How much does it cost to work with a financial planner? And is it worth it? For some, not seeking advice from a CERTIFIED FINANCIAL PLANNER™ professional only because of the cost may be short-sighted. When considering whether financial advisors are worth the cost, consider the net cost of working with an advisor: the benefits and cost savings less advisory fees.
Not every investor needs a financial advisor, but many busy professionals don’t have the time to manage their financial life properly.
Managing your own finances isn’t free. Doing your own asset management and financial planning can potentially cost you in 2 main ways:
- Higher costs to access and trade mutual funds and ETFs
- The cost of missed opportunities or making the wrong decision with your money
Retail investors managing their own accounts or working with a broker might pay a lot more in fees compared to someone with access to institutional shares. Perhaps most importantly, consider the cost of making the wrong financial decision. Or missing the potential upside that an advisor could create for their clients through planning and investing strategies.
If you haven’t done something before, how do you know you’ll get the best outcome? There’s a lot on the line with major decisions and investing your life savings.
Should you do it yourself or hire a financial planner?
Do-it-yourself investors may not realize there’s a cost to investing. The expenses of underlying investment directly reduces your return, trading costs apply to buys and sells, and mutual funds may have different share classes with varying fee structures.
401(k) and 403(b) retirement plan participants will generally pay administration fees to the plan. Their investment choices are limited to the fund lineup available to them. This is a big reason why it’s usually a good idea to roll over an old 401(k).
How fund expenses reduce your return:
Using FINRA’s fund analyzer, we selected a random mutual fund that had both Class A (up-front sales charge called a front-load) and Class I (institutional shares with no loads) and compared how the same $40,000 investment would look after 5 years assuming a 5% annual return.
Class A shares: The Class A shares we analyzed had a 4% up-front sales load and an expense ratio of 1.15%. After 5 years, the account was worth $46,271, a $6,271 gain on the initial investment. Over 5 years, the investor pays $4,027 in fees and expenses, which is reflected in the ending account balance.
Class I shares: The Class I shares we analyzed had no sales loads (neither front nor back-end) and an expense ratio of .83%. After 5 years, the account was worth $48,976, a $8,976 gain on the initial investment. Over 5 years, it costs $1,840 in fees and expenses, which is reflected in the ending account balance.
All else equal, the institutional shares cost the investor $2,705 less than the retail shares.
The cheapest option today can become the most expensive in the long run
Also keep in mind that this overly-simple example only considers one fund in an investor’s portfolio and assumes the same fund was purchased in both scenarios. Even for institutional shares, the expense ratio in this example is high.
Independent financial advisors can access the entire universe of investment options. Since they’re not affiliated with a financial institution or wirehouse, they don’t have allegiances to fund families. If an independent wealth advisor determines a different investment is a better fit for your account, it could further reduce the cost of the institutional shares, especially when the same analysis is applied to the investor’s whole portfolio holdings.
How much does a financial advisor cost? The cost to you depends what type of advisor you’re working with. But if you’re not paying your advisor, who is?
An investor working with an “advisor” who is really a broker may not always realize when their “advisor” receives financial incentives to make certain recommendations.
Fee-based advisors can receive commissions for placing the trade, recommending one investment over another, or selling annuities or life insurance. The investor may also pay a fee as a percentage of the assets held at the financial institution.
Cheaper doesn’t mean better when discussing your life savings
In contrast, fee-only financial advisors do not receive commissions or sell investment products. They’re only paid by their clients, typically as a percentage of the assets they manage for the client. Many fee-only advisors are also registered investment advisors. This is the only type of financial advisor with a fiduciary duty to always act in their clients best interest, the highest standard of care under the law.
Darrow Wealth Management is an independent, fee-only registered investment advisor and fiduciary.
Are financial advisors worth the cost?
When thinking about whether it’s worth it to work with a financial advisor, try to consider the total spectrum of costs and potential savings:
- What’s at risk if I make a mistake managing my own investments?
- Do I have the time and expertise to manage my finances properly?
- Could an advisor help me grow my wealth by improving my asset allocation, savings strategy, account selection, tax efficiencies, etc.?
- Could a financial advisor reduce the costs associated with my investments to help offset their fees?
- Do I have a strong handle on my entire financial life? Retirement planning, college, estate planning, spending and cash flows, etc.?
Think big picture when evaluating the benefits of a financial advisor
Building wealth takes time and commitment. It doesn’t necessarily make sense for every investor to work with a financial advisor. But many busy professionals just don’t have the time required to manage their financial life properly.
Are financial planners worth the cost? Understand the costs you’re currently paying and compare that to what fees and savings could be achieved with a financial advisor. Given the downside risk of going it alone and benefits of comprehensive wealth management, the value justifies the expense for many executives.
Established in 1987, Darrow Wealth Management has been serving a diverse client base of individuals and families in the Greater Boston area for over 30 years. Now a second-generation family business and predominantly female-run firm, we are proud to have the opportunity to help multiple generations of families in the community achieve their wealth and lifestyle goals.