Is hiring a financial adviser worth it?
We took inspiration for this opinion from a question sent by a reader of our website. Let's be honest, it's what we are all thinking. It's one of THE most important questions high-performance expats ask themselves when it comes to financial planning.
So is hiring a financial adviser worth it? Our answer might surprise you. A friend of us is a top banker and considers himself a sophisticated investor. He often asks us if we believe hiring an adviser would enable him to earn more (net of all fees) than if he avoided any advice and invested on his own.
The answer is, of course, it depends.
But on what exactly? To our mind, there are 7 key factors.
1. The type of financial adviser
We often explain not all 'advisers' are created equal. Some vend investments, discretionary investments from well-heeled 'names' and other expensive investments... or trade ideas that ultimately don't work.
Much of the traditional money management business has been an abject failure across the board. Especially for the high-net-worth expat investors who need bespoke plans for their complex financial situations. They are prone to poor investor behaviour that make dreadful performance even worse.
- Buying and selling too often, at the wrong times and into the wrong instruments.
- Chasing returns via managers, sectors and trades that have been 'trending'.
Only to be disappointed when mean reversion inevitably sets in. Inflated expectations make matters worse because expat investors expect outperformance as a matter of course and fund managers tell everyone to expect it, implicitly and explicitly. After all, that is what makes the sale.
In our experience, many 'advisers' and their clients wrongly think their primary function is to pick good investment vehicles. This isn't to say they aren't nice human beings, they're just not necessarily looking out for your best interests.
You may think they're providing unbiased financial advice, but they're actually brokers making money through hidden charges. However, a viable alternative does exist. A rare few are fiduciaries who are highly qualified and charge performance fees. This tiny subset is legally required to put your interests ahead of their own.
Why does this matter?
Because expats are prone to choosing the wrong type of 'adviser' who do far more damage than good.
2. The type and level of fees
We are used to paying more for better products but, with investing, the less you pay, the more you get to keep for yourself.
A performance fee-based adviser should focus on this, showing you the substantial savings and value-added benefits it brings. That is a counter-intuitive message, and people find it very difficult to fully understand.
Put another way...
Chances are, you are probably paying MORE than you think. It is highly likely you could pay far less AND get better returns, products and services than you currently are.
This is where the value comes from. Assuming you agree that performance fee-based fiduciary advisers are better than product salesmen it should be easier to quantify how much an adviser is charging for their services but internationally, it isn't!
It is not just the fee you pay, but the total annual charge which represents the real hurdle any adviser's services will have to overcome to make your engagement worthwhile.
For this reason, it's critical that you fully understand how you're being charged.
If an adviser is charging a performance fee as a percentage of assets annually, a recurring subscription fee, or a per engagement or hourly fee, it is easier to come up with an annual dollar outlay for the advice but it is the bottom part of the 'price berg' and total annual cost that matters.
Being charged in any other way, such as being put in commission-based products, could mean that your total outlay may be even more opaque.
There's no single right way to pay for financial planning but weighing up the cost of any advice as well as the total cost of the solutions you get is a good start.
Always keep the total all-in costs involved with investment and financial advice at maximum 1% per annum!
A sensible breakdown for this may broadly comprise anything up to:
- 0.5% for management
- 0.4% for performance fee advanced financial planning
- 0.1% for custody, dealing and administration fees
People generally don't understand how much they pay (in total) for investment and aren't used to getting any tangible advice.
With product charges, advice and administrations costs; things add up and eat away at your returns.
3. The breadth of advice on offer
Real financial advisers tend to fall into one of three buckets:
- Those whose primary focus is managing a client's investment portfolio
- Those who focus primarily on financial planning
- Those who emphasise both areas (comprehensive planners)
While the wrong type of adviser can be detrimental to your financial health, the right ones can bring you closer to your ideal future.
A financial adviser can increase your investment returns by 3 percentage points or more.
We quantify this as follows:
- Lowering expense ratios: 45 basis points (0.45%) back in your pocket
- Rebalancing portfolios: 35 basis points (0.35%) of increased performance
- Asset allocation: 75 basis points (0.75%) of increased performance
- Withdrawing the right investments in retirement: 70 basis points (0.70%) in savings
- Behavioural coaching: 150 basis points (1.50%) for serving as your practical psychologist
The grand total: 3.75% of added value.
In other words, if your account rises 7%, and the services of an adviser increase that to 10%, he has increased your returns by 43%+!
Planning opportunities such as tax mitigation, wealth/asset structuring, life planning through cashflow analysis and behavioural finance provide a greater opportunity to maximise value.
Advice on credit such as loans, mortgages, employee benefits, insurance and state planning offer even more.
4. The adviser's skill level
A financial adviser offering a broader range of services, will have more opportunities to add value than one with a narrower focus, it's pretty intuitive. Trouble is, many 'advisers' say they offer a broad range of financial planning services but it's hard to know which ones are truly skilled in a variety of areas and which ones are merely telling you what you want to hear.
5. The investor's skill level
Here's an interesting thought...
Without your financial adviser, how well would you do?
It doesn't just come down to how knowledgeable you are on investments/financial planning but your personality type as well. If you don't have the knowledge, a financial adviser perhaps has more room to add value.
On the other hand, if you are highly financial planning-savvy, hiring a financial adviser may provide less of a benefit but be sure to keep a couple of things in mind when making a self-assessment.
First, it's human nature to overrate our attributes. Some of us overrate our financial acumen as well. In other words, it's possible you're not as good at managing your wealth as you think you are. With further self-reflection, you may realise having blind spots, for example in tax planning. If that describes you, it might make sense to seek financial advice from an adviser who specialises in your weak spot.
Let's compare investing to dieting, exercise and meditation, all of those things fall into the category of "simple but difficult". Meditation isn't something we have really tried, but we know from personal experience that the other two definitely qualify as difficult.
The rules of successful investing are remarkably simple: keep your costs low, diversify and wait for a very long time.
The "waiting" part, in practice, is actually very difficult. Investors are constantly surrounded by noise. There's always someone saying you should be doing something like buying this or selling that - when in fact the best course of action is almost invariably inaction. Most of us have an in-built bias towards action.
If we are honest, we're all prone to fear and greed as well. For example, when we see a colleague making a fortune on Bitcoin, buy-to-let property or global stock markets free falling, we naturally want to act - even though the rational response, is to do precisely nothing.
So what's the solution?
"Get a good financial adviser. It may seem silly to you. You're smart. You may even know the math better than most of them, so what could they offer you? They offer a behavioural crutch to save you from yourself. They provide a path forward when the future could not seem less clear. That's what you are paying for!"
Yes, investing well can be simple but it certainly isn't easy and surprisingly for many. We personally value an independent, unemotional opinion we can trust.
There can be a disconnect between knowledge and action. High-net-worth expat investors who know better still make poor decisions about their own money whether it's planning errors or making emotional investment decisions. If you've made many financial decisions you later regretted, you may benefit from hiring a financial adviser who will help you make better choices for your future.
6. Life stages
Life stage is an important consideration when deciding whether hiring a financial adviser can add value for you or not. Proper financial advice can be incredibly valuable early in life. It ensures your plan gets off on a solid footing but it's arguably far more important for older expats and those with dependents.
The complexity around planning will continue to evolve with health, property, retirement and estate planning considerations. Retirement portfolio planning is inherently more complicated than portfolio planning during our accumulation years. In addition, cognitive decline is a risk factor as we age. Mistakes can be far costlier than good, professional advice. Here's where having a second set of eyes looking at your portfolio can give you financial peace of mind.
7. Specific reasons
The last question to ask yourself is...
Do you really want to invest the time and effort in managing your own finances?
For a financial adviser to have chartered status, he must have at least 5 years or 10,000 hours of professional experience. A commercial airline pilot needs 250 hours for their license to take you on a short trip. Not many people choose to fly themselves on holiday and arguably your life journey is a lot more important.
With enough time and experience, you too could probably write a perfectly good financial plan, put together an investment portfolio, re-balance it, mitigate tax and work out for yourself how much money you need to retire with but aren't there other things you would rather be doing instead?
The top ten reasons expats seek financial advice (instead of trying to manage their own finances) are to:
- Reduce complexity
- Take action
- Save time
- Offload unpleasantness
- Make someone else happy (children or spouse)
- Increase confidence
- Help make better trade-offs
- Receive encouragement
- Have someone to blame
- Feel safer
What's interesting about the list is the absence of items you would expect. There is no mention of picking the best investments or producing market-beating returns. In our experience, the majority of our expat clients want help making more informed and effective financial and life decisions that enable them to feel relieved, confident, empowered and good about their wealth and future. They want to get away from frustration, confusion, complexity and closer to clarity, confidence and control.
Just to end off...
We are often asked whether people actually need a financial adviser. Just like other professionals such as lawyers, doctors, accountants, and personal trainers, the simple answer, strictly speaking, is no. But this comes with an important caveat: you may well come to regret it if you don't.
Everyone has different circumstances and we agree with the following:
"Not everyone needs a financial adviser - at least not all of the time - but there is no one who wouldn't benefit from good financial advice."
For us, the combination of evidence-based investing and proper financial planning including cash-flow modelling, is the gold standard. A Fiduciary Performance Fee-Only adviser tends to pick their expat clients carefully. They only offer their services to those who are willing and able to pay for the value they offer. This means you can normally expect to be told if you are not the right fit for them and that's fine because they will likely point you in the right direction to get the help that is right for you. Because when you find the right advice for you and your life goals, you are giving yourself the best possible chance of achieving them.