Why an advisor makes a difference in net returns over DIY investors
It’s a common question in recent times, especially in an age when technology and algorithms can make decisions at a fraction of the cost. Is it worth it to hire a financial advisor? Or is it better to save the fees and go for a DIY strategy?
It depends who you ask but there are many – often not so obvious – factors that could make a difference to your net returns when putting your trust in a financial advisor.
Proper financial planning goes beyond how and where you invest. Good financial planning can increase your standard of living throughout your life.
Even for a complete novice it is possible to start investing in products without the help of professionals. The problem with this option is the lack of knowledge. Knowledge is crucial when it comes to investing.
Financial advisors analyse and study the markets on a daily basis and know which factors are likely to influence which part of the economy in a positive or negative way. This knowledge and expertise will have a huge impact on your net returns in the long run.
Just like in any other industry, some advisors will be more competent than others. Additionally, future economic markets are all but certain and financial advisors can only advise on the most appropriate strategy for your finances, they cannot guarantee any sort of return or success. Ultimately you are responsible for your own money and can decide whether or not to take the advice. However, saying that, it is still more prudent to rely on even the most average of advisors than following your own DIY investing approach.
You can study up on as much financial data as is humanly possible but actually putting a sound financial plan into action is not always that easy.
Most DIY investing strategies will focus on index funds which aim to mirror a specific market index. This might be a safer, less complicated strategy but it will also be reflected in the returns you are likely to see. When you invest in a market index for example, it’s obvious that you can’t beat that market. When you engage with a financial advisor however, they are able to propose various alternatives that are not just focussed on one strategy. This has the potential of resulting in excess returns, higher than related benchmark indices.
An advisor will also look at your situation and can recommend investment in specific stocks and securities, depending on the market and company performance indicators. More risky, yes, but that’s why you hire a financial professional. And again, the increased risk will be reflected in your returns which are likely to be higher.
Above we mentioned that an advisor will look at your personal circumstances and design a course of action based upon that. This is important because we are not all the same and we are all in different stages of our lives. The problem with DIY investing solutions is that in most cases it provides a blanket strategy with very little option for personalization. That’s where the personal advice from an advisor becomes invaluable. They can adjust your financial strategy according to changes in your situation and the economic markets to maximize returns.
Your situation is also less likely to get any simpler as time goes on. In fact, it’s bound to grow more complex. You might have children, receive an inheritance and start thinking about retirement. All of a sudden, there’s a lot to think about. If you have access to an advisor, you can discuss this with them and they can advise you on the best possible options. Instead of keeping track of it yourself and potentially losing out on profitable returns.
Managing your own money can be an emotional experience for most people. Believe it or not, emotions can have a detrimental effect on the ROI you are likely to see. Especially if you’ve had negative financial experiences in the past or currently find yourself in a difficult financial position. This is true even for experienced financial individuals. A neutral third party is therefore essential in situations like these. Financial advisors will have your best interest at heart while still being able to make wise financial decisions, without emotions clouding their judgement.
There’s a misconception that advisors are only for the rich and wealthy. Yes, there is a charge for their products and services. But the potential for higher net returns more than makes up for the money spent in the long run. There is great value in a comprehensive financial strategy and informed financial decision making. There’s also more to it than just merely choosing between different investment options.