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Is it worth the money to hire a financial advisor? Thumbnail

Is it worth the money to hire a financial advisor?

Before making any purchase decision, it is always a good idea to evaluate whether the value you receive exceeds the cost, or investment.  The same applies for personal services.  Whether you are hiring a doctor, a plumber, someone to mow your lawn, or a financial advisor, you might go through the same mental gymnastics in determining whether you should engage the service provider based on your situation.  Whether you should hire any service provider, including a financial advisor, depends on your situation.

Basic Decision in Getting Financial Help: Hire Someone, Do it Yourself, or Don’t Do Anything

You actually have three decisions on whether to hire a professional – you can either hire someone, do it yourself, or do nothing at all.  Not doing anything at all might be an option.  For example, do you hire a golf pro to give you golf lessons?  You might be a 20+ handicap, but perhaps you would like to get to the single digits.  Arguably, this is not a matter of life or death and may not impact your fundamental well-being over the long-term.  You might decide, however, that you value a good golf game and that improving a skill for the sake of improvement would provide personal satisfaction.  It may give you bragging rights with your friends, it may provide some meager winnings if you partake in friendly wagers on the course, or you may derive pleasure from being able to hit a 170-yard fairway shot onto the green with precision.  If you value an improved golf game in this manner, then you may decide to utilize the services of a golf pro because they have experience, knowledge, and provide accountability to help you improve your golf game.  Again, however, it is not fundamentally essential that you hire the golf pro.

There are some areas that you must take action.  If your pipes at home burst, you must repair it – doing nothing is not an option (unless you are willing to endure other costs by not taking action).  If you develop high blood pressure, you must take action (unless you are willing to pay the ultimate cost).  If your grass grows too much and your neighborhood HOA or city ordinances require you to maintain your property in satisfactory condition, you must mow your yard (unless you are willing to pay the cost of the fines).   So, not taking action may save time and you may avoid the cost of taking action (either with the investment of your time and the cost of tools or the cost of hiring a professional), but the other costs from not taking action will often exceed the cost of taking action.

Where does addressing key financial planning issues fit into the equation?  For some, it might be a bit more nebulous to define the cost of not taking action.  I might suggest that ignorance is bliss in many cases when one decides not to take action regarding their finances.  Generally, getting financial help is not a matter of life or death (unless proper attention to your financial situation encourages someone to spend the money for proper health).  However, arguably using proper financial wisdom can add significantly to your overall well-being.  The cost of not addressing critical financial planning issues lies under the surface, perhaps.   

As I’ll discuss the value a bit later, not addressing such financial issues may lead to lower investment returns, higher income taxes paid, bad financial decisions (e.g., purchasing high cost investment products because they were “sold” this product), less optimal Social Security or pension timing decisions, working harder or longer than what they otherwise would need to, increased stress caused by uncertainty around financial matters, or a less fulfilling life because they did not know whether they could spend money on a certain item or experience.  To me, I would not say it is a matter of death in failing to address financial issues, but hiring the right financial advisor can provide more “life” to your situation.  So, it is clear to me that those who address the key financial issues whether planning for retirement or financial issues well before retirement are much better off than those who do not.  Not taking action and being cavalier about your financial situation is lazy and imprudent.

Should I Hire a Financial Advisor or Do It Myself

Now that I have hopefully made the argument that one should clearly take some action in addressing their financial matters, let’s explore whether you should do it yourself or hire a professional to help you.  While the basic equation in deciding whether to hire a professional is whether the value exceeds the cost, I will review the basic factors that may come into play in deciding whether to handle your financial planning yourself.  Some more detailed factors on the cost side of the equation to consider in deciding whether to DIY are the learning curve needed to take the action, the cost and probability of poor performance if you took action yourself, and the value of your time (i.e., how much could you earn if you put a similar amount of hours in your career or business, how do you value your time with your family, your health, your hobbies, or your community).  On the value side of the equation, you can include the hard dollar and intangible or psycho benefits you get from hiring someone versus doing it yourself.

With many services, most people can – and sometimes should - do it themselves.  Most people can mow their own yard and many get great satisfaction in mowing the yard (and good health benefits).  There is not a big learning curve in mowing the yard and the nature of mowing the yard has been pretty much the same for hundreds of years (although the tools to mow the yard gradually improve).  The cost of bad performance may not be that great – what’s the cost of a slightly crooked grass line or if the bushes are not perfectly hedged?   But, the cost of hiring someone might not be too high, and they may determine that their time is better spent earning more money in your career.  However, they might decide to mow the yard despite the fact that they can hire someone more cheaply than the cost of their time – in that situation, they put greater value on seeing their work product and the benefits of the physical activity of mowing the yard.  

Plumbing is another matter.  Unless someone grew up learning these skills in their household, there is a longer learning curve for most.  But, there is more information available online via YouTube and other self-help tools that was unavailable a generation ago.  However, some plumbing tasks are harder to understand than others, and the cost of bad performance can lead to more costs down the road.  (Been there, done that.)  The cost of hiring a plumber is not minimal by any means (especially in a town like Nashville or Tampa that is growing rapidly and there is a lack of supply of good plumbers), but it may be cheaper than the value of your time (as described above).  You might get personal satisfaction from doing it yourself, but I personally don’t get thrilled if I spent an afternoon repairing a leaky faucet.  I would rather be golfing or earning money in my business.  The cost-benefit analysis will be different for each person.

Regarding hiring a financial advisor or DIY, this will be different for each person.  The learning curve for financial matters can be steep for many, but some of you may have studied some of these issues in college (high school financial literacy is lacking) or have spent a lifetime of studying this on your own. There is indeed a plethora of information on the internet, in ebooks, on podcasts (shameless plug – listen to The Retirement Oasis podcast that covers financial and lifestyle issues in preparing up to and through retirement), and other media.  You no longer have to go to the library or try to find that financial radio show on the a.m. dial and spend countless hours researching this information.  The downside of the abundance of information available is that it is hard to decipher between good information, bad information, conflicted advice, and outright illegal strategies.  (See TikTok “advisors” for examples of the latter two.)  What might seem like good information on the internet might actually be someone trying to promote a certain strategy or product because they have a financial conflict of interest – they may be actually selling something themselves or they may be getting paid to promote an item (the “affiliate advertising” as they say in the industry).

One thing that arguably makes financial decisions more difficult is the relative frequency of change compared to other areas you might need to address.  Not only do the markets, tax laws, and other external factors frequently change, there are often changes to one’s individual situation whether it is a change in one’s family situation, career, health, or overall goals.  This often requires more consistent time spent on learning and adjusting to new information and changes.  Plumbing and landscaping may not change too frequently, but financial planning issues certainly do change.  As we often say, financial planning is a journey.  The only thing constant with financial planning is change.

Outside of the learning curve, the result of bad decisions – or no decisions – can be extremely costly in some situations.  What if you were persuaded to purchase a financial solution that not only produced bad results but was costly (e.g., high priced annuities with poor performance)?   (That point might have to do more with hiring the right type of advisor rather than a pure DIY approach.)  The impact of implementing certain tax strategies incorrectly – or not at all – can be extremely costly.  The wrong decision of whether or how to save to the Roth bucket versus Traditional bucket in your retirement accounts can lead to a cost in the hundreds of thousands of dollars (or more) over one’s lifetime.  The decision to take one approach to investing – whether it is too simple of an approach (e.g., only investing the S&P) or too complex of an approach (e.g., trying to time the market by chasing what the media or one’s own gut feeling is based on trend following) – can seem small or inconsequential, but the evidence arguably suggests the costs of bad performance from poor investment decisions can be significant.

Some people get immense satisfaction from doing it themselves.  They are intellectually curious about investments and taxes so they may not look at that as a cost and may put a high value on the satisfaction they get from their studies.  They might say they value doing it themselves more than the cost of hiring a financial advisor.  Or, perhaps they don’t enjoy it as much as others that DIY, but they may put little value on the cost of their time – they may not be earning a lot in their careers or they may not put a lot of value on the time they could otherwise spend with their family on hobbies, or on community.  (That last statement is somewhat sad, but I have often seen many individuals just not care about their outside life to the extent that they would rather spend time on their finances.  I recall meeting with a prospective client that was a consultant in semi-retirement that was a DIYer.  He earned a lot per hour doing his consulting, but he still wanted to spend a lot of time doing it himself.  So much time that he met with many financial advisors to pick their brain on strategies and tools so that he could learn to do it himself.  He watched a lot of YouTube videos, created a lot of spreadsheets, read a lot of financial information, etc.  His wife – who was frustrated that they did not spend more time traveling because her husband seemed to always be busy or was concerned about spending money – shared that he spent at least 5 hours per week on their finances.  Even if we assumed he took 25% of the time off and earned $200 per hour (which is lower than actual), that would equate to approximately $39,000 per year.  And, what is the price of ignoring the desires of a spouse. Ouch!)

In addition to the cost of bad performance and the cost of one’s time, there’s the cost of tools or supplies that one might need to purchase.  With plumbing, it might be a particular wrench.  (In trying to do some faucet work myself one time, I bought a $20 basin wrench.  It took me more time than I’d like to admit to figure out what tool I needed.  After I bought it and watched some YouTube videos, I realized that I really had no clue on how to use it for that particular situation. The cost of using it incorrectly would have been high – so I decided to hire a plumber after all. Time was wasted and I could not return the wrench, but those were sunk costs I was willing to live with.  I just don’t want to incur those sunk costs with future plumbing issues.)

With financial matters, some of the hard costs might be financial planning software, the costs of research tools like Morningstar, and subscriptions to financial newsletters.  While these costs are usually a lot less than a professional advisor would spend on technology due to the relative lack of robustness of tools available at the retail level, these tool costs pale in comparison to the cost of bad (or no) performance and the cost of one’s time.

So, I would argue that the basic-cost benefit analysis would suggest that many should hire a financial advisor.  However, not everyone needs to or should hire a financial advisor.  There are some that just won’t get a lot of value from hiring a financial advisor.  They may have very limited investments and little opportunity to accumulate investments, minimal tax savings opportunities, or merely don’t have many or consequential financial decisions to make.  (We do get many calls from prospective clients that say their situation is not complicated at all.  In most cases, this is wrong and is usually a red flag for highlighting someone that really doesn’t understand their situation or overall financial matters.  They don’t know what they don’t know.) Or, in some cases, even though there may be a lot of value from hiring an advisor, someone may have a good combination of having a solid financial background and time to devote to continual research and implementation and/or they don’t value their time too significantly (e.g., no outside earning opportunities, don’t spend value their time with their family, their hobbies, etc).

What kind of value can be derived from hiring a financial advisor?

The value derived from the right advice and right implementation can be significant.  The value of hiring someone versus the DYI approach can come from many angles: better expertise, proper accountability (i.e., the right actions and behaviors are implemented), the peace, freedom, and security of knowing that certain goals or concerns are addressed, the satisfaction from pursuing a life where you are able to use your money in a way to give you meaning (rather than giving meaning to your money), or the reduction of the opportunity cost of one’s time in researching taxes, investments, and overall financial matters.

Let’s unpack the value from the expertise or technical knowledge.  We often say that a good financial advisor can indeed provide quantifiable benefits in hard dollars saved or made.  As discussed above, the advisor may provide advice on ways to minimize income taxes.  (Of course, not all advisors have the background or ability to provide tax advice.  In fact, at most of the larger brokerage houses or private banks, the advisors are not allowed to give tax advice – they may be merely “tax aware” as I have seen the term.  This discussion on what type of tax-focused advisor to hire is for another article.)   

Knowing what strategy to implement, what manner to implement, and when to implement it requires not only knowledge of the tax laws, but how it applies to one’s overall situation – as we say, it must be coordinated with the individual’s other financial moving pieces.  (Using the right tools are also quite helpful.)  It also requires actual action -- I have seen some individuals with knowledge of their situation and a general understanding of the strategy, but they merely forget to implement it.  That’s as bad as having no knowledge at all.  In some cases, the more advanced tax strategies (e.g., charitable remainder trusts, like-kind exchanges, Mega Backdoor Roths, use of DINGs and NINGs) may lead to significant tax savings, but some fundamental tax planning strategies (e.g., strategic Roth IRA conversions, capital gains tax planning, bunching itemized deductions) – if done right – can lead to tens or hundreds of thousands of dollars (or more) of tax savings.

Can a financial advisor provide benefits from an investment perspective?  A common mantra is that why hire a financial advisor because it is easy nowadays to just invest in low-cost index funds.  One just has to invest in the index and let it ride.  While it is true that a DYI with sufficient knowledge of the financial markets and discipline to make the right decisions might actually do better than an investment advisor that touts expensive and complex investment strategies that does not provide other holistic or tax advice (what I would call the “traditional financial advisor”), the costs in many cases may well exceed the fee.  If your advisor has a posh office, has more solution and chemicals in their hair than average, entertains you frequently with expensive corporate suites or golf outings, you might be paying more than the value they are providing.

I would argue, however, that many financial advisors add significant value from an investments’ perspective.  One, deriving the right asset allocation can improve either better returns, better risk management, or both.  At a high level, making the right allocation to stocks versus bonds can lead to better results.  Many individuals might have too much money in bonds in their allocation from a lack of understanding of their situation or lack of understanding of the markets – this can lead to much lower returns than what a different allocation of stocks might provide.  Or, the DIY investor may not have the right mix of stocks and bonds to weather a downturn as they retire – this is often referred to as sequence of return risk.  Not managing this properly can negatively impact the recent retiree.

There are a number of research articles that evaluate the benefits of hiring an advisor from an investment standpoint.  Vanguard “Advisor’s Alpha” study suggests that a financial advisor can provide value up to 3% or more, resulting from such things as asset allocation, cost-effective implementation, rebalancing, withdrawal strategy, asset location, and behavioral coaching, among others.

The behavioral coaching aspect suggests that individual investors tend to make the wrong decisions in trying to time the market (e.g., they get scared during downturns).  Sometimes, the behavioral mistakes don’t show up in bull markets (or, really, are not as evident since “everyone’s making money”), but they can be exacerbated during bear markets.  Or, we have seen many individuals go to all cash if the markets have a number of good years – the markets can’t keep going up, they suggest. So, they sit in cash until the “crash” occurs.  At some point, they will be right in that the market will eventually decrease, but they may have missed out on significant returns.  This mistake is often not based on sound reasoning, but is rather based on behavioral mistakes.  (In today’s world, having access to so many different prognosticators – either in the form of hot tips or doomsayers, I would argue exacerbates the behavioral mistakes.  The more noise, the greater the chance of behavioral mistakes.)  There is a wide range of behavioral mistakes that can be addressed in another article for another day.

Morningstar came up with corresponding conclusions in “The Value of a Gamma-Efficient Portfolio”.  As they wrote, “we estimate that the “average” investor is likely to benefit significantly from working with a financial advisor, so long as the advisor provides comprehensive, high-quality portfolio services for a reasonable fee.  The potential benefits associated with making better portfolio decisions will vary considerably by investor.”  I would add that the benefits vary widely based on the advisory team utilized.

Morningstar merely addressed the benefits of portfolio performance, focusing on such critical decisions such as what type of account is best, what asset classes to choose, what investments to utilize, and when to revisit or rebalance, among others.

Dalbar studies suggests that underperformance in the markets is due to psychological factors, including such behavior mistakes as anchoring, lack of diversification, herding, and loss aversion, among others.  For a good review of this, see this RIA site.  However, there have been counterpoints to this study as found in Advisor’s Perspectives.  Despite the question about the validity of all of the details of this study, the anecdotal evidence that many of these mistakes are being made by individuals (and sometimes advisors) is ample.

There are other potential hard-dollar benefits that a financial advisor may be able to provide. The decision of when to take Social Security and strategies around this (e.g., tying Social Security to asset allocation decisions in what we at Oasis Wealth call the Social Security Flex StrategyTM) can add significant value over time.  (The answer is not always to delay taking Social Security – this view is too myopic, in our opinion.)  The decision surrounding a pension can result in significant savings and will vary based on the applicable pension numbers, the individual’s tax situation, the individual’s longevity, and the individual’s asset allocation, among other factors.  

Like other financial decisions, it is not a one-size-fits-all approach.  If it were, it makes no sense to hire an advisor if all of the decisions could be made in a generic fashion.  For example, choosing a lump sum payout, in some cases, may provide significantly more benefits that annuitization and timing this decision based on where the interest rates (a critical factor in the evaluation) could more than pay the advisor’s costs in some circumstances.  Or, annuitizing the pension may be preferable and timing this decision to take advantage of other tax strategies could be critical.

While this article is not meant to provide an exhaustive review of the benefits, we will suffice to say that other value can be derived from decisions around debt (e.g., deciding whether to pay off debt is impacted by the asset allocation and tax nature of the individual as well as the value of the peace of mind of paying down the debt – too often, this decision is not fully analyzed and the mantra of “all debt should be paid off as soon as possible” is trite and often costly, utilizing a home equity line for tax planning purposes), decisions on whether and how to utilize an Employee Stock Purchase Plan, how to maximize the use of a Health Savings Account versus a Flexible Spending Account, evaluating the most effective means of covering potential long-term care needs (hint: there is a lot of misinformation out there), how to prioritize competing strategies (e.g., do you fund education first or save to retirement accounts), and how to structure life insurance most efficiently (e.g., does a laddered approach provide savings compared to a simple approaching of buying the same term length of the life insurance policies).

In some cases, the right advisor, perhaps a fiduciary advisor that arguably has less conflicts when they provide advice, can help the individual investor from buying financial solutions where the cost well exceeds the value.  Sometimes, individuals are their own worst enemy – they need protection from themselves.  Often, of course, individuals need protection from product pushers that are prevalent in the industry (but I would argue most advisors, whether fiduciary or not, have the best interest of their clients in mind).  There could be value derived from helping the client understand their budgeting and encouraging and providing accountability on saving more to meet their retirement goal. While the advice of “you should save more to reach X goal” seems trite, this does not mean that there is no value from this advice or that individuals cannot benefit from this.  If that were the case, more people would be on track for retirement and feel more confident of their position.  Saving more in the right manner can have significant benefits from compounding.

The opportunity cost of the time savings is often significant.  We alluded to this earlier.  There can be a steep learning curve with many financial matters, and the issues are constantly changing – the tax laws change, the markets change, investment solutions change, and the individual’s situation and goals change.  I would argue that the financial planning arena is one of the areas that change more than most others.  (That’s a big reason I love my role so much – it provides continual ability to learn new things.)  Everyone is different from a time investment standpoint – how much time they spend, how much time they worry, and how they value their time.  Even if you are no longer working, there is a cost to one’s time.

The time spent might be on learning the technical issues, finding the right tools, analyzing one’s situation, and implementing and completing administrative tasks.  Wading through the world’s knowledge base is one thing, implementing the strategies in the most optimal situation for one’s individualized situation is another ballgame.  While it might be hard to track the hours one devotes to working on their own financial matters, you could quantify it if you truly wanted to.  If you put in 100 hours per year and you valued your time at $100 per hour, that’s $10,0000 per year.  As I alluded to earlier, many DIYers spend significantly more time researching, analyzing, worrying, thinking, and implementing various strategies.  (This information usually comes from the spouses of DIYers.)  At 200 hours per year at $200 per hour, that equates to $40,000 per year.  Again, ouch!)  Some might rationalize the DIY approach and argue they only spend 10 hours a year addressing financial matters.  If their situation is super simple and they don’t have much to work with, that might be the case.  If not, I wonder what they are missing. Or, do they realize how much time they are truly spending?  Again, they should ask their spouse.

The final areas of where a financial advisor can provide value is a bit harder to quantify, but it might just be more valuable.  As the saying goes, it is priceless.  How do you value the peace of mind or freedom one obtains by knowing that – using the right detailed analysis and not merely by the ignorance-is-bliss-thumb-in-the-air approach -- retirement is funded?  How do you quantify the benefits of knowing you can stay in your home for long-term care needs?  Or, the value of knowing you can assist a loved one for a particular need?  The freedom of knowing you are secure can indeed be life-changing.

Similar to peace of mind but slightly different is the value of living a fulfilled life.  This might be my personal favorite for the value an advisor can provide.  This results from knowing your finances and tying your finances to living an intentional life.  Too often, money matters – or, really a lack of understanding of one’s financial situation or a lack of optimal implementation – get in the way of living in a way that provides one’s optimal life.  Simply, well-being is suboptimal as a result of inadequate financial planning and unintentional living.  Not all financial advisors provide this kind of value.  If the advisor is more of a salesperson and does not provide true goals-based life-centered financial planning, you might not derive such value from using such an advisor.

I have seen individuals or couples go from hoping they had just enough in retirement so they could eke out a living to imagining and living out what was previously considered remote possibilities.  I will never forget what one client simply told me about their situation – “I didn’t know what was possible.”  That’s a big statement, and I truly am getting emotional as I type this. Not only did that couple begin to understand what was possible, we coached and encouraged them to live out those possibilities.  They began to travel more, took adventurous trips and spent more time with loved ones in various parts of the country.  Those benefits are indeed hard to value, but the satisfaction I get from my team being able to provide analysis, advice, and encouragement to that situation is indeed priceless.  (As discussed above, not all financial advisors provide such value.  This focus on planning is often referred to as life planning, and advisors vary on the range of value provided here.  Many advisors may not add any value here while other advisors may be the friend, coach, healer, psychologist, and encourager you have been dreaming of.)

What’s the Cost of Hiring a Financial Advisor?

So, I believe the value from hiring the right financial advisor can be significant, whether it is from hard dollar savings (tax planning, investments, other financial decisions), opportunity cost of time savings, peace of mind and freedom, and from life fulfillment.  However, you must still weigh the cost of the advisor.  That analysis should be made in deciding whether to hire a financial advisor in the first place and in evaluating what advisor to engage, if any.

Ignoring value and merely focusing on cost is myopic and dangerous.  If a doctor was able to provide life-sustaining advice and action, would you refuse the doctor’s services because the cost is greater than what you would pay your family physician for a routine physical?  Of course not.  You will evaluate the value derived, and hopefully compare the doctor’s services and costs with other doctors’ services and costs (to the extent you can get adequate information from other health care providers, that is).   

While the range and methodology for determining costs of hiring an advisor can be the subject of a different article, let’s briefly explore that.  Before we look at that, however, it is important to note that there is a tremendous range of services and expertise offered by financial advisors. While you will want to evaluate the costs and value in deciding whether to DIY or hire an advisor, you will also want to correctly determine the level of services and expertise of the various advisors you are considering.  While arguably hiring a plumber or getting a mortgage is a bit of a commodity, there is a wider range of value provided and expertise offered by financial advisors.  (For that reason, I realize it is quite difficult for many consumers to choose the right advisor.)

Costs can come in the form of the cost you pay the advisor directly, the cost that third parties charge in which the advisor may get compensated in a backdoor manner (can you say “conflict”?), and the costs that third parties charge in which the advisor does not get a cut.   

That third cost – solely third-party charges – is often incurred regardless of whether you utilize an advisor or not.  This might include mutual fund or ETF expense ratios or the trading fees.  (Of course, if you decide not to take action, there may be little cost – just the opportunity cost of not taking action which is usually much greater.  For example, you may decide not to invest in a mutual fund and just keep your money in cash.  That can result in a significant opportunity cost in the form of portfolio growth. Ouch!)   But, the level of third-party charges could vary.  Some advisors do a good job of looking for optimal solutions for clients despite the fact that this does not impact the advisor’s fees.  They effectively do the due diligence for the client to save the client money – another form of value.

The second cost referenced above might include fees you are not aware of, but which the advisor receives.  For example, the mutual fund fees might include a higher expense ratio, and the advisor may get a cut from that in the form of 12b-1 fees.  While there are some disclosure requirements regarding these fees, the individual investor is often unaware of it.  I have heard prospective clients choose an advisor because they didn’t think they were paying the advisor anything.  Or, the advisor supposedly tells the client the following: “This product/solution is free to you.  It is paid out of the product/solution that is provided by the third party.”  What?!?  Don’t fall victim of these tactics.  If an advisor tells you there is no cost and the advisor implies you will not pay them anything, be cautious. Better yet, run.  

The first cost mentioned above is the direct cost paid to the advisor.  Some advisors charge a commission.  You might not be aware of this fee, but it is a direct cost to you.  For example, there are often high initial selling commissions involved with annuities (and high ongoing costs, as well).  You should obtain a proper understanding of this and get the advisor to disclose this in writing.  I am not saying merely paying a commissioned product makes purchasing a certain product unwise, but you should understand that conflict and evaluate the value of this product (and advice, if given in that situation) in light of that conflict.  If the advisor is providing a valuable solution, they deserve to be paid for their time and effort.

Other advisors charge fees in other ways.  Some may charge hourly for their advice. Hourly rates can vary from $150 to $600 per hour.  Some advisors charge a flat fee for their services. Whether the fee is hourly or flat, they often range from $2,000 to $7,000 for base financial planning work (with various degrees of customization) and can be greater for more advanced planning.  Merely because you can spend a meager amount (say $100) for some analysis tool and a few hours of your own time does not mean hiring a financial advisor does not make sense. Again, can the financial advisor provide more value than you doing it yourself?

These rates do not always correspond to expertise or value so you do need to do the cost-benefit analysis.  Hourly rate is one thing – time spent on the matter is another thing.  Again, however, the decision of whether to hire any advisor should not be made on cost alone.  An advisor that provides their service at 8 hours at $200 per hour (thus, $1,600 total) or one that provides their service at 15 hours at $300 per hour (thus, $4,500) should not merely be based on cost alone.  What value are you deriving from engaging one advisor over the other?  That’s often tough to do, but your gut may give you the right answer by understanding the advisor’s expertise, experience, and approach.

These fees noted above generally do not include ongoing investment management, ongoing tax advice, and open access to the advisor throughout the year.  Most advisors provide more comprehensive services for either flat fees or a percentage of assets managed.  This can vary widely among institutions and advisors.  Some big financial institutions’ online services are extremely– it is my understanding that such fees can be as low as .30%.  (I call these 1-800-Advisor because it is more of a distant relationship that is less customized than your typical RIA) Of course, you likely would not receive as customized investment advice, detailed tax advice, and coordination of your overall financial plan as with a team of advisors.  You likely won’t get the personal relationship with a center point of contact who can guide, coach, and encourage you to get the return on life you may otherwise want.  Again, what is the cost of inaction of engaging in more comprehensive, tax-focused, life-centered advice?  

There are some firms that charge 1.25% or 1.50% or more on the first $1mm or $3mm of investments managed, for example, and the third-party costs might be higher than average, as well.  First, you must ask whether they are providing more value than the cost of such services when compared to you doing this yourself.  If you have a strong financial background, spend an adequate time on addressing your financial matters and if the advisor merely advises on the investments without comprehensive planning, you might very well determine that the value does not exceed the “aum” cost when compared to you doing this yourself.  But, if the advisor provides more comprehensive services including tailored tax advice and true life planning that provides priceless benefits from a life fulfillment aspect, you might very well decide the cost of hiring that advisor is much less than the value provided.  If the advisor charges even less than that mentioned above and if the third-party costs are efficient, then it might become even more clear that hiring the right advisor becomes a wise financial decision.  

The decision of whether to hire a financial advisor, and, if so, which one, is not an easy task.  This important decision does not just impact your current situation, but it arguably impacts the rest of your life – and perhaps future generations within your family.  Proper analysis of the value derived and the cost involved must be done, and it is important to understand that all services and advisors are not alike and be true to yourself on where your expertise lies and how you value your time and relationships.