Is It Worth It To Hire A Financial Advisor?

Transcript

Hi everyone. My name is Greg Phelps, and I am your host to Retire Wire. My goal is to help you retire rich and fearless, both in wealth and life. And today, I’ve got a really interesting topic that has come up a lot. I’ve been a financial planner for about 30 years now, about three decades or so and I’ve gotten this question a lot over the years. Is it worth it to hire a financial advisor? And I’m going to start off by saying, you’re probably going to assume that I’m just going to say yes, absolutely. It’s worth it to hire a financial advisor. And that’s not really the case. In fact, we’re going to dig into some interesting topics within this question, is it worth it to hire a financial advisor, and then you can decide for yourself, but it’s not always best for somebody to hire a financial advisor. For some people it’s just not the best fit.

So let’s go ahead and dig right in. I’ve got a lot of information to cover today. First of all, I think we need to start this discussion with what exactly is it that a financial advisor does. Because if you don’t have a good grasp on that, how do you know if you’re getting the value out of what fees you’re paying your financial advisor? I mean, how much does your financial advisor cost and are you getting the value to you, both mentally and financially, and hopefully living that memorable and purposeful life that it’s worth it to hire a financial advisor. So let’s go ahead and talk about what does a financial advisor really do.

I think first and foremost, they help you solve money problems. You’ve got questions or you wouldn’t be watching this video. You wouldn’t be thinking about hiring a financial advisor. So you’ve got some money, maybe they’re not problems, maybe they’re challenges or roadblocks that you need to get past. And so I think that’s the first thing that a financial advisor does is they will help reduce or eliminate those money problems from your retirement. They also help you basically kind of protect yourself from the unexpected and prepare for those things. And these are things like super high inflation, or for example, social security benefits getting cut, or maybe long-term care expenses late in life. So a financial advisor should help you prepare for those unexpected things in retirement.

They also should help you manage and minimize your taxes. And I’m not saying that financial advisors should do your tax planning per se. We do some of that for clients in various specific focuses, Roth conversions, tax losses, tax gains, things like that. But at the very least, they should be helping you manage your tax implications, because every dollar you save in taxes is a guaranteed return to your bottom line. So this is a really big topic. Most advisors won’t do, or they don’t do, or they don’t have the expertise, but you should expect out of your financial advisor. Because again, every tax saved is a guaranteed return on your money. It’s money that you didn’t end up spending.

They need to be able to create a very clear cut and concise path from where you are at now in your retirement life with your finances and your goals and so forth, to where you want to be. And whether you’ve just retired or whether you’re newly retired or you’re well into retirement, or you’re about to retire, you need to have that roadmap. It’s one of the most important things. It’s one of, what I call, it’s the very first one of the seven deadly retirement sins. I’ll be doing other videos on the seven deadly retirement sins coming up.

But if you fail to plan, you’re planning to fail, and that’s a very, very important thing, is that clear cut roadmap with your assets, your income, your expenses, and liabilities mapped out over your next 30 or 40 years of life so you don’t have to worry about it. Now, this roadmap, it’s a living breathing thing. It’s going to change on a regular basis. So it’s not a static document or a static software output. It’s something that needs to be adjusted and monitored over time, but they need to be able to create that clear cut path.

Accountability is huge. A good financial advisor should say, Hey, you need to go make this change, maybe in your 401k. And a financial advisor, can’t log into your 401k, so a financial advisor needs to say next meeting or next go around or in a certain follow up, hey, did you make those changes? So there’s some accountability involved that a financial advisor owes you as a client as well. Definitely the organization, just the organization process alone is very, very important. So while you could do this on your own, you wouldn’t necessarily know all the little nooks and crannies to look in for information that could be vital to your retirement success. And so the organization alone is a very important part of what a financial advisor should be able to prompt you into doing or help you do.

Definitely the confidence. I love to say retire rich and fearless. And I mean rich in life, as well as wealth and money. And rich, really, is different things to different people. But the fearless part is very, very important, because what good is a retirement if you’re constantly looking over your shoulder waiting for the market to crash, waiting for rates to dive or go up or spike or inflation to spike. If you’re constantly worried about these things, it’s not really going to be the most enjoyable retirement, certainly not the retirement you dreamed of. So the fearless part is also critical because you need to have that confidence. Hey, I’ve got a plan, I’m sticking to it. I’ll make adjustments along the way, but my plan is there so I can go out and see family and friends and hit the links or fish or whatever it is that you want to do in retirement.

It’s that fearless mentality that I think is very important. And a financial advisor should be able to go a long way. Now for some people, it’s not possible to be “fearless”, I get it. It’s ingrained in our psyches. We all think about things, money and planning differently, but get you as close to possible as not worrying about money in retirement.

Definitely help you avoid making the big money mistakes. And there’s a lot of them out there. Missing tax loss harvesting is a mistake, sure, but a big money mistake would be something more along the lines of, and I’ve got stories I could share, I go on for days, but selling out at market bottoms when you have a long term plan in place, and there’s really no reason for it. And if anything, you should be thinking the opposite, how do I reallocate to take advantage of these market events? So avoiding big mistakes is huge.

And I know for a fact, I can name off dozens of clients over the years that I’ve helped them stay in their seats. They’ve lived through the bad times or they’re living through the bad times maybe and stay in their seats for the good times as well. So the big money, mistakes, and that’s part of what we’re going to talk about a little bit more in greater detail coming up. But it’s very important that a financial advisor is and does have that relationship with you, that they can push back and get you thinking in terms of your plan for the long term.

Definitely add value above and beyond their fees. I think this is an important one and I can make the argument that if a financial advisor adds any value and you still have costs above the value that they add, it still can be very much worth it. The piece of mind, the being the fearless part of it. But at its very simple level, the question that I have for you, and feel free to answer in the comments section, but if a financial advisor, if you have a very high level of confidence that they can add more value to your retirement, whether it’s in tax savings or planning or sleeping at night or investment returns, if they can add more value than their fees, I think that’s a pretty good sign leaning towards a financial advisor could be worth it, but not every financial advisor can do that. And so we’ll talk a little bit more about that.

And most importantly, this goes back to the rich and fearless part. The rich part is really just maximizing every dime you have. You’ve already scrimped and saved and worked your entire life. You’ve taken risk with your investments to some extent, anyways, because they’re invested. And really, it’s about squeezing every last dime that you can out of your retirement. So a good financial advisor should do all these things and a lot more. What you’ll notice that I didn’t say is, a financial advisor should not be sugarcoating things for you. A financial advisor should have a good bedside manner and be able to explain things to you and give you a level of comfort and satisfaction that you’ve got the right knowledge and you’re on the right path, but sugarcoating things, hey, your plan is doing really, really great when it may not be. It’s not helpful for you.

And while the financial advisor may still be getting paid, it might be helpful for them. It’s definitely not going to serve your long-term purposes and sugarcoating and bloviating. I like to say that I’m kind of blunt or candid maybe to a fault sometimes. And I feel that making sure that clients, you out there, you have all the right information, you’re making the right decisions as best as possible without the hyperbole. Well, our funds did this or that is really a good foundation. So a financial advisor should not be sugarcoating or bloviating at all.

They definitely shouldn’t be leading with product. I say, when all you have is a hammer, everything looks like a nail. And so you’ll see a lot of insurance brokers out there and my insurance product is the best and here’s why. That’s not assessing and diagnosing what’s important to you and where you want to be in life. That’s just saying, Hey, I’ve got a hammer and everything looks like a nail, so this insurance product is right for you. So selling products is the last thing any financial advisor should do. They shouldn’t be incentivized to sell products. They shouldn’t have products that they know are always right, because everybody’s different. So selling you products, insurance or investment products is really something a financial advisor should not be doing.

Investment and insurance products among other things are just a tool to accomplish your goals. And that’s the way that they should be approached. They definitely shouldn’t sit there and say, oh, my investments did this and they’re better than the guy down the street because that’s all hog wash. I can tell you after about three decades of doing this, that with today’s software programs, you can twist and manipulate stats and so forth to make anything look good. And it really is irrelevant, because if you’re in this retirement mindset, you’re probably using more consistent, broad-based indexes, passive investments. And you’re going to get the returns that are going to be very similar to the next guy down the street assuming your plan is done properly.

While there may be a little bit of deviation, maybe somebody picked a really good fund here, they’re probably going to pick one that under-performs there. So I don’t think that a financial advisor telling you how great their stuff is it’s something that you should run from rather than embrace, rather than hang on that number. It’s really easy for an advisor to sit down with you and say, yep, absolutely. We can do 10% a year. Doesn’t mean it’s going to happen in reality. The reality is you’re probably going to do very close within a margin of error to what other advisors can do for you. And that’s all going to be based off of your risk tolerance and your plan and so forth.

Absolutely not hide fees and commissions. Financial advisors should never do that. I believe every dime that a financial advisor makes, it should be fully disclosed to you. And we can go on and on about that, and I’ll leave that for another video. But the full disclosure, it’s kind of like when you go to a really expensive restaurant and it just says price of the day. You know it’s going to be really expensive. You don’t know how much is going to cost unless you ask and you don’t want to be that guy or girl. But you really should know what you’re paying for the value that you’re getting out of that relationship. And anybody who is going to sit down and call themselves a financial advisor, financial planner and say, yep, great. Don’t worry. It doesn’t cost a thing. You don’t pay anything. This company pays me. No, no, no, no. It’s coming out of your pocket no matter what. People do not work for free. So just keep that in mind. I think everything should be open and fully disclosed. It’s something you should require from your financial advisor.

So let’s talk a little bit more about how does your financial advisor get paid or what does it cost to hire a financial advisor. There’s a lot of different ways, probably on the base level, and I’ve done these for years, but is more of the project planning type of approach where you have a specific need. And let’s just use your retirement for this example. You want retire in four years, you plan on living until you’re 90 and your spouse plans on living until they’re 87 and you’ve got X amount of assets, expenses, income, and liabilities. And so create a plan for me to show me that I can either do this or not. Maybe I have to work another year or maybe I can retire tomorrow. So a lot of financial advisors will charge a flat fee and those fees range from a few thousand dollars to 7,000 or even more.

I know one very good advisor in Arizona who charges $7,000. Doesn’t bat an eye. People pay it all day long because she’s really, really good at what she does. And there’s a lot of value that she delivers. Things that most people on your side of the desk just would not think of. And so paying for a plan is a really, really important part of your retirement planning process. And whether you pay for it or it’s included in your financial advisor fees, there’s a lot of different ways, but some advisors will just charge you for a plan. We happen to be one of those. And some advisors will actually charge you per hour. And depending on how seasoned the advisor is and what they’re doing and how complex, you’re going to pay anywhere from a couple hundred bucks an hour to $500 an hour. It’s kind of like an accountant, a really good accountant or a really good attorney. And you’ll just paying for their time.

Very few advisors do hourly financial planning, but there are more and more these days who are willing to do that. We actually do hourly planning as well. And a lot of times it ends up where somebody will hire us for a plan and maybe a couple hours to follow up. And then they’ll call us in eight months and say, I didn’t do anything you told me to do. Just take the reins. And that happens as well. And that’s where things go more into the ongoing asset management fee. And these are across the board, but let’s just use 1% as an example. An average million dollar portfolio, most registered investment advisor firms, financial planners are going to charge you 1% to manage those assets. And then they may do your planning along the way and things like that. Wrap it all into that one fee.

So you need to make sure that you understand what the fee is, how it’s being charged and see it in black and white. Again, you need to understand what the price is so you can understand the value that is getting delivered to you. And if there is value, maybe there’s not, and maybe it’s not the best relationship for you to have.

And then finally, there’s the worst, which is the commission-based broker or advisor. And they’re really not financial planners, they’re really not financial advisors. They sell products for a living and insurance investment products, limited partnerships, variable annuities, things like that. And a lot of times these commissions, in fact, the overwhelming majority of times the commissions, the amount that the advisor makes is hidden and you don’t even know what it is unless you read through a prospectus that’s that thick. And maybe you can ask them and maybe they’ll tell you, but it’s also not a guarantee. So I just feel like the commission approach to financial planning, financial advice is really a prehistoric type of thing. And I don’t feel that’s in your best interest because you’re talking about a product sale versus a plan to retire rich and fearless.

Now, in my opinion, the best financial advisor out there for you will have a lot of different qualities, but in most circumstances, they’ll be what we call a fee-only financial advisor, which means that they do not, they’re sworn off to take any commissions. Now fee-based is very similar and it sounds like fee-only, but fee-based advisors can possibly sell products for commissions and can charge you fees for advice and management of your investment portfolio.

So fee-based is a little bit of a misnomer. I think it’s a very slick marketing scheme that Wall Street created to make you, the investing public out there, feel very warm and fuzzy that, oh, it’s fee-based, we’re on the right team together, when in reality, they could wear both hats. They can manage your assets for fees or maybe do hourly planning, but they can also sell you an insurance policy and get a 7% commission. So I think that the best financial advisors out there are going to be honest and open with you and upfront and be at least fee-based, if not fee-only. There are certain circumstances where fee-based advisors really do act like fee-only advisors. They just happen to have the ability. And so keep that in mind. Fee-based isn’t necessarily a bad thing. In many ways, it can be a good thing. There might be other tools available to a fee-based advisor that aren’t to a fee-only advisor, but overwhelmingly, fee-only is what you want to ask or request out of your relationship with a financial advisor.

So now let’s kind of go ahead and tackle that question. Is it worth it to hire a financial advisor? And what I did here is, I don’t want you to take my word for it. You can see Morningstar is a huge company. Vanguard’s a huge company. Russell is massive. Investnet is a very large company. These are four industry behemoths. These are giant financial and FinTech companies and investment management companies and so forth. And they actually did their own separate studies that I’m going to break down. And they did a study and they’re trying to answer the same question. Is it worth it to hire a financial advisor?

So let’s go ahead and talk about these studies. According to these four companies, and the numbers vary, so I’ll show you how I came up with this 3.13% in a minute. But the numbers vary, but if you believe them and you have the right situation, you’ve got the right advisor for your situation. A financial advisor could add 3% or more to your overall retirement returns performance. It’s not just in performance, it’s another thing’s, tax savings and so forth, behavioral guidance. We’ll cover that. But you can add a lot of value. So the real quick question to you, and again, answer below in the comments, but if you’ve got a financial advisor, that’s charging you 1%, but they’re adding 3% and I’m not saying you can get every ounce of this 3%. There’s a lot of factors that go into it that which we’ll cover. But if a good financial advisor can add three and they cost one, you’re coming out ahead in the game.

And at the very worst, I can make the argument, if you’re paying 1% and they only add 1%, you’ve got somebody working for you that’s not costing you anything and hopefully they’re giving you peace of mind to retire in the way that you always wanted to retire and live that dream retirement. But Morningstar says they did one study. They lumped a bunch of different aspects together. They say, a good financial advisor can add about 1.5, 1.6%. Vanguard says 3% in their study. Investnet says three, and Russell is 4.91%. So I don’t know, all of these studies are different. They’re very similar. Some of these things cross over. Those are the most important concepts where advisors can add value, and I’ll talk about that next. But if you average all those out, that comes up to 3.13. So I just wanted to average them out and just give you a rough number because I don’t know which one you can put your hat on and say, this is the right one. This advisor is going to add 4.91%. I don’t know that’s correct for everybody. I know it’s not correct for everybody. And so I just average those out.

So here’s the ways that I kind of dissected these different avenues or aspects of how a financial advisor can add value. And what I did here, actually, let me go back. What I did here was I averaged again, for example, behavioral guidance, you’ll see here, Russell places a 2.37% bump in behavioral guidance. And again, I can tell you stories for days of how I’ve talked people off the ledge and doing the wrong thing. And now they love me, because I kept them in their seats. But Vanguard says it’s only worth 1.5%. Who’s right? I don’t know, I average them out. So that’s how the process works. These are the different areas over here, tax smart investing, asset location, financial planning, all of these, these are the different areas that these studies kind of focus on.

And so if we look at this 3.13%, which is the four industry behemoths, Morningstar, Vanguard, Investnet, and Russell investments, and you average them out and you say it’s 3% or whatever, here are the different ways. So let’s talk about them real quick tax smart investing. So there’s a lot of things that go into it. And some of these aspects are going to crossover, like I mentioned. But those can be things like asset location, meaning for example, your pretax IRA, making sure that your bonds go in there because they pay out ordinary income. So you want those in your pretax IRA, your 401k, things like that.

Making sure that your most aggressive investments are in your Roth, that’s another thing that’s on this list here. Let’s see, that would be allocation. But making sure that your Roth is filled with the right investments. And most importantly, your taxable account is filled with the most tax efficient investments. Tax smart investing can also be things like tax loss harvesting, tax gain harvesting. That’s true. There are times when you want to take gains and reset your cost basis, if you’re in a low enough income bracket. So tax smart investing, if you average those out, you take all the studies, you got 1.11%.

Investment selection and monitoring, they have an average of about a half a point there. And those are things like, are you in the right ETFs, are you in the right funds? Hopefully you’re not, because you’re in this retirement mindset. I don’t feel like you should be trading stocks or individual bonds or anything like that. But investment, that could be part of the investment selection of monitoring for the 0.51%. Asset location, I just talked about that briefly. One of the studies breaks that out separately. Again, making sure that your investment asset classes, stocks, bonds, foreign stocks, big company, small companies, short term bonds, intermediate term bonds, long term bonds, whatever it may be, but make sure that those asset classes, they have different tax implications and making sure that they’re in the right type of account to reduce your overall tax implications. So they’re minimize your taxes. That’s about two thirds of a point, almost two thirds of a point.

Financial planning is my favorite one. I think it’s the most important one. 0.86% can be added. And a lot of these things are very hard to quantify. You could have a financial plan and you’re going down this path and it’s decent right now. But if you could take a little shortcut down this side road over here and get there a little bit faster or a little bit better somehow, that’s where the financial planning comes in. And so that’s, again, that’s matching up your assets, your income, your expenses, your liabilities, both now into the future throughout your retirement and creating that succinct roadmap that is definitely going to be open for adjustment on a regular basis. These things move and they change as soon as you put them into practice, but that’s almost a point. 0.86.

Asset allocation. How much should you have in stocks versus bonds, in foreign companies versus US, in real estate, in long term bonds, in junk bonds? How much should you have in each of those different asset classes? It’s a very important topic. It’s about 0.52%. When you look at these studies of value added. And that’s going to hopefully keep you from getting over your head in a more aggressive portfolio than you should be, or being too conservative and not getting the returns that you need to finish out your retirement plan. And your retirement plan is going to have a specific set of assumptions for how much each of these asset classes will earn and the volatility of each over your lifetime. And so you need to make sure that your asset allocation is dialed in.

Now, a lot of people, real quickly, a lot of financial advisors will give you a quick test and say, your allocation is 75% stocks, 25% bonds. That’s only part of it. You also need to know what is your risk required. How much risk do you need to take to accomplish your goals and what is basically your risk capacity? How much risk can you take? And if a bad market comes along, which we know it will, that’s the one thing I’ll guarantee, is we will have bad markets in the future. But how much risk can you take and not be knocked off your long term plan?

So moving on portfolio rebalancing, that means once you have your plan, let’s just say it’s 60% stocks, 40% bonds. As soon as you put that into place, the next day it changes. The market goes up or down, bonds go sideways, whatever it is. So making sure that periodically, if the market goes up for six months or a year, and now you’re 65% stocks and you’re 35% bonds, that’s a problem because your plan was based off of 60% stocks, 40% bonds. So making sure that you rebalance that by selling a little bit of stock, buying some bonds over time, adds value. It’s about a quarter of a point.

Behavioral coaching. When you average it out, remember the Vanguard had 1.5%. If you look at the other study, you average it out, it’s about 1.93%. Behavioral coaching is, I know you’re sitting there thinking I don’t need that. I don’t benefit from that. I can’t tell you that you couldn’t be farther from accurate with that, because a lot of times it takes an independent, unbiased third party to put things in perspective, to digest all of the noise and to help you tune it out. And so the behavioral coaching is very, very important. You could easily sit down one morning, watch CNBC and see three so-called experts tell you that the market’s going to crash. And you miss the afternoon session when you’ve got three of them that are different telling you the market’s going to go into a bull market immediately. And so a financial advisor, a good one, will help you sort through all of that nonsense and noise and focus on what’s important, the things that you can control.

And another favor of mine is retirement income withdrawal and spending strategy. So for example, you let’s just say you retired. You’re 65. You’re smart. You delayed social security. You’re going to delay that until age 70, and you need to have some money to live on. Where do you pull that money from? Do you pull it from a Roth IRA, a taxable account, some sort of life insurance policy? Do you pull it from a pre-tax IRA and pay taxes? So this gets really into the weeds with your tax planning. And it’s another way that a really good financial advisor can add a lot of value, is to say, hey, by the way, we need to take you up to this bracket with your IRA distributions, but we don’t want to go over. And then the rest, we’ll take out of maybe it’s your taxable account and we leave the Roth to grow. Everybody’s a little bit different. And it also depends on what your current and your expected tax brackets are going to be. So the retirement spending strategy is really, really critical. It’s definitely critical to that maximizing your retirement finances portion of what I’ve been discussing.

So that’s how the studies come up. They come up with these different aspects of ways, these are the main ways that a really good financial advisor will add value. You noticed I didn’t talk about, well, they’re going to earn you 1% more or a half percent more. No, no. That’s not what you should be focusing on, you should be focusing on the value of the planning, the holistic plan, overall, that lets you live that memorable and purposeful retirement, rich and fearless. So you don’t have to worry about it. You should be sitting on the beach with a good book and not mowing the lawn because you’re afraid to spend the money for the trip.

So some of the things that I discussed and I said a financial advisor, I said this up front, may not be the right fit and it might not be worth it to hire a financial advisor for your situation. Let’s talk about some of the things that you need to look for in a financial advisor that might make it the right fit to hire a financial advisor. Number one is fiduciary. Absolutely, positively, you must require a fiduciary financial advisor. A fiduciary is going to act in your best interests. Your needs come first above their compensation, above everything else. So I’ll give you a quick example.

Let’s say you’ve got a million dollar portfolio and you don’t really like paying your mortgage anymore. You just kind of want to wipe it out. Well, if you got a million dollars in investments and you come to any old financial advisor, you’re saying, hey, I need to pull out, let’s call it $300,000 to pay off your mortgage. Financial advisor looks at that $300,000 and they’re making 1% on it, let’s just say, and they say, well, that’s going to cost me $3,000. If you move that money out to pay off your mortgage, I don’t get paid on your mortgage. That’s a problem. That’s why you need a fiduciary financial advisor who can look at your situation and say, if you pay off the mortgage, here’s how your plan looks. And by the way, yeah, it makes sense to pull the money out. The market’s been good, whatever, you don’t have that much in gains, whatever that might be. But to be honest, and to be upfront with you and to give you the best advice, always in your best interest. And so that’s why a fiduciary is so important.

Any conflicts of interest, for example, the mortgage issue, maybe that financial advisor also has a hook up with the mortgage company and they get a kickback. Maybe they might tell you, Hey, go get a mortgage. Mortgage your half million dollar house take out 250 and put it into your investments. Well, they might get a kickback on the mortgage. They’re going to make money on the 250 they invest for you. Those conflicts of interest, the mortgage, for example, or maybe they get a trip to Hawaii if they sell this annuity. Those conflicts of interest need to be fully disclosed for you. It’s very, very important that you know what you’re paying, you know what you’re getting and that you’re getting advice always in your best interest.

I touched on this briefly. I believe strongly that a fee-only model is very important to putting the financial advisor on the same side of the desk as you. Your goals are the same. The financial advisor does better when you do better because your fees, your assets grow and their fees go up and so forth. The fee-based model, again, it’s not bad. It is basically you just are in a situation where you need to make sure that you’re not getting sold products for commissions and that are hidden. Typically, those commissions are going to be hidden. I really do not like the commission-based model at all. It is what it is. I’m sure I’ll get flooded with comments about, well, I do commission work and I’m in the client’s best interest. That’s fine. If you’re really working in the client’s best interest, then just take fees. Let them know what they’re paying, so they know if you’re actually worth it or not. Is it worth it to hire a financial advisor? You have to know what you’re paying.

And definitely there are certain niches in this industry, just like with anything else, accountants will some focus on bookkeeping, some focus on a estate tax accounting and so forth. Some just do regular tax returns. There are niches in the financial advice community, in the financial planning community in the exact same way that there are in most every other service industry out there. So for example, if you’re almost retired, you know need a retirement-type minded financial planner. But you also may be going through a divorce, and so there’s different credentials that cover here’s how we tackle divorces. And so that person, that financial advisor who might be focused on divorce planning, they’re probably going to be at the top of their game and know all these little nuances that you might not have been aware of.

So retirement planning is important in that situation, divorce planning’s also important. Finding both is probably going to be hard, but it’s great if you can do that. So finding a financial advisor that’s focused on your specific situation, if it’s a large inheritance, that might be a certain advisor, that’s really good with those type of things or lottery winnings or something. If it’s divorce, if it’s college planning, those are specific niches. Financial advisors for dentists, those are specific niches. If your niche, if your main goal is, hey, I want to retire rich and fearless. I want to have maximize my finances that I’ve built my entire life and I just don’t want to worry about it, then you need to find a financial advisor who’s focused on retirement planning for you. And so that’s a really important concept. That’s going to be the right or the best financial advisor for your situation.

I think, unless you find the best financial advisor for your situation, you’ll never know really if it’s worth it or not, because they might not have that specific focus that’s going to go miles farther for you than just any old financial advisor who can manage your investments.

Credentials. Again, I mentioned the divorce specialist or so forth. There’s retirement planning specialists, there’s business owner retirement plan specialists, and things like that. It’s important to know that they have the credentials and the extra training to help you in those specific niches. So typically, I personally think no matter what, you need a CFP, a certified financial planner. You should require that out of your financial advisor. If they’re not a CFP, I wouldn’t even bother with them. There are a lot of other credentials, but the CFP, the PFS, which is a personal financial specialist, that’s also a great one. That’s an accountant who is also a certified financial planner. So if you’re more tax focused, you have more tax implications in your situation, try to find a PFS that’s absolutely top of their game when it comes to that.

There’s also the CHFC, chartered financial consultant. That’s another great designation. These are the harder ones to get. These are the ones that actually take a lot more thought. I’ve got letters after my name that … Quick story. My kids used to take my business card and I’ve got a bunch of credentials and a bunch of letters, and they would just make up words with them, see how many words they could make up. So a lot of those credentials, they don’t mean a whole lot. The most important ones are going to be the CFP, certified financial planner. Hopefully you get one if you’re focused on retirement, that focuses on retirement. PFS is a great one. CHFC is a great one.

Another really tough designation. Actually, this one isn’t so tough. The AIF, everything’s got relative difficulty, accredited investment fiduciary. There’s that word, that buzzword, fiduciary. An accredited investment fiduciary, somebody who’s specifically focused on your investments from a fiduciary’s perspective, what’s best for you. What I was going to touch on was the CFA, the chartered financial analyst. Very difficult credential to get. It is not as focused on you and your planning as it is the investment world. So CFAs are typically going to be in big shops like Morningstar and Vanguard and Morgan Stanley and so forth and managing portfolios, not necessarily working with you, helping you achieve your goals.

So is it worth it to hire a financial advisor or do it yourself? I mean, you’ve got the option. You can do it yourself. Anybody can. But to do it yourself, you need three things. You need the time. Do you have the time to dedicate? And a lot of that time that you’re going to need to spend is getting the knowledge to know that you’re doing it right. And then you finally have to have the desire to do it. If you don’t have all three things, I don’t want to say you’re going to fail, but chances of failure in retirement, or having to make some serious adjustments because you missed something, because you jumped out of the market at the wrong time, because you didn’t harvest those tax losses and now you’re stuck with all these implications. If you don’t have all three, it’s like a three-legged stool, it’s going to fall over.

And so if you have the time, if you have the knowledge, and the experience and the credentialing and all that goes into it, and if you have the desire to do it, you can do this on your own. You may not need to hire a financial advisor. That’s a hundred percent true. A lot of those clients that have the time, knowledge, and desire, they’ll be hourly clients or a project client versus an ongoing client. So if you’re missing one of those three things, you’re very likely, or if it’s very possible, you’re not going to get the best retirement outcomes. Specifically, holistic retirement planning, holistic. I’m not just talking about, Hey. Yeah, sure. You got a million dollars, you can spend $40,000 a year for the rest of your life. That’s not holistic financial planning. I’m talking about holistic retirement planning that maps out, oh, you buy a car and you spend about $70,000 on that car every six years. These things are built into your plan.

What happens if inflation goes up? What happens if social security benefits get cut? What happens if you die? What happens to your spouse, your kids, your loved ones, your parrot? I had a client who had a parrot and in her plan because apparently they live like 50 years or something in her plan was money set aside when she dies for the parrot’s maintenance. So these are things that are important to you, whether it’s a parrot or your kids or your spouse, they’re important to you. And so the holistic retirement plan, comprehensive, assets, expenses, incomes, liabilities, mapped out over your lifetime. I could make the argument that if you don’t hire a financial advisor ongoing, at least hire a financial advisor for an hour or for a plan to get a really well rounded sense of where you’re at now, where you want to be and the best path to get there, to bridge that gap.

And finally, if you think about it, if these four studies, they’re not my studies, if these four studies, and let’s just say, it’s 3%. If you have specific issues, you find the best financial advisor for your situation. And then you ask yourself, is it worth it to hire financial advisor, and you feel confident that you have asset location issues and you have retirement spending issues, and you’ve got asset allocation and financial planning and behavioral coaching issues that can be tackled for you, if you need a trusted financial coach, a financial guide for retirement, and they’re going to provide you value over and above their fees, then yes, it’s worth it to hire a financial advisor.

If your situation is very simple and you’ve got the time, the knowledge, and the desire to do it yourself, you don’t need to hire a financial advisor. I mean, it’s true. You can do some research, because you’re going to take the time. You can get the knowledge by doing that research, and then you go and execute on your own. I would make the argument. It’s very likely you’re going to miss some things along the way, but it’s kind of like the Pareto Principle, the 80/20 rule. If you get 80% of it right, that might be good enough for you. I want to higher success ratio than 80%. And I think the best financial advisor for your situation can probably deliver that and deliver value over and above their fees.

So again, one last reminder is these studies, they’re done by these four companies, Morningstar, Vanguard, Investnet, and Russell. They’re not my studies. You can Google them on the internet and you can find them all day long. I’ve read them all cover to cover. They get pretty intense and pretty in depth and lots of equations. But those are the studies, those are the ways that a financial advisor can add value to your situation. And those companies would say, yes, it’s worth it to hire a financial advisor. Again, the point that I was trying to make was, it’s not going to come all in investment performance. You might get a bump from rebalancing your portfolio. You might get a bump from the right asset allocation because you’re maybe over-weighted, you’ve got 30 different positions, but all your stocks are large cap growth. You might get a bump from asset location, but those things aren’t going to show up on your performance report. You might save money in taxes. It’s not going to show up on your performance report.

These are holistic concepts. It requires a very good financial advisor, the best financial advisor for your situation to execute on these things. Otherwise, it’s just not going to work out for you. But again, if you believe the studies, the best financial advisor for your situation can get you 3% or more and they charge you 1%, I think you answered your own question. And again, if you’ve got a more simple situation and you’ve got the three things, the three-legged stool, then you don’t need to hire a financial advisor.

My name is Greg Phelps. Thank you so much for checking out my video. And I hope to see you on the next one. I’ve got a lot of great stuff coming up for you. And stay tuned, make sure to ask a question below. I answer every question that I possibly can. Hit the subscribe and the like button. I appreciate it. Since you’ve stuck around this long, you must have found the information somewhat interesting. Also, I do have a guide on retire wire.com. If you go and search Retire Wire, how to find a financial advisor you can trust. And I lay out all the steps. So you notice, I’m not trying to tell you to come work with me, but I’m saying I laid out all the steps, the questions you need to ask, the interview process, the research process, how to find them in the first place. Get that ebook, it will help lead you towards the right financial advisor for your situation. I already did cover a lot of it in this video, though. Thank you so much. And until next time, take care and retire rich and fearless.

The Value A Financial Advisor Adds Footnotes

1. Morningstar “Alpha, Beta, and Now… Gamma” study August 28th, 2013
2. Vanguard “Quantifying Vanguard Advisor’s Alpha” study February 2019
3. Russell Investments “Value Of An Advisor” study 2022
4. Envestnet PMC “Capital Sigma: The Advisor Advantage” study February 2019
5. The average value of a financial advisor from the four studies referenced.
6. Not every one of these strategies will perfectly apply to your unique situation.
7. Average of Russell Investments and Vanguard studies
8. Average of Vanguard and Envestnet studies
9. Average of Vanguard and Envestnet studies
10. Average of Russell Investments and Envestnet studies
11. Envestnet study
12. Average of Russell Investments, Vanguard, and Envestnet studies
13. Average of Russell Investments and Vanguard studies