Although I'm a DIY investor and encourage people to figure out how to invest themselves, there's absolutely a place for hiring a financial advisor or investment manager.
Back in 2015, I did some consulting for a startup called Motif Investing down in San Mateo. I remember talking with a person in marketing about what she liked to invest in.
Instead of telling me about various stocks or index funds, she told me she had been accumulating cash for the past several years. At 33 years old, roughly 70% of her portfolio was in cash because she didn't know what to invest in!
I was surprised to hear her portfolio composition. She was working for an online brokerage that created various thematic portfolios (motifs) for their users.
The investment ideas were endless and the cost to invest was extremely low for the time. Yet she still was stuck, unsure what to do with most of her capital.
A financial advisor would have definitely helped.
Why You May Want To Hire A Financial Advisor Or Investment Manager
The biggest pushback against hiring a financial advisor or investment manager is the cost. In a world where everybody wants something for free, paying for advice or portfolio management can feel abnormal.
However, there may come a point where paying for financial help might be the best thing you can do for your financial future. Here are some reasons why you should hire a financial advisor or investment manager.
1) You don't know where to start.
The hardest part of doing a lot of things is starting. When it comes to investing, the sheer number of investment options can be overwhelming. Therefore, some people simply tend to hoard cash. Cash is familiar and easy. Cash also doesn't lose absolute value.
However, if you end up holding the majority of your portfolio in cash during a bull market for years, you end up missing out on a lot of gains.
A financial advisor or investment manager helps create a financial action plan for you. They will help set up a risk-appropriate investment portfolio. And, they will even manage your portfolio for a fee.
2) You are too busy to stay on top of your investments.
Imagine having to work from home with two kids out of school for the last 18 months. You're barely keeping your head above water. You'd love to review your investments and put more cash flow to work. But you simply don't have time.
As a result, you aren't conducting any tax-loss harvesting. You aren't rebalancing your portfolio to a target allocation every quarter either. Further, you've let your cash pile up as well.
People hire others to mow their lawn, clean their house and cut their hair. There's no shame in hiring a financial advisor to stay on top of your investments. For those of you who invest in active funds or private funds, hiring a financial advisor can provide more guidance.
3) Money stresses you out more than the average person.
There's something to be said about farming out your investments to an investment manager so you don't have to think about your money as much. During volatile times, it may be more comforting to know someone is watching out for your money.
For example, if your DIY portfolio was down big during March 2020, you probably blamed yourself. Your stress may have spilled over to your partner and children. It's easier to get moody when you're losing years of savings quickly.
However, if you had money with a robo-advisor, you could have blamed it instead. Blaming someone else often feels better than admitting fault, even if the outcome is the same. It's just human nature to give ourselves credit for our successes and blame others for our failures.
Psychologically, compartmentalizing your money with a money manager may give you more peace of mind to focus on your main way of making money. I've been investing our family's money for 20+ years and it can sometimes feel like a stressful full time job.
4) To protect yourself from yourself.
One of the benefits of having a financial advisor is that you better insulate yourself from bad financial moves. It is much easier to hit the sell button during a financial meltdown when you are managing your own money.
The ease of panic selling is partly the reason why I prefer investing in real estate. The difficulty in quickly selling real estate saved me from selling a home right before the housing market took off in 2012. The illiquidity of real estate forces owners to be longer-term investor, which is generally a good thing for returns.
If your money is with a financial advisor, then you would have to contact your financial advisor and then panic sell. During this time, your financial advisor might convince you not to walk off the ledge. You might also calm down on your own.
The harder it is to trade, the less you will trade. But if you've always got a jar full of freshly baked cookies in your kitchen, you won't be able to help yourself. In general, trading in and out of positions is a suboptimal financial move.
5) You have too much money at stake not to get your investments right.
Let's say you have $5 million in investable capital. You accumulated your $5 million as an early startup employee for a visual design company. Your expertise is design not in investing.
With so much capital at stake, you don't want to mess up your returns. The difference between a 5% return and a 10% return is $250,000. Therefore, you decide to hire a financial advisor for a fixed fee to tell you how to invest.
Even though the fee cost $3,000, you are still much better off than had you kept all your capital in cash and Treasury bonds in a bull market.
Or maybe your financial advisor advises you not to angel invest $50,000 in a particular startup that ends up going out of business three years later. Having a voice of reason when every investment pitch sounds fabulous can be very helpful.
6) You're interested in learning about portfolio construction to eventually DIY.
Let's say you have a modest $50,000 in investable capital. You're 26 years old and just starting off on your long investing journey. The easiest way for you to boost your wealth is to focus on your career. At the same time, you are very interested in learning how to be a DIY investor.
One way to learn how to be a DIY investor is by investing your $50,000 with a robo-advisor like Betterment. Betterment charges a 0.25% fee of assets under management. In other words, you pay $125 a year in fees for a $50,000 portfolio, which is dirt cheap. In exchange, you get:
- Low-cost investing portfolios built and managed based on your priorities
- Socially responsible investing options
- Account choices, including joint accounts, IRAs, and trusts
- Automatic features like portfolio rebalancing, dividend reinvestment, and auto-adjust
- Advanced tax-saving strategies like tax-loss harvesting and asset location
- Add Checking and Cash Reserve with no additional fees
After three years of letting a robo-advisor manage your money, you might decide you've learned enough about portfolio construction to just create your own portfolio. During this three-year period, hopefully, your portfolio will have gained in value as well.
There's no better way to learn than to learn by doing with the initial help of a coach. Once you've learned the fundamentals of investing, you can go work out yourself.
7) You want to gain access to special deal flow.
I randomly met the founder of ICONIQ Capital on the tennis court the other day. ICONIQ Capital manages around $70 billion for the likes of Mark Zuckerberg, Jack Dorsey, and a bunch of other very wealthy people.
Paying an asset management fee on big money means big money for the money management firm. However, what's unique about ICONIQ Capital is that it not only manages money, it also invests in venture capital, private equity, and real estate. It also has its own funds.
Given the size of ICONIQ Capital and its exclusive clientele, it has access to deal flow that isn't available to the average person. For example, some of its early investments include Zoom, Airbnb, DocuSign, and SnowFlake. A 0.5% fee on $1 billion is $5 million. But if the firm can return 20% in one year, that's $200 million.
Therefore, paying a management fee to access exclusive deal flow can be very worth it. If you hire a financial advisor, ask what type of deal flow they have. A common benefit may be getting IPO or investing shares in a company your financial advisor is taking public. Or, your money manager might have access to secondary shares.
Traditionally, firms such as Goldman Sachs, Morgan Stanley, and JP Morgan have some of the best deal flow. However, the space is extremely competitive and the league tables are changing all the time.
8) You're Constantly Unsure About How To Invest
Recently, I had over $520,000 in equity structured notes come due. As a result, I had to figure out how to reinvest the proceeds, save the money, or spend the money. This was a relatively cumbersome and stressful experience.
If you invest with a robo-advisor or financial advisor, they can help take that stress away by reinvesting the proceeds for you. Once the responsibility of investing specific sums of money is off your shoulders, you don't worry about it as much. You already made the choice to hire help.
Given I don't have a financial advisor, I decide to invest half the proceeds in the S&P 500 and sit on the other half. At least this way, I invested inline with my uncertainty.
Financial Advisors Fill An Important Need
A financial advisor isn't going to solve all of your investment problems. Financial advisors are human too, which makes them susceptible to mistakes and the usual emotions of fear and greed.
However, I think it's worth it to pay a financial advisor or sign up with a digital wealth advisor to help you get started. It's also good to pay a financial advisor to help you stay on track.
If the alternative is not doing anything with your cash, then hiring a financial advisor or paying an asset management fee is the preferred choice.
Part of the reason why digital wealth advisors have flourished over the past 10 years is because there is a huge need for lower-cost financial advice. And some people will always want someone to talk to, which is why the hybrid model of using algorithms and advisors has also done so well.
A Cap On Advisor Fees
Personally, I find it extremely difficult to pay an ongoing 1% financial advisor fee once your portfolio crosses over $500,000. 1% of $500,000 is $5,000, every year, as long as you let the financial advisor manage your money. For $5,000, you can easily learn all there is to know about investing your money.
Now imagine if you had $5 million or $10 million in investable assets. Paying $50,000 – $100,000 a year in financial advisor fees seems egregious. It's as egregious as still paying a 6% selling commission on a multi-million dollar house.
Thankfully, the management fee percentage declines the more assets you have managed.
I know it's not good for the money management business, but capping fees or introducing a scaled flat fee is good for the consumer. And I'm always going to advocate for the consumer on Financial Samurai.
Lower Rates Of Returns Should Also Mean Lower Fees
Further, if the expected return for various asset classes in the future is lower, a 1% advisor fee is even more painful.
In the past, I've been mocked for recommending a lower safe withdrawal rate in retirement. This is despite my logical arguments and the fact that I'm trying to live the retirement life and not just pontificate about it. When you don't have stable income anymore, you will face hard-to-quantify psychological money challenges as well.
So if you don't believe in my reasonings for being more cautious about your withdrawal rate in retirement, perhaps you might want to listen to Vanguard.
Below is the 10-year median forecast of U.S. stocks, bonds, and inflation by the Vanguard Capital Markets Model® (VCMM). It came out a full year after I suggested reducing your safe withdrawal rate to about 0.5% when the 10-year yield dropped to 0.7% in August 2020.
If your blended portfolio of stocks and bonds returns 3% and you have to pay a 1% fee, that's a net return of 2%. And if inflation is 1.58%, then your real rate of return is only 0.42%!
Let's hope Vanguard is wrong about its forecasts. However, if they are right, following the Financial Samurai Safe Withdrawal Formula = 10-year yield X 80% for the first several years of retirement is prudent.
As with any service, make sure you are getting your money's worth every year. Maybe you want to ask your financial advisor to do a quarterly investment checkup. Or maybe your financial advisor has free tickets to NFL football games.
Thanks to a tremendous bull market since 2009, it's hard for financial advisors and investment managers to do wrong. Most financial advisor clients should have benefited more than the fees they have paid. Let's just hope the same happens during bad times as well!
It is really during the bad times when financial advisors and investment managers can really prove their worth. Don't underestimate the value of someone being there for you when things go to hell.
DIY Investor Free Tool
Empower easily enables me to track my net worth, highlight where I'm paying excessive portfolio fees, calculate my future retirement income, and so much more. Before Personal Capital, I was just tracking everything with an Excel spreadsheet.
The better you can track your finances, the better you can optimize. If you find yourself needing more help, you can always get a free portfolio consultation later.
Invest In Real Estate To Diversify Your Investments
Real estate is my favorite asset class to build wealth. Not only does real estate provide income, it is less volatile and provides utility. Since 2016, I've invested $810,000 in the Sunbelt region where valuations are lower and net rental yields are higher.
Fundrise: A way for accredited and non-accredited investors to diversify into real estate through private real estate funds. Fundrise has been around since 2012 and now has over $3.5 billion and over 450,000 investors. Fundrise's focus is on residential real estate in the Sunbelt region where valuations are lower and yields are higher. The demographic shift toward lower-cost areas of the country is a multi-decade trend.
CrowdStreet: A way for accredited investors to invest in individual real estate opportunities mostly in 18-hour cities. 18-hour cities are secondary cities with lower valuations and higher rental yields. Growth is likely higher as well due to strong demographic trends. With more capital, you can build your own select real estate portfolio.
Both platforms are free to sign up and explore.
Related posts about financial advisors:
Readers, what are more reasons for hiring a financial advisor? How has a financial advisor or investment manager helped you build more wealth?
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