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Should You Fire Your Financial Advisor?

It's a question that any investor employing an advisor should ask.


As financial advice becomes easier to access and new technologies threaten to make the traditional advisor model obsolete, many investors are wondering if it makes more sense to go it alone.

Providing a universal answer to this question is impossible. It depends on the exact financial situation as well as level of interest — but we can provide some general guidance.

The Case for Firing Your Advisor

The simplest case for firing your advisor is this: in many cases, brokers are under no obligation to place your best interest above their own. If an advisor doesn’t operate under a fiduciary standard, they’re required only to recommend investments that are suitable.

Practically, this often means directing client money toward products that are technically “suitable” but charge huge commissions and ongoing fees. In many cases, these commissions work their way back into the pockets of the advisors who recommended them.

So step one is to ask your advisor if he or she is a fee-only fiduciary. (In other words, ask if he/she is required to act in your best interest and makes no money from commissions.) If the answer is “no,” the next question needs to be about transferring your account elsewhere.

To be clear, many financial advisors are fiduciaries who are legally required to prioritize their clients and avoid conflicts of interest. But that doesn’t necessarily mean you should retain their services. There are two primary reasons why:

  1. Advice is expensive; and
  2. Investing really isn’t that complicated.

The Cost of Financial Advice

Many financial advisors will charge a fee equal to 1 percent of assets annually. That may not sound like much, but when compounded over decades it can translate into a huge amount of money for even modest savings.

The following chart shows how a portfolio will grow for an investor who saves $1,000 each month (assuming 6 percent annual returns):

In this scenario, the total cost of a financial advisor comes out to about $465,000 — or roughly 39 years’ worth of savings.

Now, this example assumes that a financial advisor delivers zero value — that the fee is simply a drag on returns. But the point is to illustrate how relatively small fees can compound over time.

The Complexity of Financial Advice

Many investors seek out financial advisors because they are overwhelmed by the thought of managing their own portfolios. That feeling is understandable; there are several different types of accounts and thousands of investment options. Throw in some investing jargon and talking heads, and it seems way too complex to track.

But the truth is that a sound financial plan is pretty easy to draft and execute.

Max out contributions to your 401(k) and IRA. Create a simple portfolio (no more than five funds) using low-cost index funds and ETFs. Contribute and rebalance regularly.

For most individuals, that gets you 95 percent of the way there. There are a lot of details that need to be filled in depending on your exact situation, such as a 529 plan for college savings. But the core of a sound retirement plan is simple, cheap, and requires very little maintenance.

Many financial professionals try to make portfolios seem very complex. Some will even build them with dozens of stocks and funds, including exotic asset classes, to create an illusion of value. But it has been proven over and over that complexity adds very little value; the simplest portfolios are often the best.

The Case Against Firing Your Advisor

There are some very good arguments in favor of using a financial advisor.

The statement above that investing isn’t all that complicated is perhaps only partially true. The high level strategies — asset allocation and fee minimization — are pretty straightforward. But the details can get a bit messy, especially for investors who have an IRA, 401(k), and a taxable account. Knowing which accounts to close, how to prioritize contributions, and how to allocate in a tax efficient manner takes a bit of research.

It’s certainly doable, regardless of your background or financial expertise. And it doesn’t actually take that much time; most efficiencies can be realized with a few additional hours of work. But for those who aren’t passionate about markets or their portfolio, it may be a major inconvenience. And that’s perfectly fine; there’s nothing wrong with paying someone to handle those unpleasant tasks for you.

Perhaps the bigger advantage of using an advisor comes in the form of behavioral counseling. A lot of folks will panic when the markets fall, or want to pursue stock tips they got from TV or their friends. The psychological hurdles to investing are often underestimated. A good financial advisor will know as much about psychology as he or she does about stocks, and be prepared to talk clients out of making rash short-term decisions that hurt their long-term wealth.

Bottom Line

For most investors, a financial advisor is probably a good idea for the tax knowledge and behavioral guidance alone. Managing your own portfolio is only a good idea if you have an interest in doing so and the time available to do the required work. If you don’t meet both of the following criteria, you probably need an advisor:

  1. Passionate about investing; and
  2. Willing and able to dedicate time to learning investing best practices.

If you don’t have both the passion and the time, find a good financial advisor. But not just any financial advisor will do; anyone you trust with your money should:

  1. Be a fee-only fiduciary; and
  2. Charge you less than 0.50 percent annually.

The vast majority of financial advisors fail to meet these criteria. But there are plenty who do. (Here’s a recommendation if you’re not sure where to start.)

For those who have a passion for investing and just a little bit of spare time, the “do-it-yourself” route may make a lot more sense. Managing your own portfolio isn’t nearly complex as a lot of professionals would like you to believe.

And, perhaps more importantly, no one will ever care as much about your money as you do. If you think you’re ready to fire your advisor or still aren’t sure, download our free report “Should You Fire Your Financial Advisor?”. This report contains the three questions that every investor should ask his/her advisor. If you get unsatisfactory answers to these three questions, you’ll know what to do.

About the Author: Andy Hagans

Andy Hagans is editor in chief for Fund Reference, and also serves as CEO of parent company Poseidon Financial. He is passionate about the “Bogleheads” school of investing, and is focused on helping investors achieve higher net returns via tax efficiency and fee minimization. He resides in southwest Michigan.

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