Should you ever use a financial advisor?

financial advisor behind a computer

There’s a lot of criticism in the FIRE community when it comes to taking advice from financial advisors. I’m here to address the main concerns:

1) Financial advisors will still get paid even if your portfolio loses money. They don’t care about what investment performance is achieved.

Wrong. Of course, financial advisors care about their clients and their wellbeing. Advising clients is a long term business and not about shafting somebody to make a quick buck.

Yes, most advisors charge say 0.5%-1% to manage a client’s portfolio. Yes, that ongoing adviser charge is payable even when your portfolio has lost money. However, if financial advisors lose money in your portfolio, it doesn’t mean they haven’t done their job to justify their ongoing advisor fees. Quite often, the portfolio an advisor looks after suffers significantly smaller losses than a portfolio picked by clients themselves. I’ve seen it many times myself as clients like to have the majority of their wealth managed by professionals but leave a small pot of “play money”, which is typically invested in the latest hottest stocks with very little diversification.

The “play money” can go through wild swings and at times look like a fantastic investment in comparison to the advised portfolio. However, we’re not comparing apples with apples here if the advised portfolio is significantly less risky (has less in equities) and the “play money” pot is 100% invested in shares.

Advisors are interested in growing their client’s portfolio because if the portfolio grows, so will their fees because their 0.5%-1% fee is applied to a bigger portfolio.

Competition is another driver which necessitates the requirement to grow a portfolio. There are many attempts by competitors to steal a client’s portfolio. Somebody might offer a better track record or lower charges, or an improved service when looking at the client’s monies. Clients also speak with friends and family and can be influenced by them when moving monies around. Advisors know this and that’s why they do what they can to grow clients’ assets and keep them happy.

2) “I can do it myself. I am better off keeping my costs low and as an advisor is an additional expense, I should avoid it.

Do you do your own plumbing? What about your accounting? Do you know how to fix your car’s engine? Would you extract your partner’s wisdom teeth?

It’s hard to know everything and there’s a reason we have specialisms out there. They all charge a fee for their service – why should you not want to pay for a service you receive from an advisor? If you don’t want the service, you don’t have to sign up to it.

computer screen with market charts

The fact is most people know nothing about investing and the financial markets. They would much rather have somebody else look at their portfolio than deal with it themselves. If you are a busy entrepreneur or a mother of three young children, you don’t have the time, inclination or interest to research the ins and outs of building an investment portfolio – you just want it to be sorted and not worry about it. Financial advisor help with that.

A financial advisor is also your investment coach. Every time there is a wobble in the stock market, they get a massive increase in calls from scared clients. People call their advisors and ask what’s being done to prevent losses or demand that everything is sold to cash right this very instant as it’s their expletive money! Selling during a market correction is, of course, a very bad idea as people would unlikely be able to benefit from a market recovery. Often sellers would lock in a permanent loss of capital, miss a big part of the recovery and get back in at higher prices. An advisor would explain this to a client and advise them to stay cool and carry on. Ask yourself, is it worth paying somebody 1% a year and risk missing out on 10%-20% of investment gains because you felt better staying in cash? I’ve seen clients who gave up on the stock market after the 2008 crash and have held nothing but cash since – a good advisor would have helped them achieve much better returns than cash ever could.

If you know how to invest and are comfortable making investment decisions, then more power to you. You do not need an advisor to look after your portfolio. However, there are other things you might be able to benefit from such as tax planning, estate planning and protection (insurance) planning. For example, do you know what’s going to happen to your FIRE strategy and your family if you’re unable to work due to a serious illness (cancer or heart attack) or your partner dies? Do you have a will, if not, do you know what will happen with your money on your death? Do you know what a lasting power of attorney is? Do you know how much inheritance tax your family will pay when you’re gone? Should you take all of your pension tax-free cash now in one go or in stages? What should you do with the £321,472.89 transfer value of your defined benefit pension? Oh, you’re divorcing – do you think lawyers and judges have a good understanding of financial assets to ensure how to split the marital assets in a fair way? Do you think you need advice?

investment growth on a screen

3) Many people think that an advisor just invests your money.

Financial advisors do a lot more than just invest client’s money. They work out the best way to reduce taxes by using different tax allowances, tax exemptions and make changes when the regulatory environment changes.

The best examples are in the pensions world. There have been massive changes in the UK pension legislation and these can have a huge impact on somebody’s finances. For example, not having your children nominated as death beneficiaries on a pension could mean that a big tax charge is payable when your children inherit the pension. No, this is not an inheritance tax charge, it’s income tax. If you die after age 75 (and most people will) with monies in your pension and your child (or any other pension beneficiary) takes the inherited pension money as a lump sum paid into their bank account, it would be fully taxed as income. How would you feel if you inherited a £500K pension and had to pay £200K+ to the taxman? You could have kept it all in an inherited pension account, if you had used a good financial advisor. This isn’t common knowledge and the average person on the street has no idea how these things work. Would you be OK paying somebody a relatively small fee to avoid paying many thousands of tax down the road?

Advisors add value, just like a dentist, a mechanic or school teacher. If they didn’t, they would be, quite rightly, out of business.

4) Advisors are all a bunch of sleazy salesmen.

Yes, financial advisors sell products but their main value is in providing the service of financial advice and they charge for it. It used to be the Wild Wild West in the UK as anybody could call themselves a financial advisor and start flogging financial products, which paid them the biggest commission. This is no longer possible. Commission payments have been largely outlawed (only possible with insurance products) by the regulators. Client protections have been improved and advisors can be held responsible for mis-selling any products.

The main thing advisors sell is advice – the products are just a tool to achieve the clients’ objectives. It’s common to agree on the fees with clients in advance so that they know what becomes payable and when. There’s no smoke and mirrors anymore. Charging has become much more transparent and people know where their fees go.

A good advisor will not sell you something you don’t need.

The first meeting with an advisor is almost always free of charge or at the advisor’s cost. It’s an opportunity to discuss your situation with the advisor to see if there are any opportunities to start a mutually beneficial relationship. The advisor won’t give you any advice in that meeting but it might be worth having a discussion to see if there’s something obvious you should be doing. This could be as simple as checking with your employer if you’re maximising your pension contribution matching arrangement.

Summary

People need advice. I think they will make significantly better decisions if they take advice from financial advisors. Even if you don’t value their investment advice, there is so much more you can benefit from using an advisor. As mentioned above, the first meeting (often) doesn’t cost anything and if you don’t like what they have to offer don’t go ahead with it. Shop around. You can always disagree or ignore advisors and continue going your own way.

When you think about it, among other things, financial advisors help people retire and pull the trigger to stop working, which is exactly what FIRE does. Maybe they’re not so bad after all.

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