The decision to hire a financial advisor can be a daunting one, particularly when the cost is a primary concern. Many Americans have misconceptions about the cost of a financial advisor, assuming that it may be too high for them to afford. However, in light of recent market volatility, the value of a good financial advisor has become increasingly clear. While the S&P 500 saw a 22% decline in 2022, many individuals have become skeptical about investing or hiring an advisor. Nonetheless, the cost of a good advisor is often worth it, especially in challenging times like these.
If you have already hired a financial advisor and your investment accounts have not gained much, or any, value this year, you may be questioning the value of your advisor. However, it is important to consider that you are paying a fee for their services, and their value may become more apparent in difficult times. A good advisor will not allow you to withdraw your money based on fear during market downturns, and instead, encourage you to stay invested. According to a study by JPMorgan, seven of the 10 best trading days between 2002 and 2021 occurred within two weeks of the 10 worst days. By staying invested, you could have nearly doubled your returns compared to missing just 10 of the best trading days. The guidance and expertise of a good financial advisor can pay huge dividends over the long term.
For those who are considering hiring a financial advisor, it is important to understand why the cost is worth it. One of the primary benefits of working with a financial advisor is diversification. Diversification does not simply mean investing in a few different companies, but rather it involves creating a portfolio that is diversified across different asset categories and within those categories. A truly diversified portfolio should include nine asset categories: U.S. Large Cap, U.S. Mid Cap, U.S. Small Cap, International Developed Markets, International Emerging Markets, Real Estate, Commodities, Fixed Income, and Cash. An advisor can help you define your goals and build a properly diversified portfolio that is aligned with those goals. They can also help you select funds that have been thoroughly researched and vetted, which will help reduce risk and offset market volatility.
Another key benefit of working with a financial advisor is that they can help protect you against making irrational decisions. As emotional creatures, humans tend to act on emotions rather than facts, particularly when it comes to investing. While robo-advisors have allowed many Americans to begin investing for the first time, they do not offer the same level of guidance and expertise as a human financial advisor. During a market downturn, retail investors tend to make irrational decisions that can negatively impact their wealth. A robo-advisor will not tell an investor not to sell their investments in a down market, nor will it take into account their personal situation or try to resolve their desire to sell out of their investments at an inopportune time. A financial advisor, on the other hand, can offer personalized guidance and advice that takes into account your individual circumstances and helps you avoid making emotional decisions.
Lastly, a good financial advisor can help ensure that you are taking advantage of dollar cost averaging (DCA). DCA is the practice of investing a fixed dollar amount on a regular basis, regardless of the share price. It can help you be disciplined in your investing habits while increasing efficiency and even mitigating costs and stress. An advisor can help ensure that you are taking advantage of DCA and not engaging in speculation. By remaining in the market and investing when the market is down, flat, or up, you can invest at a more optimal price per share compared to trying to time the market. DCA establishes good investing habits, keeps you open to opportunities, and removes emotion from investing.
Behavioral finance studies the psychology of decision-making when it comes to financial decisions. It looks at how people make irrational decisions in the market and how those decisions can impact their wealth. An advisor can help you navigate these pitfalls and work to keep your emotions in check.
One of the key ways a financial advisor can help with behavioral finance is by establishing an investment plan and sticking to it. When an investor has a plan, they are less likely to make emotional decisions in times of market volatility. An advisor can also help coach an investor on how to think about market dips and how to avoid making rash decisions based on fear.
No matter the age or the net worth, all investors should manage their risk. Investors should evaluate their portfolios and assess their risk tolerance based on their age, financial goals, and personal needs. A financial advisor can help investors identify their risk tolerance, and then create a portfolio that aligns with their goals and preferences.
A good financial advisor will monitor your portfolio regularly and make changes as necessary. This can include shifting investments to reduce risk when the market is volatile, or adjusting your portfolio to meet your changing goals.
Education and Planning
Financial planning is an ongoing process. A financial advisor can help you build a plan and review it with you regularly to ensure you’re staying on track. They can also educate you on important financial concepts and help you understand how they apply to your specific situation. This includes everything from retirement planning to tax strategies to estate planning.
A financial advisor can also help you prioritize your financial goals and identify areas where you can make changes to improve your financial situation. They can provide guidance on things like saving for a down payment on a home, paying off debt, or planning for your children’s education.
While the cost of a financial advisor can vary, it’s important to think about the true value that they can provide. A good advisor can help you diversify your portfolio, avoid making emotional decisions, take advantage of dollar cost averaging, navigate behavioral finance pitfalls, manage risk, and provide ongoing education and planning.
Ultimately, the cost of a financial advisor is a small price to pay for the peace of mind that comes with knowing you have a plan in place and someone to guide you along the way. It’s important to work with a trusted advisor who has your best interests in mind and can provide personalized advice that aligns with your specific financial goals and needs.
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