August 12, 2022
Written By: Jerod Herzog
The process of investing assets is relatively simple. Especially in the age of low-cost brokerages and Investopedia, it’s something that can be done by the individual investor.
But every year, people still decide to enlist an investment advisor. Despite their unglamorous public perception, advisors now have roughly 4 trillion dollars under management.
So, why are individual investors willing to pay a fee for advice?
For them, that question has five easy answers.
First. Advisors Know a Thing or Two.
Advisors are often nerds. Yep, the kind with a calculator in their shirt pocket and tape between their eyeglasses. You can find them spending inordinate amounts of time obsessing over market trends, global events, Wall Street mishaps, new tax policies—you name it.
That sort of experience isn’t typical in a DIY investor. Because most of us simply don’t have enough hands on the clock to deeply manage our portfolio. But an advisor simply does. And the ease of mind that comes with knowing your investment is taken care of can, itself, pay dividends.
Second. They Help You Miss the BIG Mistakes.
Anyone could change their own oil if they wanted to. It might be a dirty job and somewhat backbreaking. But you could do it. A professional mechanic can also change your oil— they’ve likely done it a jillion times.
The advantage of hiring a professional is in the things they won’t do and in the things you don’t see.
They won’t use the wrong oil or forget to tighten the gasket. They won’t jack the car up on an incline—in other words, they rarely make the big blunder. But they will notice if other parts of the engine need attention. We amateurs, on the other hand, are prone to the tiny mistakes. And a tiny mistake can easily destroy your whole engine.
Just the same, poor decision-making costs investors thousands of dollars every year. An investment advisor helps you avoid investment-ruining pitfalls— especially when those mistakes are often the easiest to make.
Third. They’re Objective.
We all like to think we’re rational investors. That is until your 401k drops by 20% in a single week. Advisors are talented at teaching discipline and talking you off the ledge when things go awry.
They also diagnose how comfortable you are with risk BEFOREHAND, so when the market gets wonky—you aren’t shrouded in panic. They can even recommend you have cash set aside for market downturns, just to make your mattress a little more comfortable at night. Their objective view will likely be more reasonable than the person whose life savings is at stake—especially when markets get topsy-turvy.
Fourth. They Have a Plan.
Financial advisors work with your goals in mind. They know that your future depends on the decisions you make today. When they advise on your portfolio, they do so in a way that works for your life—not chasing market trends.
So often, investors get caught timing the market, using their returns unwisely and getting their tail end handed to them. Advisors ensure each move you make, down to tax location, reflects an intentional objective. And they remain disciplined. This is how great investors maximize returns over the course of their lives.
And Fifth. Even Advisors Have Advisors.
With all their knowledge and expertise, even advisors know how to keep the ego in check. Even CEOs of financial institutions consult an advisor. Why? Because they are human, just like everyone else. Like you, their stomach drops when their account balance does.
Now, they could easily regard themselves as savvier than the average investor and manage their portfolios on their own. But they know that expertise is barely half the battle. Cognitive bias still weighs on decisions. Downturns still set off internal alarm bells.
There really isn’t a person who wouldn’t benefit from a personal trainer. All of us would find value in consulting a dietitian because they are going to find a way to add value for you. That’s what they do. They tailor the plan to ensure it fits you and whatever situation you are in. If advisors need advisors, why wouldn’t you?
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