You still have to choose whether to manage your own investment portfolio, invest via a robo-advisor or hybrid advisor, or hire a full-fledged financial advisor.
The more services you get, the more you pay in fees. The fees you pay play a huge role in determining your long-term wealth. It can make a difference of tens or even hundreds of thousands of dollars across your lifetime.
It’s a careful balance between avoiding unnecessary fees and recognizing your strengths and weaknesses.
Should I Fire My Financial Advisor?
At Team Clark, we spend a lot of time helping you understand what a fee-only fiduciary is. It's crucial that your financial advisor isn't getting paid to recommend specific investments. You need a person that's legally required to look out for your best interests.
Financial advisors have become adept at representing themselves as fee-only fiduciaries. Those true individuals only get an annual percentage of the assets they manage for you. It’s typically near 1%. So if they’re managing $500,000 for you, you’d pay $5,000 a year. And whatever advice your person sends your way will not change what they’re getting paid.
But many represent they fit into that category while also getting paid in ways they aren’t always upfront about.
It’s easy to get so caught up in identifying a fee-only fiduciary that you forget an even bigger honest self-assessment: Do you need a financial advisor at all?
If you don’t need one but you pay for one anyway, you could be wasting thousands of dollars a year.
That’s what a listener recently asked Clark Howard.
Asked Charles in Texas: "I've been struggling for weeks with whether to fire our financial advisor who is charging us a 1% management fee. My wife and I are 35, and the advisor has been managing our retirement accounts for three years. The advisor's services and account returns are fine, but I can't get over the hundreds of thousands in potential fees we will pay them if we stick to our retirement savings plan.
"They are fiduciaries and don't try to sell me commission-based junk, but I'm considering the Boglehead approach of 'low-cost index funds and chill.' Also, I'm a CPA and feel comfortable managing my finances. Thoughts?"
Do You Really Need a Financial Advisor?
If all you need is investment advice, you almost certainly don't need a financial advisor. You can find a good robo-advisor that charges less than 0.35% all-in. It may not sound like much, but saving 0.65% on fees each year will make an enormous difference.
Especially if it’s over three decades like it may be for a 35-year-old like Charles.
“You have stated your own thoughts. That there are people who benefit very much from having a fiduciary fee-only financial planner. And paying the industry-standard 1%.
“You’re not one of those people, Charles. And you want me to bless you going out on your own.”
You can read more about why you may want to hire a 1% financial advisor here. In a general sense, if you're only accumulating wealth by investing a set amount each month, you don't need an advisor.
If you run a business, have a complex family situation, accumulate significant wealth (say, seven figures) and need help with retirement planning, insurance, tax optimization and more, you may do well to hire a financial advisor.
“The real advantage of a financial advisor is much wider than picking funds. That’s not really what they’re about. It’s about building a plan for you, making sure you’re meeting the goals that are important to you,” Clark says. “They keep you from overreacting when the market has declines and all that.
“You sound like an independent sort and it’s not a good fit for you to be with this one percenter. Even though you say everything about him is great, they’re not right for you because you want to be your own advisor. And I think you’re fine to do that at this stage of your life.”
Manage Your Own Investments the Clark Howard Way
Want to manage your investments on your own?
Consider investing in a target date fund inside of a 401(k) or Roth IRA.
If you want to go further, or if you’re investing in a taxable brokerage account, you don’t need complexity. Clark likes low-cost index funds or even ETFs. One total stock market, one bond fund and one international fund.
Vanguard is almost zero-cost. And Fidelity has some true zero-cost funds as a loss leader. Either of those choices are great, Clark says.
In general, Clark wants you to keep your fees low. Avoid individual stocks. And stay invested for the long term. Contribute automatically every paycheck or every month. And ride out the highs and lows of the market.
Final Thoughts
If you don’t think you need a financial advisor, and you can manage your own investments, that’s great. Saving the annual 1% fee will do you well in the long term. It’s important to be absolutely certain that you need a financial advisor. The typical bias is toward needing one when you don’t.
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