Financial advisors can seem intimidating, and maybe you’re under the impression that advisors are reserved for only the ultra-wealthy. In reality, nearly anyone can benefit from working with a financial professional.
If you’re wondering what value a financial advisor can bring to the table, you’re not alone. Read on to discover how an advisor can help boost your returns, as well as five bonus benefits you can expect while working with an advisor.
The Alpha of Advisors
In finance, the term “alpha” is used to describe the concrete value an advisor can bring to the table. Forbes describes alpha as “how a fund manager can combine securities into a portfolio that provides excess returns to investors above the appropriate related benchmark index for those investments on a risk-adjusted basis.”
In other words, alpha is the difference between the returns you could get if you invested with the help of an advisor versus investing on your own.
If you were to pay an advisor $1 and they returned $5 to you, the alpha for that advisor would be $4 – it’s the net positive return the advisor brought to the table.
A study by The Vanguard Group found that on average, advisors add about 3% to client returns, even after accounting for their fees and expenses. That may not sound like much, but 3% of $1,000,000 comes out to an additional $30,000 per year. And when you consider that most advisors charge around 1% of the assets under management, you can still end up coming out on top.
5 Ways an Advisor Can Add Value to Your Financial Plans
Now you know the numerical data an advisor brings to the table, but how else could a financial professional help you meet your money goals?
1. Help You Create Smart Financial Goals
Financial advisors can help you figure out your individual goals and create financial targets to fund those goals. While some financial goals are pretty much universal (like retirement), others will be unique to your journey (like parasailing in the Mediterranean or starting your own food truck restaurant).
2. Save Time and Money
Registered Investment Advisors (RIAs) are fiduciaries, which means they’re legally required to work in your best interest as your advisor. Their entire job is to help you make the most of your money while staying within your risk tolerance (how much you’re willing to risk losing along the way).
While there’s an upfront cost to working with an advisor, they’ll likely save you more money in the long run. Plus, you can avoid sifting through hours of internet research and take your questions right to the expert.
3. Provide Timely Advice
The markets are unpredictable (hello, bear market) – and it can be tough to keep your cool when all your hard-earned money is losing value.
A financial advisor has the experience of working through market fluctuations. While they can’t predict when or if you’ll recoup your funds, they can help you maintain perspective and stay focused on your goals.
For example, many investors panic when they see stocks tumbling, and might even seek to sell their investments as a way to avoid further losses. But some of the most common advice from financial professionals is to hit pause and ride out the market waves, pointing to the overall positive trend of the markets.
Of course, that’s not always the case – especially if you’re within a few years of retiring – and an advisor can help you figure out what to do.
4. Choose Investment Strategies
You’ve nailed down your goals…now what? Something about mutual funds and ETFs? Or are you supposed to put your money in real estate? Maybe it’s best to just shove it all in your freezer (ok, maybe not).
Having goals isn’t the same as having a game plan to make those goals a reality. In such a jargon-heavy industry, it can be tough to know what you should do to maximize your gains.
A financial advisor can lay out all your options and explain the pros and cons in simple terms, giving you the agency to make more informed decisions.
Having an advisor is like having a personal trainer. Sure, you could walk into the gym and just start working out on the nearest machine, but a personal trainer is someone who understands your fitness goals and knows what workouts could help you reach them.
Why hire a personal trainer if you could just do it yourself? Because they’re someone who specializes in helping people reach fitness goals, and they’ve done it time and time again. It’s the same with advisors: they specialize in helping people reach financial goals and they’ve done it time and time again.
5. Navigate Big Life Changes
Whether it’s buying your first home, planning a wedding or settling into retirement, your life changes tend to come with financial hurdles as well.
From bigger returns to goal-setting support, a financial advisor could add big value to your financial planning endeavors.
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