The decision to work with a financial advisor is a big one. You’re choosing someone to entrust with one of the most intimate aspects of your life: your money. As you consider whether it’s the right time to find a financial partner, one question that comes up often is, “Is it really worth the cost of having a financial advisor manage my portfolio?”
We could go on and on about the peace of mind an advisor brings or the confidence they instill in their clients to make more educated decisions. But at the end of the day, it’s good to know if it’s a smart and worthwhile financial decision to work with a professional financial partner.
AND THE SURVEY SAYS…
We analyzed three different surveys, each of which was used to determine if professionally managed accounts yielded better returns than self-managed portfolios.
Each survey concluded with similar results, indicating that professionally managed assets performed 3-4% better than self-managed ones — even when including advisory fees.
WHY PROFESSIONALLY MANAGED ASSETS HAVE THE ADVANTAGE
Below we’ve identified a few reasons why professionally managed assets tend to outperform those managed by individual investors.
When the going gets tough… individual investors tend to take their money and run — and it’s easy to see why. Watching your money drop can feel like an emotional roller coaster. Without a professional helping coach you through the tough times, you’re more inclined to make short-sighted and emotionally driven decisions. Research consistently shows that the average investor earns below-average returns, because of fear/uncertainty during down markets, and overconfidence during market highs. A financial advisor has a long-term focus and can serve as a buffer between your emotions and investment decisions.
Consider this: Sarah and Katie are two investors, each making an initial investment of $100,000 on January 1, 2011.
For the next decade, Sarah works with an asset manager who helps keep her money invested every day, despite periodic market drops. After 10 years, her investments are worth $462,575.
Katie got a little spooked when the market experienced volatility, and she pulled her money out which caused her to miss 10 of the best market days. As a result, her investments are worth $257,143.
That’s a difference of $205,432 — because of just 10 days over a 10-year period.
Reallocation and Rebalancing
When working with a financial advisor that manages your accounts, they can help you view market drops not as a reason to run, but rather an opportunity to reassess and reallocate. Alternatively, when markets are doing well or there is media noise about an investment fad or “hot stock”, an advisor can help you assess the risk and make decisions within the context of your financial plan.
Additionally, individual investors are not always disciplined about rebalancing their portfolios on a regular basis. Life gets busy and checking in on these things isn’t always a priority or focus. That’s where an advisor comes in. A study by Russell Investments analyzed the results of a typical balanced portfolio held between Jan. 2002 and Dec. 2021. They found that an actively rebalanced portfolio offered 0.11% higher returns adjusted for risk than one that wasn’t rebalanced. In addition, the actively rebalanced portfolio experienced 0.51% less in portfolio volatility.
Growing your wealth is one thing, but preserving it requires a different skill set altogether. Taxes on capital gains distributions have the potential to increase your tax bill significantly, especially when not properly planned for or managed.
For example, an investor with tax-managed mutual funds may receive no capital gains (and resulting tax obligation), whereas someone with U.S. equity funds has to pay as much as 20% on their capital gains distribution. If you had a distribution at 12% (the average for 2021) on a $500,000 year-end balance, that’s a tax bill of $12,000 on $60,000 capital gains distributions.
A financial advisor helps investors understand the potential tax obligation of their investments and find a tax-minded approach that works best for their situation.
READY TO WORK WITH A FINANCIAL ADVISOR?
Research shows time and time again that the value of an advisor exceeds their associated fees and costs and yields attractive returns for investors. But beyond professionally managed assets, a financial advisor brings immense value to your financial life that can never be measured. Educating your loved ones, helping you through tough life transitions, and aligning your wealth with your long-term goals are all things your financial advisor can do for you.
If you’d ever like to learn more about working with our Northstar team, please give us a call anytime. We’d be happy to discuss more on how we can bring value to your financial life.