Pros and Cons of Hiring a Financial Advisor Despite the 1% Fee

Managing personal finances is like sailing on an ever-changing sea. The tides of economic fluctuations, investment opportunities, and retirement planning can be challenging to navigate alone. This is where financial advisors step in, offering expertise and guidance to help you chart a steady course towards your financial goals. However, one potential roadblock often raises eyebrows: the fee, typically around 1% of your assets under management.

While it may not seem like much, that 1% takes a hefty chunk out of the returns.   To put it in context, Using Vanguard data, we know that from 1926 through 2019 an 80% stock and 20% bond portfolio returned 9.7% a year.  Let’s assume we invest $1,000/m over a 40 year career.  The portfolio would grow to about $5.8 million.

Pretty awesome.

Now if we applied a 1% fee and returns dropped fom 9.7% to 8.7% the portfolio would only be work about $4.3 million.  Expressed otherwise the absolute cost of the 1% fee was 25% of the portfolio value.  That’s huge!  The SEC has this document on it as well.

Pros: Navigating the Prospects

Despite the negative impact on portfolio returns, financial advisors can add value in other ways.

1. Expertise in a Complex World

The financial landscape is intricate, filled with a myriad of investment options, tax implications, and market fluctuations. A financial advisor is armed with knowledge and experience to help you make informed decisions tailored to your specific goals and risk tolerance.

2. Customized Financial Planning

A one-size-fits-all approach rarely works in financial planning. A skilled advisor takes the time to understand your unique situation, aspirations, and concerns, crafting a personalized plan that adapts as your life evolves.

3. Emotional Restraint in Investment

Emotions often drive financial decisions, leading to impulsive actions during market volatility. An advisor acts as a rational anchor, preventing you from making hasty choices that could negatively impact your portfolio’s long-term growth.

4. Time and Effort Savings

Researching investment options, monitoring your portfolio, and staying up-to-date with financial trends demand significant time and effort. With an advisor, these tasks are delegated, freeing you to focus on your passions and career.

5. Access to Exclusive Opportunities

Financial advisors often have access to investment opportunities and financial instruments that might not be readily available to the general public. This can potentially enhance the diversification and performance of your portfolio.

Cons: Navigating the Challenges

1. The 1% Fee

The most glaring concern is the fee, which is typically around 1% of your assets under management. While this fee may seem small, it can accumulate over time, potentially impacting your overall returns, especially during periods of lower market growth.

2. Conflicts of Interest

Advisors can sometimes be influenced by commissions from recommending specific products. It’s essential to ensure that your advisor is acting in your best interest, choosing investments that align with your goals rather than generating higher commissions for themselves.

3. Returns May Not Justify the Fee

In some cases, the additional returns gained through an advisor’s guidance may not necessarily offset the 1% fee. This scenario can arise in a market environment with consistently high returns.

4. Dependence on External Expertise

Relying on a financial advisor may deter you from fully engaging with your financial education. It’s crucial to understand the basics of investing and financial planning, enabling you to have meaningful conversations with your advisor and make informed decisions.

5. No Guarantee of Performance

Hiring an advisor doesn’t guarantee success. Markets are unpredictable, and while advisors provide valuable insights, they can’t control market movements or eliminate all risks.

My Take:

While financial advisors can add value in ways beyond the simple compound annual growth rate (cagr) of the portfolio assets, 1% is quite steep.  I would guide anyone looking for a financial advisor to consider lower cost alternatives.   One option is Betterment who provides a fiduciary advisor at 0.4% for those with more than $100,000 in assets at the firm.  Another option is Vanguard who has varying levels of advisory services starting at around 0.35% for accounts with $50,000.  Either of them will also be utilizing low cost ETF’s as opposed to high fee mutual funds as well.