Financial advisors are not popular amongst a lot of personal finance experts and bloggers. These pundits point to the fact that studies have shown that most financial advisors cannot consistently outperform an index fund tied to the S&P 500 and for those sub-par results financial advisors charge fees that further reduce your portfolio’s returns. It’s pretty easy to conclude that under the best of circumstances you get a financial advisor that can’t outperform a standard index fund and in more egregious situations you can get a financial advisor that does not have your best interests in mind and may actually do more harm than good. I’ve used a financial advisor since 2015. Why?
Why do I use a financial advisor to manage part of my investments?
First, I try to take the Bernie Madoff scenario off the table of possible options by picking a financial advisor that is legally bound to act in my best interests. This type of advisor is held to a fiduciary standard. Fiduciary advisors must put their clients’ interests before their own. They are fee-only advisors because they don’t accept commissions on the investments they recommend. Make sure you work with a fiduciary advisor and NOT an advisor that only meets the suitability standard.
The second thing I do is I have direct access to the account where my investments are held and my advisor does not have the ability to withdraw any funds from this account except for his standard management fee. Therefore, I always know what my advisor has me invested in and he has limited ability to withdraw any funds. You should make sure any advisor accounts you have are set-up the same way. I don’t consider these reasons to use an advisor but these are protections I have put in place to reduce the chance that I get involved with the wrong kind of advisor that can do me harm.
So, here are the reasons I use a financial advisor:
Get diversification beyond the stock market
The first reason I use an advisor is because I want to adequately diversify my investments across different asset classes. This means I want to diversify beyond just different stocks or mutual funds. With my investor, I am invested in equity funds, bond funds (of various types), real estate funds, and some other private placements. The goal here is to have a portfolio that is not highly correlated to the stock market. This means when the stock market goes down my portfolio should not go down as much. We haven’t seen the stock market go down much in the last ten years but when the S&P 500 dropped by almost 14% in the fourth quarter of 2018 my portfolio went up by a little less than 1% during that time. With that being said, the portfolio managed by my financial advisor has seen positive returns every year but these results have not been as good as the return from the S&P 500. That’s okay. My goal is to get solid returns from this return with much less volatility than the stock market.
Access to Investments I Could Not Invest in Otherwise
I invest in several investments introduced to me by my financial advisor. I also have access to certain investments that have minimum investment requirements that are waived or met because of the total amount my advisor invests. These investments have performed well and would not be available to me if I did not work with my advisor. You should consider whether any advisor that you pick will give you access to investments not otherwise available to you. Here is a post describing one of these investments introduced to me by my financial advisor that provides me with a solid 7% cash return.
My Advisor is my Barrier to Emotional Decision Making
Another reason I use a financial advisor is because I think people incorrectly assume that they can invest in a rational and unemotional manner even when there is panic selling in the market. I think most people cannot do invest rationally and that is why people sell investments early and buy them late. I have seen me make this mistake – in 2010 I correctly bought certain stocks when they were at very low valuations but I sold most of them after 3-4 years and after 50% or so in gains. I made money but I sold too early. My most painful example is Microsoft. I bought the stock in 2010 for about $30 per share and sold it for around $50 per share in 2015. It was still a great company in 2015 and still had room to run but I sold it to lock-in my gains. Well, Microsoft’s stock is $157 per share as of December 2019. I need a financial advisor to help me keep the emotion out of my decisions. You should think about whether you can invest without emotion and stay the course when your portfolio is down by 20% or more.
My Advisor is more than my Stock Picker
I spend several hours with my financial advisor every year discussing the financial and risk-management strategies I need to put in place to ensure I maintain my financial independence. This goes beyond stock advice – we discuss insurance, estate planning, my children’s educations, career choices, and the economy. My advisor is a great sounding board regarding my financial and risk-management decisions and I receive value from his counsel. I think a lot of people would benefit from getting this type of comprehensive wealth management advice.
I did not have a financial advisor the day I started saving my money to place in different investments. In fact, I invested much of my savings on my own for almost 15 years and I did fairly well. However, I eventually realized I needed someone to help me implement a comprehensive investment strategy. For me, finding a good financial advisor once I had some meaningful investment funds (at least $100,000) was the right decision because it put my investing on auto-pilot while I tried to earn as much money as possible during my corporate career in order to achieve financial independence. Now that I have achieved financial independence, I am going to stay with my financial advisor as I believe working with him will help me maintain my financial independence. You should think about whether the reasons I outlined above are good reasons for you to find a good financial advisor to work with.