There are many benefits to working with a financial advisor. There are lots of different areas where a financial planner or financial advisor's expertise can allow you to generate better returns, save tax, and just generally manage your finances more efficiently.
But can an advisor make you rich? The answer to this question is yes, but probably not in the way you might expect.
In today's article I'm going to be explaining exactly what a financial advisor does, the benefit they could potentially provide to your financial situation and whether a financial advisor can make you rich.
Does a Financial Advisor Only Provide Investment Advice?
One big misconception when it comes to financial advisors is that all they do is provide investment recommendations. This is a very big part of what a financial advisor does, but it’s only one small element of a broader financial plan.
Financial Advisors also provide advice around tax and how to minimise it. They provide advice on estate planning, managing inheritance tax, ensuring you have sufficient insurance and protection in place and guidance as to how best to pass on your money to your children. They can also help with your day to day financial management, including cash flow monitoring, budgeting and long term investment and wealth projections.
Can a Financial Advisor Help You Get Rich Quick?
One of the key elements to working with a financial planner is that not only do they look to maximise your potential returns, but at the same time they also look to minimise your potential risk and volatility. It's for this reason that working with a financial planner is not a way to get rich quick. Financial Advisors recommendations tend to rely on slower, long term, consistent growth over long periods of time, as opposed to recommending investments that could potentially get you rich quickly. The reason for this is because investments that have the potential to get you rich quickly, also have a high potential of losing you money as well.
This is something that financial advisors try to avoid, as managing risk is a very big part of their job. A financial advisor can make you rich, but you need to work with him for a very long time if you're not rich already. Anybody who has a reasonable sum of money and is young enough can invest in a way that can turn them into a millionaire over many, many years. This is due to the benefits of compound growth, which means that small initial or regular investment contributions can add up to huge amounts of money given enough time.
Is a Financial Advisor Worth it?
So how much difference does a financial advisor actually make? Well, Vanguard have published a White Paper that looked at exactly this question. They went through a huge number of investment portfolios, looked at a range of different data and calculated that a financial advisor adds approximately 3% per annum return to their clients net returns over the long term.
According to this study, this means that clients who work with financial advisors over the long term will be 3% better off with your investment returns each year, than if they hadn't worked with that financial advisor. No obviously this isn’t 3% every year in a smooth line, but averaged out over the long term.
But where do financial advisors add this value? The White Paper also breaks this down into a number of different categories, where an advisor provides additional value to their clients. Some of the smaller differentials are cost effective implementation or minimising the investment management costs, rebalancing or regular review of the asset allocation of a portfolio, asset location or choosing the type of investments, and finally, how the funds are actually withdrawn from the portfolio.
But the biggest difference at 1.5% of the total 3% was on behavioural coaching. And this is ensuring that you have an unbiased third party who can assist with your investment decisions, in relation to the performance of investment markets. The reason why this is so important is because often when markets are volatile, it's actually the worst time to sell. But this is often many people's first instinct. Working with an advisor can ensure that you keep your eyes on your long term strategy and don't get as easily distracted by short term volatility.
So how much of a difference does 3% p.a. actually make? Well, for somebody with £100,000 to invest, if they had invested in something that provided a return of 6% over 20 years, that portfolio would be worth £331,020. If that same person had got an extra 3% return on their investments, and achieved a 9% rate of return over a 20 year period, that investment portfolio would actually be worth £600,915. So an additional 3% return over a 20 year time frame for someone with a £100,000 investment, could add up to almost £270,000 in additional money in the account. Obviously, this is a significant difference and really highlights the benefits of financial advice
Does a Young Person Need a Financial Advisor?
Realistically, though, if you're a young person with a relatively small amount of money to invest, you're not likely to need the services of a financial advisor. They do charge for their advice, and often on smaller amounts of money these costs could potentially outweigh the benefits that you would receive from working with them. It's also important to keep in mind that many financial advisors won't actually take on clients unless they have enough money to invest. This can be anywhere from £100,000 to £250,000 pounds depending on the company and their target demographic.
A different way to think about what a financial adviser does is that they help keep you rich, generally speaking financial advisors tend to work with people who already have amassed a reasonable level of wealth. The problem is that when you reach this level of wealth, there are many different ways in which the government and various different external factors can impact you to actually reduce that level of wealth or limit what you can pass on to your children.
Financial Advisors work very closely with their clients to make sure that the investments that they are selecting have low enough risk as to not put their total portfolio in danger. They assist with areas such as trusts, and look at different ways to minimise taxation to limit the amount of drag on an individual or a family's overall wealth.
So can a financial adviser make you rich? The answer is yes. But it would take a very long time unless you already have a reasonable amount of money. Definitely one of the key benefits to working with a financial advisor is long term slow wealth creation and wealth protection.
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