Is Wealth Management Worth It? The ROI of Working With a Financial Advisor (2024)

When it comes to managing wealth and planning for a secure financial future, the services of financial professionals, such as financial advisors or wealth managers, are invaluable. Yet, some individuals might be skeptical about the cost of these services. In this article, we’ll break down the impacts that professional financial planning can have on investment performance, and help you understand how to determine if working with a financial advisor is right for you.

Table of Contents

1. What Services Does a Financial Advisor Provide?
2. The Quantifiable ROI of Working with a Financial Advisor: Case Studies
3. The Challenge of Beating the Market
4. The Intangible ROI of a Financial Advisor
5. The Cost of Working With A Financial Advisor
6. Are Robo-Advisors a Good Alternative?
7. Frequently Asked Questions

What Services Does a Financial Advisor Provide?

Wealth managers and financial advisors offer a wide range of wealth management services designed to help clients achieve their financial goals. These services typically include:

• Investment Management: Advisors can offer customized investment portfolios aligned with your risk tolerance, time horizon, and financial objectives. Financial advisors can handle asset allocation and portfolio management, monitoring your investments for adherence to your agreed-upon investment strategy.
• Financial Planning: This involves creating a comprehensive financial plan, considering all aspects of your financial situation. This plan may cover estate and retirement planning, college savings, debt management, and more.
• Tax Planning: Financial advisors can help manage your tax liability, advising on strategies to minimize capital gains taxes, maximizing tax-efficient investments in retirement accounts, and charitable giving.
• Retirement Planning: Financial advisors can guide you in creating a strategy to ensure a steady retirement income, helping manage your retirement accounts, like traditional IRA.

The Quantifiable ROI of Working with a Financial Advisor: Case Studies

The exact ROI of a financial advisor is difficult to determine as it would involve a number of tangible and intangible factors. That said, several studies have been conducted to quantify the return on investment when working with a financial advisor or wealth manager. Here, we focus on two such studies.

International Longevity Centre-UK (ILC-UK): The Value of Financial Advice

The International Longevity Centre-UK conducted a study aimed at understanding the long-term effect of financial advice on wealth accumulation. This study revealed several key points:

Between the years 2001 and 2007, individuals who obtained financial advice accumulated more liquid financial assets and pension wealth by 2012-2014 compared to those who didn’t receive advice. Specifically, the group that received advice had 39% more liquid financial assets and 21% more pension wealth.

The benefits of financial advice extended beyond affluent individuals. Those identified as ‘just getting by’ also experienced an increase in wealth after receiving advice, with an augmentation of 14% in liquid financial assets and 16% more in pension wealth.

These results underline the potential role of financial advice in fostering long-term wealth accumulation across a wide range of economic statuses, including those with affluent backgrounds and those who are ‘just getting by.’

CIRANO: The Gamma Factor and the Value of Financial Advice

A similar study published by the Canadian research center CIRANO found that households that engaged with financial advisors for a period of 15 years or longer accumulated 290% more assets than those who didn’t consult with financial advisors.

Additionally, the CIRANO study noted that clients who discontinued services with their advisors experienced a 34% decrease in their overall asset values over the next four years. On the contrary, clients who continued to consult their financial advisors saw a 26% increase in their assets over the same period.

While these studies provide a positive picture of financial advising, it’s essential to note that results can vary based on individual circ*mstances, market conditions, investment selection, inflation, the specific expertise of different advisors, and many other factors. The studies referenced above focus on Great Britain and Canadian investors, respectively.

The Challenge of Beating the Market

Beating the market, or generating higher returns than the stock market as a whole, is a considerable challenge that many individual investors and professional fund managers confront year after year.

In its ongoing research, the S&P Dow Jones Indices’ SPIVA U.S. Scorecard offers a detailed comparison of the performance of actively managed funds against their corresponding S&P index benchmarks. According to the latest SPIVA U.S. Scorecard released in 2021, a significant majority of fund managers across various categories didn’t outperform their benchmarks over the past decade, underscoring the difficulty of achieving consistently high returns.

Financial advisors can guide clients through the intricacies of the investment landscape, providing strategic guidance and can help their clients avoid common pitfalls. They can assist in setting realistic expectations about market performance and understanding that beating the market consistently may not be a dependable measure of success. The primary focus of an effective personal finance strategy should be to create a personalized investment strategy that aligns with each client’s specific financial goals, risk tolerance, and time horizon. This approach, rather than pursuing market-beating returns, is more likely to lead to satisfactory results and financial security. Investing is not just about outperforming the market; it’s about setting personal financial goals that meet your unique goals and needs over time.

The Intangible ROI of Wealth Management

The non-monetary return on investment when working with a financial advisor can be equally, if not more, valuable than the financial ROI. A 2019 study conducted by the Certified Financial Planner Board of Standards found that 78% of those surveyed felt it would be very beneficial or somewhat beneficial to “work with a financial advisor if faced with a recession”, compared to only 32% of those managing their money on their own. Confidence, peace of mind, and the assurance that you’re making the right decisions with your money are intangible benefits that an advisor aims to provide.

Financial advisors can also have the potential to save their clients’ time and alleviate the stress of managing their finances, allowing individuals to focus on other important aspects of life. Although difficult to quantify, the peace of mind and mental clarity that can come from knowing a financial professional is handling your financial future shouldn’t be underestimated. As with most things investment-related, there is a risk vs. reward trade-off as well. We’ll explore the potential downside of working with a financial advisor below.

The Cost of Working With A Financial Advisor

The fee structure for wealth management services varies. Some advisors charge a percentage of the client’s assets under management (AUM), while others may charge an hourly rate or a fixed fee. Annual fees can include management fees for handling your investment portfolio and trading costs. It’s essential to understand these costs upfront to calculate the potential ROI of hiring a wealth manager, and finding the best options for your budget.

Are Robo-Advisors a Good Alternative?

The advent of robo-advisors has revolutionized the financial advisory landscape, offering automated, algorithm-driven financial planning services with little to no human intervention. While this technology-driven approach may be appealing due to its cost-effectiveness and convenience, it may not be the optimal choice for everyone.

While robo-advisors are effective at simplifying the investing process, they may not be as beneficial for investors seeking comprehensive, personalized financial planning. If you’re new to investing and are looking for an effective means of building a foundation from which to grow, a robo-advisor might be a good starting point. But as your needs evolve and become more complex, a human-led financial advisory approach might start to make more sense.

Frequently Asked Questions

What’s the difference between a financial advisor and a wealth manager?

The term ‘financial advisor’ is somewhat broad, encompassing professionals who help with a variety of financial planning tasks. A ‘wealth manager,’ on the other hand, typically caters to clients with a high net worth and offers more comprehensive services. While their tasks often overlap, their target clients and range of services might differ.

How can I evaluate a potential financial advisor?

When selecting a financial advisor, it’s important to take into account more than just their investment performance. Dive into their professional background, seek out recommendations from trusted sources, and get to know them on a more personal level. Additionally, if an advisor has professional designations, it’s highly recommended to check the advisor’s credentials through the issuing authority. For example, the Certified Financial Planning (CFP) Board maintains public databases meant for this exact purpose. The Investment Adviser Public Disclosure website and FINRA’s BrokerCheck website will provide details on a registered investment adviser or registered representative’s employment background, registrations, reportable professional designations*, outside business activities, and disciplinary history, if any.

*Not all professional designations are reported through these websites.

When should I hire a financial advisor?

Deciding to hire a financial advisor is a personal decision that depends on an individual’s specific circ*mstances. However, some indicators might suggest it’s time to consider professional advice. These could include a lack of time or expertise to effectively manage finances, an increase in assets that becomes difficult to manage independently, a significant life event that impacts one’s financial situation, or an upcoming transition like retirement.

Is there a downside to hiring a financial advisor?

As with all financial decisions, hiring a financial advisor comes with certain material risks. These can include costs that may not be outweighed by the gains, a level of dependence on the expertise and guidance of another individual, and potential conflicts of interest. Some individuals may experience a feeling of lost control over their financial decisions, and there is no guarantee of investment outcomes or that the advice received will always lead to profitable results. Additionally, in the digital age, there are inherent risks associated with data security when sharing sensitive information. It is essential to consider these factors and thoroughly evaluate any potential advisor before making a decision.

Harness Wealth Can Help

Navigating the complex financial landscape can be challenging, but you don’t have to do it alone. Working with a financial advisor or wealth manager can add value, with the goal of optimizing your wealth and leading to a potential higher net return on your investments.

At Harness Wealth, we understand the importance of comprehensive wealth management and the impact it can have on your financial life. Our experienced team of financial advisors and wealth managers work closely with you to understand your financial situation, goals, and risk tolerance to provide a personalized plan that aligns with your aspirations. By leveraging our team’s expertise and our suite of financial tools, we aim to optimize your wealth, simplify complex financial decisions, and ultimately, drive a meaningful ROI for our clients.

Tax services provided through Harness Tax LLC. Harness Tax LLC is affiliated with Harness Wealth Advisers LLC, collectively referred to as “Harness Wealth”. Harness Wealth Advisers LLC is an internet investment adviser registered with the Securities and Exchange Commission (“SEC”). Harness Wealth Advisers LLC solely acts as a paid promoter for unaffiliated registered investment advisers. Harness Wealth Advisers LLC’s registration as an investment adviser with the SEC does not imply a certain level of skill or training.

This document does not constitute advice or a recommendation, or offer to sell, or a solicitation to deal in any security or financial product. It is provided for information purposes only. To the extent that the reader has any questions regarding the applicability of any specific issue discussed above to their specific portfolio or situation, prospective investors are encouraged to contact Harness Wealth or consult with the professional advisor of their choosing.

All investing involves a risk of loss, and investment strategies can lose money over short or even long periods of time. The reader should keep in mind that investing in securities involves a risk of loss that they should be prepared to bear. Past performance is in no way an indication of future results. Over time, assets will fluctuate and be worth more or less than the initial invested amount. Depending on the investment type, differing risk levels will exist. Harness Wealth cannot offer any guarantees or promises that a client’s financial goals and objectives will be met.

Certain information contained herein has been obtained from third-party sources and such information has not been independently verified by Harness Wealth. No representation, warranty, or undertaking, expressed or implied, is given to the accuracy or completeness of such information by Harness Wealth or any other person. While such sources are believed to be reliable, Harness Wealth does not assume any responsibility for the accuracy or completeness of such information. Harness Wealth does not undertake any obligation to update the information contained herein as of any future date.