In the U.S. alone, over 260,000 personal financial advisors [1] are spending every working day trying to make their clients wealthier. That’s according to a study by MagnifyMoney from March of 2021.[2] Unfortunately, a large percentage of people have absolutely no idea what these advisors do. And even if they do understand the many benefits of using a financial advisor, they believe they have to wait until they win the lottery or retire to hire one. So, here’s a quick look at three common misunderstandings about financial advisors and the services they offer. Hopefully this will help solve the not-so-baffling mystery of what working with financial advisors is all about.
The Millionaire Next Door
One common myth revealed in the study mentioned above: you have to be very wealthy already to hire a financial advisor. While it’s true that many large advisory firms require very large minimum investments, that’s not the case for all advisors. Many will state a specific amount, and that could be accessible to those who are far from reaching millionaire status. Other firms offer even greater flexibility and will gladly work with investors who show a commitment to financial planning and investment while their objectives match those of the firm's investment strategy.
An Arm and a Leg, Please
A common myth about financial advisors is that you have to be a millionaire to afford one. But the fee structure for fee-only advisors is easy to understand. It’s based on a small percentage of one’s portfolio, so anyone can figure how much it would cost them per year. “Small percentage” means that, on average, most advisors charge approximately one percent—even lower for larger portfolios. That means that if they manage your portfolio of $200,000 in assets, they earn $2,000 for the entire year. That’s for doing research, making trades on your behalf and giving you professional advice on important areas from retirement planning and tax strategies to charitable giving and trusts.
The fee-only structure means that your advisor is making every effort to grow your portfolio, thus increasing the amount they earn along the way. Now, no financial advisor will—or is even legally allowed to—promise results. But would someone be less likely or more likely to build on their wealth by hiring a professional to help with planning and investing decisions and activities?
I’ll Cross That Bridge…
A good number of people simply think of financial advisors as people who only work with elderly people, so they don’t imagine they would need a financial advisor until they reached middle age. Of course everyone who’s in their forties resets middle age to start in their fifties, and so on! That’s really too bad, as those people are probably missing out on possibly decades of guidance, not to mention the lost opportunity of compounding and the potential for long-term stock growth.
The Takeaway
In the survey that inspired this article, the main reason for hiring a financial manager was given as “investment management.” Three of the most common other reasons were “achieving financial goals,” “getting general financial advice,” and “creating a comprehensive financial plan.” By the way, in that same survey, 95 percent of those who use a financial advisor reported that it’s worth the money. That’s quite a convincing majority of investors who are definitely neither baffled nor mystified by what a financial advisor does.
Sources:
1. https://www.bls.gov/oes/current/oes132052.htm
2. https://www.magnifymoney.com/news/financial-advisors-cost-survey/
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