I thought it might be useful to look at some numbers to really get a sense of how much value an adviser would have to provide to make it worth it, strictly from a cost perspective.
It is nearly impossible to measure convenience. If someone simply would prefer not to think too much about it and have someone else manage their investment portfolio, then this discussion probably does not have much value for them and is moot. Before we look at the numbers, we have to understand that with regards to fee structure, there are basically two types of advisers.
The first type, sometimes referred to as Fee-Only are paid only for the advice they give, normally per session. In other words, if you have specific questions, they will charge by the hour for their time. They do not earn commissions by selling financial products nor do they charge a percentage of the assets under their management.
With that out of the way, let’s look at twin sisters Cindy and Wendy Watson. On the their 24th birthday, December 15th, 2013, their grandparents gave both of them a gift of $10,000. Both sisters decide to invest all of the money in the new year.
Cindy decides to hire a financial adviser that offers his services at a rate of 1.5% annually. Whatever Cindy makes each year, her returns will be 1.5% less what they otherwise would have been as her adviser will deduct that amount from her gains as his payment.
Conversely, Wendy – who happens to be a RetirementSavvy reader and has been learning about investing through various mediums (e.g. formal classes in school, financial blogs, financial magazines, etc.) decides to forgo the adviser and manager her own portfolio.
On January 1st, 2014, both sisters will invest the $10,000 in the same products and each month they will invest an additional $200 ($2,400/year). As fate would have it, over the course of 40 years, the sister’s money was invested – and traded in and out – in the same investments. Over the 40 years, the average rate of return on their investments is 7%. How will the sister’s respective portfolios look come 2054 as they prepare for retirement? A good Investment Calculator gives us some insight …
As you can see, everything else being equal, the fees paid by Cindy to her financial adviser come at a cost of $231,389,05 at the end of 40 years. Does this suggest that financial planners/advisers have no role? Not necessarily. However, I believe that for the vast majority of people, in the vast majority of cases, financial advisers are best avoided, particularly the Fee-Based type. If an investor does decide to use a Fee-Based adviser, I would suggest they do so with the full understanding of what the cost will be.
I believe most individuals will be much better served by taking the time to educate themselves, become financially literate, and use Fee-Only advisers – paying a single fee – on the occasions that they have specific questions for a specific issue.