One surprising finding in our business is that only four out of 10 Americans choose to work with a financial advisor, even though doing so has been shown by numerous academic and industry studies to produce better results for investors. Why don’t more people use advisors?
Many people think that they can manage their own investment and financial plans on their own. Others don’t want to pay for advice. And trust is lacking in the financial services industry itself, with only 54% of respondents in the 2022 Edelman Trust Barometer survey saying they trust their financial institutions (only social media had weak performance)! Perhaps the most obvious reason is that many people are embarrassed by their financial situation or the poor choices they have made.
value of independent advice
On the other side of this coin, there is at least a decade of research that confirms that financial advisors are worth their cost if they add performance value to investors. Here’s a small sample of that research:
- In 2013, the Consumer Federation of America reported that “…more broadly, households plan, they are better prepared financially in terms of the prospect of saving, investing, and managing credit card debt; The greater the effectiveness of debt management; and the greater their confidence in managing their finances.” The same study noted that people who engage planners are “better prepared to meet goals ranging from dealing with financial emergencies to living well into retirement.”
- In particular, some research on the question of trust distinguishes between advice consumers receive from a registered representative or someone working with a registered investment advisory (RIA) firm. RIAs must act in the best interests of their clients when making recommendations or decisions that may legally and ethically affect their clients’ financial plans. Princeton Survey Research Associates reported in 2014 that financial professionals who switched to a fiduciary (i.e., RIA) standard of care reported strong customer gains, with 71% reporting increased customer confidence and 72% customer satisfaction. reported an increase.
- In 2015, Dalbar, an independent market research firm that evaluates the performance of financial advisors and clients, reported that half of investors rated their financial professional’s advice as “excellent” and an additional 48% rated it as “good”. rated. Similarly, 96% of investors either “absolutely agree” or “agree” that the services provided by their financial professional have helped them achieve their investment goals and objectives, and nine out of ten close to them. Would recommend your advisor to friends, relatives or colleagues.
- In 2019, Vanguard, one of the world’s largest financial services companies, found that over 25 years an average investment of $500,000 under the supervision of an advisor would increase to $3.4 million, compared to the expected value of $1.69 from self-management. million. Importantly, advisors were able to add an average of 3% per year in additional growth by providing “solid money management through financial planning, discipline and guidance, rather than trying to time the market,” according to the study.
choosing a consultant
Often when people say they don’t work with an advisor, it’s because they don’t know how to find an advisor. There are a few simple steps you can take to determine if a consultant is a good fit.
Referral: Your friends, family members, co-workers or neighbors may have a similar financial situation to yours, and if they currently work with a consultant, they may be willing to refer you. All advisors should be prepared to schedule an introductory meeting at no cost or obligation to see if there is a good fit between what they offer and what you’re looking for. Interview two or three candidates before narrowing down your options.
interview: In your initial and possibly follow-up meetings, what are you most comfortable with? Did they care about you? Are they committed to meeting with you regularly, the way you prefer (virtually, by phone or in person, once or twice a year or once a quarter)?
Independent fiduciary: If your advisor works with a firm in which they have a strong ownership interest, you can be more confident that their advice is independent, unlike representatives from other firms who have the financial resources to sell you their proprietary products. There is encouragement. You can quickly find out where a consultant falls in the “standard of care” spectrum by asking a simple question:
Are you allowed to consider any factors other than my best interest when making investment recommendations? If they answer “yes”, you can continue the search.
How does a consultant get paid?
There are many ways in which consultants are compensated, and it is important that you work with someone whose business model is completely manifest, transparent, and aligned with your personal preferences and objectives. For example, some financial planners offer planning services for a flat fee, which can be increased according to the complexity of your finances. Others are paid a commission for selling investment or insurance products to you. RIAs charge asset-based fees tied to their assets under management. Other hybrid arrangements combine elements of commission and asset-based fees depending on the type of services and products they sell.
It may well be that you enjoy managing your own money and are good at it. But we find for many investors, the time and effort it takes to stay on top of their finances drives them away from the things they wanted to do. Pegg and I are old enough to remember the ’70s, when most people used to fix their cars – they were simple. Cars today are more complex and require specialists to keep up to date with the evolving technologies needed to fix and maintain them. Just as you wouldn’t take care of your health by not going to the doctor, or keeping your car fixed by skipping the mechanic, you should also think about your financial well-being and consider working with a qualified investment professional. needed.
The opinions expressed in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
Bruce Helmer and Peg Webb are financial advisors at Wealth Enhancement Group and co-hosts “Your Money” on Sunday Mornings on KLKS 100.1 FM. Email Bruce and Pegg at [email protected] Securities offered through LPL Financial, Member FINRA/SIPC. Advisory services offered through Wealth Enhancement Advisory Services, LLC, a Registered Investment Advisor. Wealth Enhancement Group and Wealth Enhancement Advisory Services are separate entities from LPL Financial.