With inflation soaring, you’re looking to spend less. You’ve already explored the most obvious cuts—to extravagances that can wait. Now you’re thinking of leaving your financial adviser to save the fees.
For some individuals, it’s tempting to quit the firm and handle your own investments. After all, you may still be paying a wealth manager roughly 1% of your assets under management even as the pot of money shrinks.
So you’re peeved that your adviser continues to get paid even when you’re losing money. On the other hand, advisers do more than manage a portfolio. They might customize a financial plan for you, update it regularly and offer a range of other services such as tax planning and retirement planning.
In your search to save money, you still can’t help but wonder, “Can I take on this job?”
“Before you give up your adviser, ask yourself what answers an adviser can provide that aren’t readily available for free,” said Lou Harvey, president and chief executive of Dalbar, a financial services research firm in Marlborough, Mass.
Deciding where to invest is relatively easy, he says. There are many digital tools that provide model portfolios after prompting users to plug in their goals, risk tolerance and other variables. “You don’t need an adviser for that,” Harvey said.
Yet advisers might argue that in drafting an investment policy statement for a client, they set forth a tactical playbook that encompasses many aspects of portfolio management. Beyond addressing asset allocation, it offers investment strategies, tracking procedures to review results periodically and contingency plans when markets hit turbulence.
Depending on the size and complexity of your portfolio, you may not need a formal document that lays out a detailed investment roadmap. Harvey says there are four other keys to consider whether you would benefit from an adviser’s guidance:
1. Assessing your cash needs for both the near- and long-term.
2. Understanding when you can access your cash, which involves knowing the rules and restrictions of various investment products such as a 401(k) or other tax-advantaged accounts.
3. Resisting the impulse to make rash investment decisions in volatile markets.
4. Applying an orderly, prudent process that dictates your investment moves.
“If you have these four bases covered, you don’t need an adviser,” Harvey said. “But each of them is tricky” to manage on your own.
Another factor to consider if you’re thinking of taking a DIY approach: Can you meet or beat your adviser’s performance in managing your portfolio?
“To answer that question, compute your rate of return over all the years you’ve been with your adviser,” said T. Erik Conley, founder and chief executive at ZenInvestor, a nonprofit investor advocacy group in Mundelein, Ill. “That gives you a concrete number to shoot for” if you decide to go it alone.
Fans of indexing may feel more confident ditching their adviser and picking index ETFs or mutual funds on their own. These products may provide instant diversification and low cost with minimal hassle.
If you prefer active management of your portfolio, by contrast, then you probably cannot replicate a resource-rich adviser who offers proprietary research, trading strategies and access to alternative investments that satisfy your risk appetite.
Conley suggests asking yourself, “Would I be comfortable owning two- to four index funds and just leaving them alone and letting them ride?”
If so, you may be able to leave your adviser without a hitch.
For those weighing whether to embrace DIY investing, Conley highlights a few easy-to-overlook risks.
Yes, you might save on adviser fees and wield more control over your investments. But you’ll also need to spend more time and energy monitoring your nest egg.
“There’s a complexity to tracking it all on your own,” Conley said. “And a good adviser will prepare you for a market downturn by positioning your account to mitigate the damage somewhat.”
Left to your own devices, you may panic and make costly mistakes. Even if you’ve established an impressive track record, one or two poorly timed trades can offset years of rich returns.
“If you save 1% in adviser fees but lose 2%-3% a year to the market, what have you gained?” Conley said. “There’s a tendency for overconfidence with DIY investors.”
For those eager to save money, it can make sense to seek out advisers who charge a flat fee or retainer as opposed to a percentage of assets under management. That’s especially true if your financial house is largely in order and you have relatively straightforward needs.
“If you go with a flat-fee adviser, that can be an improvement,” Conley said. “Many advisers will look at the complexity of your account and charge you a fee based on their time” to service your portfolio.
In any case, confirm that your adviser is a fiduciary who acts legally and ethically in the client’s best interests. And always ask, “How do you get paid? What are all the ways you’re compensated?”
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