Loren Rojas is a Financial Advisor at Northwestern Mutual.
When an individual is in the market looking for a financial advisor, the most common question that is usually asked is, “What is the cost?” Some Americans will avoid getting a financial advisor because they may have presumed notions the cost of an advisor is too much for them. Although this could be true, there are some considerations to think about when assessing the true cost of a financial advisor.
While the S&P 500 was down about 22% in 2022, this has created skepticism for many Americans. Speculation on the right time to start investing, or to hire an advisor, are a common concern during times like these. In regard to hiring an advisor, the cost is often considered worth it, particularly when hiring a good advisor.
First, to mention the individuals who have already hired a financial advisor and whose investment accounts have not posted much, if any, gains this year. Why should you keep your advisor? You are being charged a fee, and the advisor has not necessarily delivered a positive rate of return for your investment account. When your investment account is down, this is when the value of your advisor shines. You may be inclined to withdraw your money into cash or sit on your current excess cash for a market uptick. However, based on a study from JPMorgan, seven of the 10 best trading days from January 1, 2002, through December 31, 2021, occurred within two weeks of the 10 worst days. A good advisor will typically not allow you to take your money out based on fear during these times. Your returns would have nearly doubled being fully invested compared to missing just 10 of the best trading days. Staying invested during these times can pay huge dividends long term.
Now, for the individuals looking to hire an advisor, consider these reasons why the cost is worth it.
Diversification does not mean investing in a few different companies. To be truly diversified, a portfolio should be diversified at two levels: between asset categories and within asset categories. A truly diversified portfolio is widely considered to include these nine asset categories:
- U.S. Large Cap
- U.S. Mid Cap
- U.S. Small Cap
- International Developed Markets
- International Emerging Markets
- Real Estate
- Fixed Income
An advisor would help you define your goals and when you would like to accomplish them, then build a properly diversified portfolio around those goals. Their cost is worth getting a properly diversified portfolio using funds that have been thoroughly researched and vetted. This will reduce risk and offset market volatility.
Humans are emotional creatures. We tend to act on emotion and not always on facts. Depending on the situation, this might not be a bad thing. However, when it comes to investing, it can be a bad thing.
Many investing platforms in the United States offer robo-advisors. These robo-advisors have allowed many Americans to begin investing for the first time. Offering different investment models, one can open an account and set up auto contributions, then watch their money grow over time. This can be a great entry into investing, but it won’t open you to the full capability of the market.
This statement is mostly true when the market is positive. However, when the market is negative, retail investors tend to make irrational decisions that can negatively impact their wealth. A robo-advisor will not tell the investor not to sell their investments in a down market. The robo-advisor will not take the investor’s life into account and try to resolve their desire to sell out of their investments in an inopportune time. The robo-advisor will execute the commands of the investor. In a down market, this decision is magnified. Financial advisors do not have to compete with technology. Rather, an advisor can leverage technology to help the client improve their efficiency by providing access to diversified investment portfolios, document vaults and client portals.
Dollar Cost Averaging
Dollar cost averaging (DCA) is “the practice of investing a fixed dollar amount on a regular basis, regardless of the share price.” It can help you be disciplined in your investing habit while increasing efficiency and even mitigating costs as well as stress.
A good advisor will help to ensure the investor is taking advantage of DCA and not speculation. Remaining in the market and investing when the market is down, as well as when the market is flat or up, allows the investor to have invested at a more optimal price per share compared to timing the market. DCA establishes good investing habits, keeps one open to opportunities, and removes emotion from investing. An advisor will help ensure DCA is taken advantage of and can partner with the investor to keep him/her up to date throughout market volatility.
Consider diversification, protection against irrational decisions, and ensuring dollar cost averaging as solid reasons as to why a good financial advisor is worth the cost.
The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.