5 Minute Read
Part of Dave’s investing philosophy is that you should work with an experienced investing professional to build your retirement nest egg. He knows from experience that you can get a lot of value from the advice and expertise of a trusted pro. But as beneficial as an advisor’s help can be, you should never put up with a “pro” who can’t, or won’t, answer some tough questions.
For example, you’ve probably already asked yourself, Why shouldn’t I invest on my own in low-cost mutual funds or exchange-traded funds, get the same returns as the stock market, and skip paying an advisor’s commission? That’s a great question for a smart investor to ask an advisor as well.You deserve to know what you can expect from an investing professional before you decide to spend your hard-earned money paying any fees.
But asking the question is just the first step. You’ll also need to know how to judge your advisor’s answer before you place your trust in them. Here’s the kind of honest and detailed response you’re looking for:
An Advisor May Cost More Up Front, But . . .
A good advisor will understand your concern about expenses. After all, the money you pay them reduces the amount you’re able to invest for your retirement.
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“In an apples-to-apples comparison, you will pay more by using an advisor,” Clayton Shearer, an investing advisor in Colorado, said.
But for this to be a true apples-to-apples comparison, you, as an investor working on your own, would have to choose the same investment as the advisor, make the same decisions about that investment, and keep the investment the same amount of time as an advisor would recommend, Clayton added.
If you did all that, it’s true you could match the returns the advisor would get and save on the commission. But what usually happens when an investor goes it alone is that they allow emotion to rule their investing decisions. As a result, they panic in market downturns, selling off their mutual funds to avoid additional losses. Then, when the market recovers, they miss out on most of the rebound, buying back their mutual funds after values have gone back up.
DALBAR, an investor behavior research firm, has analyzed investor behavior for more than 20 years, and their studies confirm Clayton’s experiences with his clients. Because investors buy and sell at all the wrong times, their average return trailed the S&P 500 by more than 8% in 2014 and nearly 5% over the last 20 years. That’s the difference between facing retirement with a $1 million-plus retirement nest egg and a $430,000 nest egg after 30 years of investing.
“Over the long term, an advisor is going to make you more money,” Clayton explained. “I’m not going to say that we will outperform the market. But I am going to say that our process of picking investments, keeping investments, and keeping you on track will give you more consistent long-term growth than the vast majority of investors could achieve on their own.”
Tough Times Prove an Advisor’s Worth
In a market like the current one with large gains and little volatility, it’s easy for investors to believe they can handle their own investments and stick with a long-term plan without panicking in market downturns. But, as Clayton and DALBAR point out, we don’t always do what we know we should do.
“I know as soon as the stock market turns, every investor is going to be doing the exact same thing they did in 2008,” he said. “Emotions will take over and they’ll start calling me to tell me they’re done—they want out right now.
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“That’s when an advisor truly proves their worth,” he explained. “When we can keep you in the market when you need to be in the market and keep you putting money in even when it doesn’t feel good, then we have just multiplied your earnings in the future.”
Protection and Planning: The Advisor’s One-Two Punch
Jeff Dobyns, investing advisor and long-time Endorsed Local Provider, agrees that protecting clients from investing mistakes is a large part of an advisor's job, but it may not be the most important part.
“Probably the biggest value-add is the comprehensive financial planning a good advisor can bring to the table,” Jeff said.
Poor decision-making in any financial area can cost an investor thousands—even hundreds of thousands—over the investor’s lifetime. The tax savings on the choice to invest in a traditional IRA or a Roth IRA alone can lead to substantially greater savings than an investor could get by working without an advisor.
When you meet with a planning-based investing professional like Clayton and Jeff, you can expect them to answer your questions fully—no dodging and no sales pitches. But if you come across an advisor who doesn’t like your questions or is all about guaranteed returns, keep looking.
If you already work with an advisor but you don’t feel like you’re receiving much benefit from the relationship, start looking for a new one. Your retirement is too important to stick with an advisor who’s not living up to their side of the deal.