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Can someone explain the advantage of having a financial advisor? I was under the impression that mutual funds offer the best returns for low risk investments

by qntty 11y ago

imgabe 11y ago
There are different types of advisers. Some charge a flat fee and generally provide unbiased advice which can be helpful for people who don't have any idea what they're doing with finances. Others are basically salespeople who are paid a commission to sell certain funds or other investments.
jevgeni 11y ago
I'd go with passive ETFs tracking a market index. Very few mutual funds can beat them, especially when you subtract the management fee.
rcavezza 11y ago
I'm probably not the best person to get into the details, but I'm a developer at a financial company so I can probably explain a little bit. Comparing financial advisors to mutual funds is comparing apples to oranges. Many times, advisors will advise you to invest in mutual funds as a part of your overall portfolio strategy. So you have to think about having a financial advisor versus not having a financial advisor. In my company, the advantage I have mostly seen has been high net worth clients looking for tax advantage investing strategy and protecting their wealth. There are probably other advantages that I don't see on a daily basis. The cost is typically a large disadvantage. Advisors typically take a small percent on your investments even if you lost money. 1% of a hundred million dollars is a million dollars. Is the utility provided by a financial advisor worth a million dollars? In a similar vein, you can also think of the advantages/disadvantages of mutual funds versus single stocks. The same goes for the advantages/disadvantages of actively managed mutual funds versus passively managed mutual funds.
- hesdeadjim 11y ago
  This. I had an exit a few years back for a sizable, but not retirement-worthy, amount of money. My friend who was one the founders did make retirement level money and went the full financial planner route with a large investment firm. I had begun to do a lot of research for where and how to invest, but before meeting with "his guy" I doubled down and consumed everything I could find. I ended up deciding that if I went my own route I would just go with Wealthfront for the simplicity of their strategy and the extras like tax-loss harvesting and immediate and near-real time account re-balancing. I eventually did meet with the financial planner and his staff did their best to make me feel "special". The waiting room was modern and wood paneled, I was offered drinks and snacks, and when he brought me back to the war room he had another member of his team there and reassured me that I'd have their full resources at my command. This triggered immense skepticism off the bat, since a few simple calculations with their fee structure revealed that I was essentially a chump to them compared to my friend. We talked for a while and he led me through various investment options and I later left with a few personalized investment strategies in a nice leather-bound folio. It took all of about five minutes of study to determine the proposals were a waste of time and an even larger waste of money. For a 1.5% management fee they would invest in high cost mutual funds -- the kind that even do kickbacks to the advisers, and provide me with a once a year re-balance of my accounts with no opportunity for tax-loss harvesting. I told him all this and that I was just going with Wealthfront instead and in a subtle but patronizing manner he told me I did not understand his value proposition. Unless you are high net-worth I have a hard time understanding why you would ever go the planner route as opposed to just keeping a safety net and dumping the rest into a service like Wealthfront.
  - matwood 11y ago
    FYI, if you don't mind spending an hour every quarter rebalacing you can save the Wealthfront fee by using TDAs commission free ETFs. Last time I checked they had almost all of the same ones Wealthfront uses. Maybe the fee is worth it to you to never have to think about it, but since you mentioned the 1.5% management fee, I thought maybe you might not want a fee at all :)
    - hesdeadjim 11y ago
forgetsusername 11y ago
>I was under the impression that mutual funds offer the best returns for low risk investments Mutual funds certainly don't offer the "best" returns (generally). This demonstrates why people need financial advisors, just like we need, say, auto mechanics. Most people don't have the time or inclination to learn about investing. Unfortunately, just like auto mechanics, many are out to make a buck off of client's lack of knowledge. The information and internet age is making these types of markets more efficient.
matwood 11y ago
I think you are confusing 2 concepts. A true FA gives advice over your entire financial health. Insurance, investment, debt, etc... are things an FA might advise on, and a good fee based one can be worth the money if you are a high net worth individual. Mutual funds are one instrument that may be used for the equity side of the investments. If you are thinking that FA means active vs. passive/index funds then read on. The one thing you absolutely can control when investing is costs. Low cost index funds put you in a more advantageous position right out of the gate which means more money available to compound over time. Do some managed funds or advisors beat the low cost index funds? Yes, but they cost more and you have to be fortunate enough to pick the one who beats. Keep in mind the one who beats also often changes year to year so you're stuck rolling the dice over and over. Personally, instead of spending time researching which managed funds may do better than the rest I focus on companies instead. I have a small % of my portfolio in a brokerage account where I can directly invest in companies and ETFs that I think may do well.
icu 11y ago
Hi, I can only speak to reasons why from a UK perspective, however it may still be applicable in a wider geographical sense: 1) To have a holistic, financial plan. What I mean by this term is a truly comprehensive understanding a client's motivations, aspirations, hopes and dreams for their life and providing a plan on how to achieve this. Ultimately this approach comes from the belief that your money is there to help you live the life that you want. This holistic approach will encompasses all areas: protection, retirement, investment, savings, mortgage, tax, long-term care and inheritance. Not taking a holistic approach means that you miss out on the synergy offered when structuring a client's affairs with complementary financial products. 2) To ensure that your financial plan is appropriate for your current and future circumstances. What I mean by that is that each client is different and that I believe there is no 'one size fits all' approach. Your plan should take into account your current arrangements, life's goals, attitude to risk and capacity for loss. The last two items are very important because some clients are risk adverse and as an adviser you must take this into consideration when you consider how best to reach their life's goals. For example if a client wants a pension income of x, and you can achieve that goal with less risk (and therefore less returns), then it may be appropriate not to chase 'market returns' for that client. 3) Access to specialist tools and knowledge. For example we use psychographic risk profiling from Oxford University. In conjunction with that we use stochastic modelling for efficient frontier analysis of a client's entire portfolio and lifetime cash flow modelling tools. I would suggest that these tools, while absolutely essential to creating a good holistic plan, are out of reach for most retail investors. Furthermore there are many financial products that may be appropriate for a retail investor within a wider portfolio, but they are simply not marketed to the wider retail market (intermediaries only). One last point, we have a team that includes several domain experts covering different areas such as tax and pension transfers. I highly doubt that a typical retail client would understand, keep up with, and be capable of legally mitigating their tax. UK Regulation Has Raised Standards Post the UK regulator's (Financial Conduct Authority or FCA) shake up of the adviser market with the Retail Distribution Review (RDR), huge changes have occurred in how advice is given. Part of this is that from the beginning of next year commission from financial products will be switched off and adviser/product charging must be completely transparent. If UK advisers were to carry out the self-serving advice offered by US "advisers" they would fall foul of UK regulation and face huge fines and a ban from the industry. Another interesting point is that the FCA now require evidence of ongoing servicing of a client or an adviser will be forced by the regulator to hand back all remuneration paid by the client to the adviser. Quite frankly if you are not demonstrating value to a client for the fee you charge you will likely loose the client anyway. Closing Thoughts Good financial advisers in the UK have already switched over to fee based business models many years ago and have been in line with best practice anyway. Raising the minimum standards, while painfully implemented by the regulator, has ultimately been good for clients who can afford advice. Unfortunately there have been unintended consequences and as a result it has made advice more expensive and inaccessible (that is another story). Finally I would say that yes, there are bad advisers out there and you should be cautious. However there are good ones out there too and I truly believe in the value proposition that a holistic approach offers to clients.

Can someone explain the advantage of having a financial advisor? I was under the impression that mutual funds offer the best returns for low risk investments

by qntty 11y ago

Can someone explain the advantage of having a financial advisor? I was under the impression that mutual funds offer the best returns for low risk investments

imgabe 11y ago

There are different types of advisers. Some charge a flat fee and generally provide unbiased advice which can be helpful for people who don't have any idea what they're doing with finances. Others are basically salespeople who are paid a commission to sell certain funds or other investments.

jevgeni 11y ago

I'd go with passive ETFs tracking a market index. Very few mutual funds can beat them, especially when you subtract the management fee.

rcavezza 11y ago

I'm probably not the best person to get into the details, but I'm a developer at a financial company so I can probably explain a little bit. Comparing financial advisors to mutual funds is comparing apples to oranges. Many times, advisors will advise you to invest in mutual funds as a part of your overall portfolio strategy. So you have to think about having a financial advisor versus not having a financial advisor. In my company, the advantage I have mostly seen has been high net worth clients looking for tax advantage investing strategy and protecting their wealth. There are probably other advantages that I don't see on a daily basis. The cost is typically a large disadvantage. Advisors typically take a small percent on your investments even if you lost money. 1% of a hundred million dollars is a million dollars. Is the utility provided by a financial advisor worth a million dollars? In a similar vein, you can also think of the advantages/disadvantages of mutual funds versus single stocks. The same goes for the advantages/disadvantages of actively managed mutual funds versus passively managed mutual funds.

hesdeadjim 11y ago
This. I had an exit a few years back for a sizable, but not retirement-worthy, amount of money. My friend who was one the founders did make retirement level money and went the full financial planner route with a large investment firm. I had begun to do a lot of research for where and how to invest, but before meeting with "his guy" I doubled down and consumed everything I could find. I ended up deciding that if I went my own route I would just go with Wealthfront for the simplicity of their strategy and the extras like tax-loss harvesting and immediate and near-real time account re-balancing. I eventually did meet with the financial planner and his staff did their best to make me feel "special". The waiting room was modern and wood paneled, I was offered drinks and snacks, and when he brought me back to the war room he had another member of his team there and reassured me that I'd have their full resources at my command. This triggered immense skepticism off the bat, since a few simple calculations with their fee structure revealed that I was essentially a chump to them compared to my friend. We talked for a while and he led me through various investment options and I later left with a few personalized investment strategies in a nice leather-bound folio. It took all of about five minutes of study to determine the proposals were a waste of time and an even larger waste of money. For a 1.5% management fee they would invest in high cost mutual funds -- the kind that even do kickbacks to the advisers, and provide me with a once a year re-balance of my accounts with no opportunity for tax-loss harvesting. I told him all this and that I was just going with Wealthfront instead and in a subtle but patronizing manner he told me I did not understand his value proposition. Unless you are high net-worth I have a hard time understanding why you would ever go the planner route as opposed to just keeping a safety net and dumping the rest into a service like Wealthfront.
- matwood 11y ago
  FYI, if you don't mind spending an hour every quarter rebalacing you can save the Wealthfront fee by using TDAs commission free ETFs. Last time I checked they had almost all of the same ones Wealthfront uses. Maybe the fee is worth it to you to never have to think about it, but since you mentioned the 1.5% management fee, I thought maybe you might not want a fee at all :)
  - hesdeadjim 11y ago

forgetsusername 11y ago

>I was under the impression that mutual funds offer the best returns for low risk investments Mutual funds certainly don't offer the "best" returns (generally). This demonstrates why people need financial advisors, just like we need, say, auto mechanics. Most people don't have the time or inclination to learn about investing. Unfortunately, just like auto mechanics, many are out to make a buck off of client's lack of knowledge. The information and internet age is making these types of markets more efficient.

matwood 11y ago

I think you are confusing 2 concepts. A true FA gives advice over your entire financial health. Insurance, investment, debt, etc... are things an FA might advise on, and a good fee based one can be worth the money if you are a high net worth individual. Mutual funds are one instrument that may be used for the equity side of the investments. If you are thinking that FA means active vs. passive/index funds then read on. The one thing you absolutely can control when investing is costs. Low cost index funds put you in a more advantageous position right out of the gate which means more money available to compound over time. Do some managed funds or advisors beat the low cost index funds? Yes, but they cost more and you have to be fortunate enough to pick the one who beats. Keep in mind the one who beats also often changes year to year so you're stuck rolling the dice over and over. Personally, instead of spending time researching which managed funds may do better than the rest I focus on companies instead. I have a small % of my portfolio in a brokerage account where I can directly invest in companies and ETFs that I think may do well.

icu 11y ago

Hi, I can only speak to reasons why from a UK perspective, however it may still be applicable in a wider geographical sense: 1) To have a holistic, financial plan. What I mean by this term is a truly comprehensive understanding a client's motivations, aspirations, hopes and dreams for their life and providing a plan on how to achieve this. Ultimately this approach comes from the belief that your money is there to help you live the life that you want. This holistic approach will encompasses all areas: protection, retirement, investment, savings, mortgage, tax, long-term care and inheritance. Not taking a holistic approach means that you miss out on the synergy offered when structuring a client's affairs with complementary financial products. 2) To ensure that your financial plan is appropriate for your current and future circumstances. What I mean by that is that each client is different and that I believe there is no 'one size fits all' approach. Your plan should take into account your current arrangements, life's goals, attitude to risk and capacity for loss. The last two items are very important because some clients are risk adverse and as an adviser you must take this into consideration when you consider how best to reach their life's goals. For example if a client wants a pension income of x, and you can achieve that goal with less risk (and therefore less returns), then it may be appropriate not to chase 'market returns' for that client. 3) Access to specialist tools and knowledge. For example we use psychographic risk profiling from Oxford University. In conjunction with that we use stochastic modelling for efficient frontier analysis of a client's entire portfolio and lifetime cash flow modelling tools. I would suggest that these tools, while absolutely essential to creating a good holistic plan, are out of reach for most retail investors. Furthermore there are many financial products that may be appropriate for a retail investor within a wider portfolio, but they are simply not marketed to the wider retail market (intermediaries only). One last point, we have a team that includes several domain experts covering different areas such as tax and pension transfers. I highly doubt that a typical retail client would understand, keep up with, and be capable of legally mitigating their tax. UK Regulation Has Raised Standards Post the UK regulator's (Financial Conduct Authority or FCA) shake up of the adviser market with the Retail Distribution Review (RDR), huge changes have occurred in how advice is given. Part of this is that from the beginning of next year commission from financial products will be switched off and adviser/product charging must be completely transparent. If UK advisers were to carry out the self-serving advice offered by US "advisers" they would fall foul of UK regulation and face huge fines and a ban from the industry. Another interesting point is that the FCA now require evidence of ongoing servicing of a client or an adviser will be forced by the regulator to hand back all remuneration paid by the client to the adviser. Quite frankly if you are not demonstrating value to a client for the fee you charge you will likely loose the client anyway. Closing Thoughts Good financial advisers in the UK have already switched over to fee based business models many years ago and have been in line with best practice anyway. Raising the minimum standards, while painfully implemented by the regulator, has ultimately been good for clients who can afford advice. Unfortunately there have been unintended consequences and as a result it has made advice more expensive and inaccessible (that is another story). Finally I would say that yes, there are bad advisers out there and you should be cautious. However there are good ones out there too and I truly believe in the value proposition that a holistic approach offers to clients.