A recent study by Vanguard found that having a financial advisor can increase net returns by 3%.
To show how big this is, let’s say you retire with a portfolio valued at $500,000, and your retirement duration spans 20 years. If a financial advisor helps you increase net returns by 3% each year, the power of compound interest comes into play.
In other words, in 20 years, you will have $903,055, which means a minimum of $400,000 in additional earnings thanks to the financial advisor.
After paying the financial advisor’s fee of, let’s assume, $100,000, you have $300,000 in net earnings throughout the entirety of your retirement period. Pricey, but can you really put a price on peace of mind?
You might be thinking: "Of course, Nestor would be inclined to mention a study that supports the notion of having a financial advisor, considering he is one himself."
Stay with me for another minute.
In an era where pensions are a thing of the past, making good financial decisions carries more weight than ever.
Benefits of Having a Financial Advisor
One of the key benefits of a financial advisor is their ability to prevent you from making financial decisions out of fear or greed. They use data-driven strategies and risk assessment tools to avoid impulsive decisions based on market highs or lows.
A skilled financial advisor is crucial as financial decisions have the potential to significantly impact not only your retirement lifestyle but also the wealth you pass on to your children.
Are you not convinced about the value of a financial advisor yet?
This chart shows the impact over a 40-year period. If you had missed out on the top 10 performing days in the market during the 40 years, your portfolio’s value would have been cut almost in half.
A good financial advisor does more than that, though. They would:
Look for ways to reduce your taxes
Protect your assets from litigation
Prepare you emotionally for retirement, among others.
Types of Financial Advisors
Generally, there are two types of financial advisors: financial planners and wealth managers, each offering distinct services to meet your goals.
While these titles are often used interchangeably, they come with unique approaches to assisting individuals and families in navigating their financial landscapes.
Think of it as choosing between vinyl records and a streaming service - they both deliver music but in a very different way.
Financial Planners
Financial planners excel at crafting financial strategies and don’t usually need a minimum account balance. They charge fees similar to what accountants or lawyers would charge. This a wise option for those seeking money guidance without the need for wealth management.
Wealth Managers
Wealth managers oversee existing wealth and often require you to have a certain amount in your account to work with them. They offer both financial planning and money management, which is important for an all-around approach to your financial life.
If your wealth manager does not provide financial planning, consider seeking alternatives.
Cost of Financial Advisors
There are different ways to pay for financial services:
For individuals who have already amassed a significant amount of wealth and are looking for a comprehensive strategy to manage and grow it further, a one-time project fee or an annual fee are great options.
With hourly fees, the focus may become more transactional, potentially limiting the depth of advice you receive. Because advisors are paid by the hour, you might hesitate to seek ongoing guidance, which is often necessary for effective retirement planning.
Commission-based compensation poses a different challenge; it could create a conflict of interest where the advisor might recommend financial products that offer them the highest commission rather than what's in your best financial interest for retirement.
Do I Need a Financial Advisor If I Have an Accountant?
Absolutely! Accountants handle current tax matters, so they do not focus on long-term financial planning.
Accountants excel at preparing your taxes, managing your books if you have a business, and offering advice on how to manage your current tax liabilities.
In contrast, a financial advisor takes a future-focused approach. They look beyond your immediate financial picture to help you plan for long-term goals.
Consider this:
When did your accountant last contact you to strategize minimizing taxes on your current and future retirement income?
Or:
When did they reach out during market downturns to review your investment strategy?
While accountants are excellent for managing your present-day finances, a personalized, successful financial plan for the future requires the expertise of a financial advisor.
8 Questions to Ask When Interviewing a Financial Advisor
The following questions are designed to help you see "behind the curtain" of any person with whom you might entrust your financial future.
How often will I hear from you?
Do you have the knowledge and experience to guide me through the complicated financial planning and tax world to achieve my financial goals?
Will your recommendations primarily focus on one area, or will your advice be all-inclusive? In other words, will I need to find another advisor for guidance in other areas?
What will be my total investment expense, how much will you be compensated, and where can I see this in writing?
Do you like cats or dogs?- OK, maybe not this one.
Are your recommendations truly in my best interest?
Where do you keep my money, and how can I see it?
Will you assist me with any and all financial problems I may encounter?
Summary: Where to Find a Financial Advisor?
The primary role of a financial advisor isn't about outperforming the stock market but rather safeguarding you from 'The Big Mistake' that could put your retirement at risk - such as emotional decision-making or lack of planning.
There are various ways to engage with a financial advisor based on your specific situation and priorities. NAPFA.com is a great way to find advisors who are not commissioned-based.
If you already have a financial advisor, consider seeking a second opinion.
Ready to avoid the Big Mistake and supercharge your retirement savings?
Book a consultation with me today, and let’s map out your personalized road to successful retirement and peace of mind.
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Nestor Vargas, CFP®
Bienvenido! I own Green Mountain Planning, a commission-free retirement planning firm helping individuals 50 or older retire easily and confidently by reducing their tax bill, optimizing their investments, and creating an easy-to-understand income plan. When I am not geeking out on retirement planning strategies, you can find me at a concert at Red Rocks Amphitheater or traveling with our RV across the country.
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