But financial advisers can still be of great value — provided they evolve with the times and focus on the right things.
Markets are pretty efficient these days, so advisers aren’t likely to create value by picking stocks.
They can create some value from building well-structured portfolios and counselling about investments, but not enough to justify the bulk of their fees by those activities alone.
On the other hand, there is often enormous potential for advisers to add value by providing broad financial advice and in-depth financial planning. If it is done well, an adviser can often fully justify their fees and more.
Innovations like online brokerage accounts, low-fee passive ETFs and online portfolio managers (also called robo-advisers) are making it easier to invest at low cost.
As a result, investors are rightfully questioning the relatively high fees they pay for advice.
In the mass market, advisers typically use mutual funds with total fees of about two per cent of assets a year (for investment management and advice combined). Combined fees for other types of financial advisers (often serving wealthier clients) ranges from about one to two per cent a year.
While the amount you pay in fees is important, the key thing to focus on is value — the benefits you get from advice net of the fees you pay.
To provide the most value, advisers shouldn’t just focus narrowly on investments, but should provide broad advice including financial planning.
Look for “holistic financial advice,” says Stephen Horan, former head of credentialing and education at the CFA Institute, a global organization of investment professionals.
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