One of the most baffling things about our business is that only about four in 10 Americans choose to work with a financial advisor, even though it’s been shown by numerous academic and industry studies to produce better results for investors. Why aren’t more people using an advisor?
Many believe they can manage their investments and financial plans on their own. Others don’t want to pay for advice. And the financial services sector itself has a trust deficit, with only 54% of respondents to the Edelman Trust Barometer 2022 survey saying they trust their financial institutions (only social media had a weaker performance)! Perhaps the most telling reason is that many people are embarrassed by their financial situation or the poor choices they have made.
THE VALUE OF INDEPENDENT ADVICE
On the other side of this coin, there is at least a decade of research that validates that financial advisors are worth their cost if they add demonstrable value to investors. Here is a small sample of that research:
- In 2013, the Consumer Federation of America reported that “…the more households plan, the better financially prepared they are in terms of the likelihood of saving, investing, and managing credit card debt; the greater the efficiency of this management of savings, investment and debt; and the higher their confidence in managing their finances. The same study noted that those who hire planners are “better prepared to achieve goals ranging from managing financial emergencies to living the good life in retirement.”
- Notably, some of the research on the issue of trust draws a distinction between the advice consumers receive comes from a registered representative or from someone who works with a registered investment advisory firm (RIA). RIAs must legally and ethically act in the best interests of their clients when making recommendations or decisions that affect their clients’ financial plans. Princeton Survey Research Associates reported in 2014 that finance professionals who transitioned to a fiduciary standard of care (i.e. RIA) reported greater benefits for clients, with 71% reporting an increase in customer confidence and 72% reporting an increase in customer satisfaction.
- In 2015, Dalbar, an independent market research firm that rates financial advisors and client performance, reported that half of investors rated their finance professional’s advice as “excellent” and a further 48% rated it as “good”. Similarly, 96% of investors “strongly agree” or “agree” that the services provided by their financial professional have helped them achieve their investment goals and objectives, and nine in ten would recommend their advising close friends, relatives or colleagues.
- In 2019, Vanguard, one of the world’s largest financial services companies, found that a $500,000 investment would average $3.4 million under the care of an advisor over 25 years, so that the expected value of self-management would be $1.69. million. Importantly, advisors were able to add an average of 3% per year of incremental growth by providing “consistent wealth management through financial planning, discipline and guidance, rather than trying to time the market,” according to the study.
CHOOSE AN ADVISOR
Often when people say they don’t work with an advisor, it’s because they just don’t know how to find one. There are a few simple steps you can take to determine if an advisor is right for you.
References : Your friends, family, co-workers or neighbors may have very similar financial situations to yours, and if they are currently working with an advisor, they might be willing to recommend you. All advisors should be willing to schedule an introductory meeting, at no cost or obligation, to see if there’s a good fit between what they offer and what you’re looking for. Interview two or three candidates before narrowing down your choices.
Interviews: In your initial and possibly follow-up meetings, who are you most comfortable with? Did they seem to care about you? Have they committed to meeting with you regularly, in whatever way you prefer (virtually, by phone or in person, once or twice a year or once a quarter)?
Independent Trustees: If your advisor works with a company in which they have a large stake, you can be more confident that their advice is independent, unlike representatives of other companies who have financial incentives to sell you their proprietary products. You can quickly find out where an advisor falls on the “standard of care” spectrum by asking them a simple question:
Are you allowed to consider factors other than my best interests when making investment recommendations? If they answer “yes”, you might want to keep looking.
HOW IS THE ADVISOR COMPENSATED?
There are many ways to compensate advisors, and it’s important that you work with someone whose business model is fully disclosed, transparent, and aligned with your personal preferences and goals. For example, some financial planners offer planning services for a flat fee, which can be tiered depending on the complexity of your finances. Others receive a commission for selling you investment or insurance products. RIAs tend to charge asset-based fees related to their assets under management. Other hybrid agreements combine commission elements and asset-based fees depending on the type of services and products they sell.
It could well be that you enjoy managing your own money and are good at it. But we find that for many investors, the time and effort it takes to stay on top of their finances takes them away from the things they’d rather be doing. Peg and I are old enough to remember the 70s when most people fixed their own cars – it was simpler then. Today’s cars are more complex and need specialists to keep up to date with the evolving technologies needed to repair and maintain them. Just as you wouldn’t take care of your health by not going to the doctor or by not keeping your car in good condition by avoiding the mechanic, you should think about your financial well-being in the same way and consider working with a qualified investment professional.
The opinions expressed herein are for general information only and are not intended to provide specific advice or recommendations to any individual.
Bruce Helmer and Peg Webb are financial advisors at Wealth Enhancement Group and co-hosts of “Your Money” on KLKS 100.1 FM on Sunday mornings. Email Bruce and Peg at firstname.lastname@example.org. Securities offered by LPL Financial, member FINRA/SIPC. Advisory services offered by Wealth Enhancement Advisory Services, LLC, a registered investment adviser. Wealth Enhancement Group and Wealth Enhancement Advisory Services are separate entities from LPL Financial.