Why would anyone want to pay for financial planning advice when you have the internet and Robo-Advisors popping up like mushrooms after a rainy weekend? And if you’re going to invest money, why pay more than what you can get from a Robo-Advisors? Then again Google can get you your answers for free, no?
While good advice may not be cheap, bad advice always costs you dearly no matter how little you pay for it.
– Larry Swedrow, Investment Author
Robo-Advisors refer to online platforms using computer algorithms for investment services. They have an asset management fee that typically is way below what a Registered Investment Adviser staffed by flesh-and-blood advisers may charge. While there are different Robo-Advisor platforms and fee structures, you’ll probably find the fee ranges from 0.40% to 0.60% of assets managed. Future Advisor charges 0.50% for their investment services. Financial Engines, which some are familiar with through their 401(k) at work, is roughly 0.60%. Some others have flat rates. Some may be lower depending on how much money is managed through the Robo-Advisor platform.
The whole premise of Robo-Advisors is that you can cut out the middle man, rely on asset allocations and investment choices based on mathematical algorithms and save a boat-load of money.
Sounds great. Sign me up. But wait a minute. Are we really comparing apples to apples here?
Apples and Oranges
Sure those air-breathing advisers at those ‘old’ brick-and-mortar registered investment adviser firms do cost more – and have all the problems that other humans offer as well. But I’m going out on a limb here to say that these folks may well be worth it. Now, I admit that I have a certain bias – and a dog in this fight – since I’m one of those pesky human advisor types.
In my advice-based financial planning firm, I work with clients to help them make smarter, more common sense solutions for their money. This goes beyond the whole investing thing. I find myself trying to solve their financial problems and offer insights that will put them on track for a more secure financial future.
The kinds of questions that folks call about typically have only a tangential relationship with investing. I’ll get questions such as “Is it better to refinance now?” or “How much life insurance do I need?” or “What’s the best way to pay for college for my high school senior who’s going to college next year?”
And for this I charge a fee. My fees are based partly on investments. In fact, my investment management fees are at about the same level as many of those Robo-Advisors: 0.60% for advisor-managed assets to as low as 0.30% depending on account size.
Most of what I do is to offer plans, advice and insight. This is where the real value of ANY adviser resides. And this is why my fees are based on value provided to solve a client’s problems and provide peace of mind.
Holes versus Drills
Think of it this way: When you go to a hardware store, you don’t want to buy a drill because you want a drill to put in your tool box. You buy it because you want holes.
You pay a financial planner not because you want colorful charts, graphs and special reports. You want to know “Can I afford to retire?” or “How do I pay for college?” or “When should I take my Social Security benefits?” or “What happens to me if I go through a divorce?”
All of these require expertise and specialized tools that no Robo-Advisor – or many real advisors – even offers.
Planning Is Not Just Investing
Unfortunately, the media has tended to confuse and merge the terms ‘financial planning’ with ‘investing.’ While the two are certainly linked, financial planning is certainly way more than investing. In fact, for those of us who are CERTIFIED FINANCIAL PLANNER™ Professionals, we can certainly tell you that only one of the six courses needed to complete the education needed for our designation was labeled ‘Investments.’
I remember the days when I was a mortgage broker. Whenever I placed an ad in a newspaper, my phone would ring with potential clients doing some comparison shopping. “What’s your rate?” Invariably, I would answer that ‘it depends.’ I wasn’t trying to put people off but the reality was – and is – that rates vary based on the client’s situation and need. And that’s the way fees for advice-based planning are set. Fees are set based on household income, net worth, complexity and scope of the project.
Many people hesitate to call a professional financial planner because they are concerned about cost. This is certainly understandable given the many financial obligations we all have. But a better question might be this: what will it cost you to go without professional advice? It’s not uncommon for people to throw away tens (or even hundreds) of thousands of dollars over their lifetime by making poor financial decisions on their own.
Ultimately, paying a financial planner a fee is an investment – an investment in your family, your future and your peace of mind.