Question: My question is about financial advisers. Specifically: Do I need one? I know that such help is important, but paying 1% of my assets annually, which appears to be the going rate, seems steep. My wife and I have adequate retirement savings, our mortgage is paid off, we have virtually no debt, and we are invested almost exclusively in index funds with low fees. Our estate planning documents are in order, as well, So, what would I gain from working with a financial advisor?
I certainly have met and spoken with retirees who have the skills and time to manage their finances in later life. And yes, many advisers typically charge, annually, 1% of assets under management. If the value of your nest egg is, say $1.5 million, then $15,000 goes to your advisor. (Check carefully if an advisor tells you: "My help is tax-deductible." Some, but not all, adviser fees fall under that heading.)
That said, there are several reasons why most people approaching retirement or already retired should at least consider meeting and possibly working with a financial advisor.
Most important, a good adviser will keep you from doing something stupid with your money. And most people, even those who have, or think they have, a good handle on their finances, trip up at some point. That includes me.
Several years ago, a close family member approached me about investing a sizable amount of money in a supposedly can't-miss-opportunity. Even though I was aware of the risks involved in lending money to family and friends (you tend to follow your heart rather than your head), I wrote the check. Well, the can't-miss investment missed. And my wife and I paid the price. Very dumb.
And don't assume that simply because you're invested in index funds or other seemingly straightforward products you must know what you're doing. Barry Kaplan, a certified financial planner and principal with Modera Wealth Management in Atlanta, recalls meeting a young lawyer who confidently explained that 75% of his next egg was invested in an S&P 500 index fund and 25% in a Wilshire 5000 index fund. The latter, the lawyer said represented the small-cap portion of his holdings.
The problem: The Wilshire 5000 is a total-market index, not a small-cap index. The lawyer assumed that one-quarter of his money was invested in small-cap stocks, when, in reality, the figure was closer to 5%.
"He didn't understand that index investing, while simpler than traditional active investing, isn't that simple," Mr. Kaplan says. "You have to determine which indexes. What's the overlap between the indexes? What are the gaps? And what about foreign (funds)? It's even more complicated there."
A good way to gauge your financial smarts: What did you do as markets were crashing in 2008 and 2009? Run for the hills? Sit tight? Tweak your investment strategy? Says William J. Bernstein a neurologist, investment advisor and author: "You are not as good looking, charming, or as good a driver as you think you are. The same goes for your investing abilities."
Two additional reasons why retirees might benefit from working with an adviser are taxes and spouses. Many retirees have two or more different types of savings or sources of income: taxable accounts, tax-deferred accounts, Roth IRAs, pensions, Social Security, etc. Ensuring that your nest egg lasts as long as you do is the biggest financial challenge most of us face in retirement, and tapping various assets in the most tax-efficient way possible is crucial to that. Here, a good adviser can be invaluable.
As for spouses, most couples seem to have one person who handles and understands retirement finances. If that person dies suddenly, the surviving spouse could benefit from having an adviser in place.
Condensed and excerpted from the Wall Street Journal article "Why Retirees Should Consider a Financial Advisor" by Glenn Ruffenach.