Financial Advisors – Worth the Money? 6 Considerations

Are financial advisors worth the money? A Morningstar reader recently posed the question to columnist Christine Benz, “Can advisors add enough value to justify their fees?” Benz’s wise answer was, “It depends.”

Depends on what? Here are 6 areas to consider:

A client’s financial self-efficacy

This is a fancy term for how well a client feels they do at managing their financial life and the emotions that accompany money. An advisor’s first concern should be for helping clients increase their sense of self-efficacy, especially through education on handling negative events. Tests of self-efficacy often come at times of financial stress, such as we are seeing in a pandemic, but also at times like death, divorce, disability, job loss, business failure, and family turmoil. In these times, advisors earn their keep as a voice of empathy and guide through the emotional fog that can cloud our best judgment. Some people handle such stresses fine without help. Others need assistance.

The advisor’s breadth of expertise

As noted by Benz in her article, a Morningstar study by David Blanchett and Paul Kaplan, “Alpha, Beta, and now…Gamma” concluded that having an advisor help with more areas of a person’s financial life than just investing led to a 20% increase in retirement income. Those areas included things like tax planning, income withdrawal strategies, and whether and how to purchase an annuity. Obviously this specific result should not be expected for any particular person. The point of the paper was to illustrate that breadth of expertise has value.

Experience

Remember Western Auto? My husband used to be a store manager for that chain of auto repair shops. He had a younger mechanic who could do a complete brake job in three hours; and an older one who only took 1 hour, with fewer mistakes. Which mechanic do you think had more experience? As with any other skilled profession, there’s no substitute for years at the craft of financial management.

Credentials

Certified Financial Planner™  certificants haven’t only passed a 2-day exam which has a 50% pass rate. They have at least a bachelor’s degree; taken at least 2 years of relevant courses; and have 3 years of experience in the field. They have 30 hours of continuing education required every 2 years. Credentials aren’t about passing a test; they’re usually a sign of the professional’s interest in self-improvement and growth in their expertise. Put together, experience and credentials should mean the advisor has access to a bigger toolbox, and can creatively toss out the toolbox when warranted.

Stage of life

Young people just getting started in the workforce may have simpler situations than those who have a few decades of savings they now must tap for retirement. Although it could be argued the 20-something would derive more financial benefit over their remaining lifetime than a 60-something, there comes a point when having a navigator, or guide, could help prevent a costly mistake. By the time we are in our 80s, over half of us will have some form of cognitive impairment. Turning over the IRA distributions to adult children might work fine for some parents. Others might want a professional involved at that stage for the sake of family harmony.

The fees themselves

So if advisors help people boost self-efficacy and confidence in their financial future, avoid mistakes, pay less taxes, strategize for income, and maintain a little family harmony, what’s all of that worth? Again, it depends.  For some people at certain stages of life, these services are priceless. For others who don’t need much help, the bare minimum is fair. Sometimes it’s not clear how much the fees are, especially if they’re paid indirectly. That’s on the advisor – fees should be transparent and clear, disclosed orally and in writing.

Once fees are understood in full, only then can you decide whether they are justified, for you, or not.

Holly Donaldson

Holly Donaldson, CFP® runs an hourly and fee-for-service financial planning practice virtually from her Tampa Bay, Florida office. She also works with clients throughout the U.S. (except Texas) interested in retirement and tax planning advice without product sales or investment management. Holly is the author of The Mindful Money Mentality: How to Find Balance in Your Financial Future (Porchview Publishing, 2013) and publisher of the award-winning monthly e-letter, "The View From the Porch."

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