You’re ready to start investing. Your parents insist that you should hire a professional to manage your investments but the investment books and your co-workers advocate for a DIY approach. Since financial advisors typically charge a fee of 0.5%-2% of your portfolio you’re skeptical that they’re worth it. So who’s right?
Here are three compelling reasons to hire a financial advisor to manage your investments.
Your emotions are likely to get in the way. Let’s face it. Money is emotional. It’s normal to have an emotional reaction if your portfolio quickly drops tens — or hundreds — of thousands of dollars. And if you had money in the stock market in 2008 that’s exactly what would have happened. It’s one thing to know that the right choice for your portfolio is to ride it out, but it’s another thing to actually stomach doing it. This is the #1 thing that trips up individual investors. Following the impulse of your emotions rather than best practices can cost you. A lot. A financial advisor may be worth much more than even a 2% fee if they prevent you from making bad emotionally-driven financial choices.
The trade-off of time and energy is worth it to you. How much is it worth to you to never worry about your investments? Do you enjoy reading the finance section and rebalancing your portfolio, or would you rather have more quality time with your family? It’s a lifestyle question. As you have more demands, less time, and a more complicated portfolio working with a professional makes more and more sense.
You’re looking for someone with very specific expertise. A good financial advisor spends a lot of time developing deep expertise in investments. In some areas, like socially responsible investing, it can be hard to tell which funds actually fit your values. Would you consider Google socially responsible? How about Nestle? Or an oil company? What if shareholders of that oil company are actively demanding accountability? A financial advisor can help you make choices that work for you given your specific priorities and values.
Most financial advisors require that clients have a minimum of $250k-$1M of investable assets. If any of the above points apply and you meet that minimum, start interviewing financial advisors. Ask about their investment approach and how they interact with clients. Find out if they get comission for any of the products they recommend to clients. And ensure that they are a fiduciary; that is that they have a legal obligation to act in your best interests. It may seem crazy but not all financial advisors promise to make choices that are in your best interests.