Why does a financial advisor charge a fee of 1% or more? This seems really high. If my return is only 4% (say, in a dividend), I’m giving away 25% of my return, which is even worse with a bear market. How about charging 1% on the increase in the value of distributed income?
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It’s completely understandable to look at the returns on your investment as a measure of how much they are The value your financial advisor provides. Most people want to make sure their money is put to good use.
I also wouldn’t tell you that your advisor should charge 1% or more. There are different types of financial advisors with many different types of fee arrangements. The right partnership for you depends on your goals and circumstances.
However, I would encourage you to look beyond comparing your investment returns to yours expenses When considering whether your financial advisor is worth the cost. (This tool can help you with a counselor who may meet your needs.)
The latter investment terms are not a good measure of value
A good financial advisor will understand your investment and personal goals Take risks. He will help you create a portfolio that will give you a good chance of reaching those goals, based on the best research available.
But even the best financial advisors are on the whim of the market.
Most professional investors trying to beat the market have actually underperformed over a certain period of time. And those who manage to outperform the market during one time period can rarely outperform it again during the subsequent time period. For an in-depth explanation of this, see S&P Global’s latest Continuity Scorecard. “
In other words, even the pros can’t consistently beat the market. This means that the correct prediction is usually to target a portfolio that tracks the market as closely as possible with a balance between risk (equities) and stability (bonds) that aligns with your goals and risk tolerance.
Even when this portfolio offers a file Long term returns You need, there will always be good years and bad years. Sometimes, your wallet will be in a high position. Sometimes, it will go down. This is how the market works.
Unless your financial advisor promises to outperform the market, which might actually be a good reason to reconsider the relationship, recent investment returns are often not a good measure of their value.
If you are ready to match up with local advisors who can help you achieve your financial goals, then let’s start.
The true value of a financial advisor
Good financial advisors provide value that far exceeds the percentage return in your investment accounts. Here are some of the services a good counselor may provide:
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Take the time to understand your goals and values, and help you build a plan that will allow you to reach them.
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Decide how much you need to save and which accounts you should contribute to in order to reach your goals.
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Helping you understand exactly what you can afford and create withdrawal strategies that maximize tax efficiency, so your money lasts as long as possible.
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Ensure that you have the appropriate insurance.
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Coordinate with an attorney to ensure that you have an estate plan that aligns with the rest of your financial plan.
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Guide you if you want to buy a home, make a charitable contribution, or help your child or grandchild through college.
And yes, they are there to create, implement, and maintain a investment portfolio It should provide you with the long-term returns you need to fund your larger goals. But even then, there is much more than return to consider in terms of what your financial advisor offers.
Determine the value of a financial advisor
A good financial advisor can increase net returns by up to or even more than 3% per annum over the long term, according to Vanguard Research.
The most important part of this value comes from behavioral training, which means helping investors Be disciplined during the ups and downs of the market. It won’t be easy to see that value from year to year, especially in years when the market is down. But in the long run, that consistency will do a lot for your bottom line.
Now, this does not mean that you should expect your portfolio to exceed market returns by 3% each year. Instead, 3% is a long-term number. It’s a comparison to how the average investor would do on its own, not a comparison to market returns.
But this means that a good financial advisor usually provides great value, even when your portfolio isn’t performing the way you want it to.
How do you rate your financial advisor?
Evaluating financial advisors is tricky, especially when there are no easy numbers you can use to measure their performance.
So what should you look at? Here are some key questions I might consider:
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Do they listen well?
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Do their recommendations align with your personal goals and values?
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Do you understand your financial plan and how it can help you reach your goals?
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Are they responsive and helpful when you have questions?
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Are they helping you with your entire financial situation and not just your investment portfolio?
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Are your investment returns in line with market returns, given your personal balance between risk and return?
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Are they proactive in helping you anticipate and plan for future needs?
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Do you trust them?
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Do you feel more secure because of their guidance?
If you have questions or concerns, I will bring them up to your financial advisor. This relationship is based on trust and communication. This is something you should be able to discuss.
What’s next
Remember that short-term returns are not a good way to measure the value of your financial advisor. These returns are always out of our control, and a good financial advisor does a lot to help you reach your goals.
Investment and retirement advice
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If you have questions specific to your investment and retirement situation, a A financial advisor can help. Finding a financial advisor doesn’t have to be difficult. Free SmartAsset tool It matches you with up to three vetted financial advisors serving your area, and you can interview your own advisors at no cost to determine which one is right for you. If you are ready to find a counselor who can help you achieve your financial goals, let’s start.
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While planning for retirement, keep an eye on Social Security. Uses SmartAsset Social Security Calculator To get an idea of what your benefits could look like in retirement.
Matt Baker, CFP®, is a SmartAsset financial planning columnist and answers readers’ questions about personal finance and tax topics. Do you have a question you would like answered? Email AskAnAdvisor@smartasset.com and your question may be answered in a future column.
Please note that Matt is not a participant in the SmartAdvisor Match platform, and has been compensated for this article.
Photo credit: © iStock.com / Natee Meepian, © iStock.com / AndreyPopov
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