Depending on what survey you read, according to some investors, advisors are too expensive, and one recent survey pegs that belief and number at close to 50% of those surveyed. Other surveys inform us that for those that do have an advisor, over 90% feel the fee is well worth it.
So, what is the cost of a financial advisor? In short, just about whatever you can afford. Over the past 20 years the variety, choice, and specializations of advisors has skyrocketed. You can find an advisor that charges just $75 per month, there are advisors that charge a flat fee for a financial plan which can be from a few hundred dollars, you can hire an advisor for a singular piece of advice like the optimal way to consolidate retirement accounts, and there are advisors that charge a percentage of assets under management, which on average run about 1% of assets under management.
There is even available for free, financial planning advice offered by qualified advisors that donate their time via pro-bono programs for people in dire need.
So why do so many people believe that advisors are too expensive given the wide variety and reasonable fees that are available? In a word, education. And if you have read the above costs for the first time and still think they are too expensive, then the same answer applies, that education is in need.
People believe something is too expensive for two reasons: one, they literally do not have the money to pay for something. In the case of financial advice, if paying a couple hundred dollars for a specific piece of advice, for example, means you must forgo paying a bill then pro-bono financial planning is what you should seek.
The second reason people believe something is too expensive is they do not view that the underlying item or service is worth paying any money, or that specific price is worth it. As it relates to investment advice, this too is usually addressed by education, all else being equal.
In most of these surveys, the firm surveying the investors make the assumption that those surveyed understand financial advice, and in particular, what benefit they get in return for paying for the advice. This is a mistake. Most investors do not understand how beneficial advice is and this research from the respected and notable firm Morningstar points out that on average an investor will net 3% more per year by using an advisor to manage a portfolio. 3% per year compounded for years makes a dramatic positive impact on a retirement fund. They join other firms with similar research such as Vanguard, Financial Engines/AON Hewitt and several others.
For investors who use one-time, project or sporadic advice, the benefit can also be equally dramatic. Take this example of the client of Marguerita (Rita) Cheng, the CEO of Blue Ocean Global Wealth (from our founders’ 2018 book interviewing Rita): “Another client of hers were approaching retirement (wife was fifty-three and husband sixty-seven) and had not yet discussed what they would do should one or both fall ill. They were highly skeptical about long term care insurance. Rita coached them into thinking about the actual care, and how insurance was only one of many solutions that included family, government programs, and other options. At the end of the process, it was determined that for $2,600 per year, they could indeed cover the costs of long-term care insurance. Thirteen years later, the husband fell ill, and that policy began paying $58,000 per year in benefits to pay for his care. He needed care for three years. Had Rita not overcome the couple’s skepticism, the financial loss from the care expenses would have been dramatic, particularly for the widow. The net savings of $140,200 dollars was very meaningful for this widow.
The price paid for anything in life should always be considered. But the benefit of that expense should also be considered equally before something is deemed too costly.
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