may be worth sitting down with an advisor who charges an hourly fee or a flat fee-for-service sort of advisor to get some help with either of those questions.

Help Implementing the Plan

Alternatively, you may have no difficulty creating an investment plan, but still find it worthwhile to have somebody else handle the actual implementation of that plan.

For example, if much of your portfolio is in a taxable account, it’s beneficial to have somebody checking regularly for tax-loss harvesting opportunities. If you don’t want to take the time to do that yourself, it may be worth using an advisor.

Or perhaps you find it difficult to convince yourself to rebalance into stocks during bear markets or out of stocks during bull markets, despite the fact that your investment plan calls for exactly that. In such cases, it can be helpful to have somebody who is emotionally detached from the portfolio who can handle the rebalancing.

For such services, a low-cost annual-fee advisor could be a good fit.

Help with Tricky Questions

And finally, there are some aspects of investing and retirement planning that can still be rather complicated, even when you’ve made a point of keeping your portfolio as simple as possible.

For example, deciding when you and your spouse should each claim claim Social Security isn’t a very intuitive process. In addition, the change in marginal tax rates that results from starting Social Security can often result in tax planning opportunities. A CFP skilled in such areas could be well-worth his/her fee.

Ditto for the question of how to spend down your accounts in retirement. By strategically planning how much to spend from taxable accounts, tax-deferred accounts, and tax-free accounts every year, you can save a lot of money over the course of your retirement. If that’s not something you want to take the time to research and think through, hiring a tax-savvy advisor may be an efficient use of your money.

In short: Yes, passive investing is mostly straightforward. Still, depending on your circumstances, an advisor may be able to offer you a value that significantly exceeds his/her fee. And remember, it doesn’t have to be an all-or-nothing decision. You can be a mostly-DIY investor, who still meets with an advisor every few years when life circumstances change or tricky planning situations arise.

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  1. Great article.

    Another consideration is for your spouse/heirs. If something should happen to you and your spouse has not been involved in your investment plan, having an advisor available will help your spouse continue with your plan.

  2. In 2005 I did the same thing Jeff is doing, moved from expensive managed accounts to Vanguard. Very glad I did.

  3. The trouble is that you don’t really need an adviser during your accumulation phase. But my experience is that at some time between age 70 and 90, people begin to lose interest in managing their own money (and research confirms that at some later point in life, people are less able to make financial decisions as well as they did earlier). Hopefully you have a child that you can trust, and is interested in helping you make some decisions. However, if you don’t, you are now looking for a financial adviser in your 70’s or 80’s. A time when you might be vulnerable. So, I think that there is some merit to developing a relationship with a financial adviser when you are in your 60’s.

  4. Mike writes: “For such services, a low-cost annual-fee advisor could be a good fit,” and links to a supposedly good example of same. However, this advisor charges a minimum of $625 a quarter or $2500 a year, which for a small investor with a $100K portfolio works out to 2.5%. And then they write:

    “A typical financial advisor collect [sic] fees of 1% per year on average for their clients. That’s much too high given the technological advances in investment management industry over the past 20 years. High advisor fees persist because the public doesn’t know that a low cost advisor service exists and has been available for more than a decade.”

    In my book, that’s what’s known as chutzpah. Caveat emptor, and make sure to read the fine print.

  5. Larry,

    In Rick’s defense, I wouldn’t call his fee disclosure “fine print.”

    Also, he makes it clear on the website< that the service is recommended only for investors with portfolios in excess of $1 million. They don't even take portfolios below $500,000. In other words, as a percentage, his fee would never be more than 0.5%. In my opinion, compared to the vast majority of advisors, Rick does an exemplary job disclosing his costs and telling you exactly what you will and won't get for that, leaving it up to you to decide whether or not that makes sense for your own particular situation.

  6. Even so, everything is relative, and I think you can’t deny that this is a “low-cost” service only if you’re pretty rich to start with. Smaller investors who want or need advice are bound to feel excluded.

  7. No doubt — his service is only for people with large portfolios.

    The truth is, there isn’t much in the way of personalized advice that would be cost effective for the $100k-sized portfolio you mentioned. At that level, I think the best bet by far is to just spend the money and time on reading a few books. Then check in at the Bogleheads forum every once in a while to get second opinions on your portfolio.

  8. There is a difference between investment advice and personal finance advice. I’ve yet to come up with a scenario where an advisor can add investing value above DIY by a reasonably knowledgeable individual using low-cost, passive, tax appropriate techniques on their own. For those that don’t have the knowledge, there may be value in getting help from an advisor.

    There is other financial advice you can get from an advisor that isn’t about how to invest. There may be tax strategies to consider, better places for cash or CD strategies you’re not aware of, and often simple budgeting opportunities that get overlooked. Again this may all be stuff that, with the right knowledge, can be done DIY, but some times a second set of knowledgeable, objective eyes can spot a few more efficiencies to be had.

    Mike nailed it when he mentioned value that exceeds the fee. Just about anyone can hire a knowledgeable and experienced financial advisor for a couple of hours for less than $500. If the advisor can save you more than $500 with their advice, it should be an easy decision.

  9. layla sabourian says

    Thanks, great article, specially for people who are completely new to investing 🙂

  10. Other than tax advice, I don’t think I’d ever visit a professional.

  11. In reality, most investors don’t have the emotional fortitude to stick with their plans through thick and thin. If you look at equity and bond fund flows in 2002, 2006, and 2008, you see clear patterns on investors buying equities high and selling low to pile into the safety of bonds. A good low cost advisor that can hold their clients feet to the fire is worth their fees.

  12. For the most part, financial advisors have given themselves a bad name which is unfortunate, because we (and I’m including myself in this) do have the ability to add significant value. I manage my own portfolio, but really would rather pay someone to do it. Unfortunately I know enough about investing etc to know when I’m being “sold”. Fee based financial advice is best and to me the best mark of a good advisor is one who’ll forgo the commission on a product and recommend one that he doesn’t sell (and it does happen).

  13. Looking at Dylan’s site, I would feel much more confident working with him than with Rick based on the following:

    “You shouldn’t have to be rich to work with a financial planner. So it doesn’t matter how much or how little money you have, and it doesn’t matter how much money you make in order to work with me.”

    Dylan offers fee-based services that people of modest means can afford, starting with from $350-1500 for single consultations that may well satisfy many people’s needs. Rick is basically not interested in you unless your portfolio is $500K or more, and he wants to bill you at least $2500 annually, to do what I don’t know. But then he claims he is offering a “low-cost” service that could easily eat into the returns I would realize by investing in low-cost index funds. This is why, Mike, I persist in looking skeptically at what Rick is offering. It’s a question of inclusivity.

    I don’t mind paying good money for good service. When I did my estate plan, I could have used one of these cut-rate Internet services that charged $100 for a will. But on interviewing several lawyers, I came to believe that such a service did little more than proofread, and could result in a will that might not be valid in my state. I also interviewed lawyers who wanted $3500 for my plan. I went with someone who charged $750 for my documents, and I felt confident with him because he saw no reason for me to have a living trust that could cost me $2000 more, and he allows small changes to my documents without extra charges.

  14. I think the services that Dylan and Rick offer are meaningfully different.

    Dylan provides planning/advice. For that, I think an hourly fee or a fee-for-service makes sense.

    Rick’s firm does the actual execution. That is, they actually make the trades for you (e.g., for rebalancing or tax-loss harvesting as necessary). For a service of an ongoing nature like this, it makes sense to me that an ongoing fee is charged.

    In other words, they offer different services for different markets, and they therefore charge different fees for their services. It makes sense that one model appeals to certain people (e.g., you) more than the other model. But I think they’re each suitable for the market they serve.

  15. I think there is definite value in working with a financial planner. You want your money to be aligned with your lifetime goals. Finances are more than where your money should go, it’s about how you’re going to get there and checking in from time to time to make sure you’re on the right track.

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