Do You Really Need a Financial Advisor?

In the 1990s, there was an independence movement among individual investors. Anyone with a laptop and a dial-up modem could trade their own stocks. The current bear market has provided a reality check. Many individual investors, having seen their previous gains evaporate, are reassessing their need for professional advice.

What are the advantages of hiring expert help? The evidence shows that people with financial advisors are more likely to realize their financial goals. A good financial advisor will start by listening carefully to you. What is your current situation? What are your near-term and long-term financial aims? How tolerant are you of investment risk? Based on this information, he or she will devise a plan tailored to your specific needs.

An important feature of this plan is your asset allocation strategy. Asset allocation refers to how your portfolio is divided among asset classes, such as stocks, bonds, and cash. It also reflects your relative portfolio weightings in various sub-classes, such as small-cap, mid-cap, large-cap, domestic, international, value and growth stocks. Academic research has shown that asset allocation accounts for about 94% of a portfolio's investment returns, with stock selection and market timing being relatively unimportant. If your financial advisor does nothing else but provide you with a sound asset allocation plan, she will have earned her keep.

A good investment advisor will coordinate the management of your taxable and tax-deferred investments in order to minimize your tax liability. Tax-friendly investments, such as municipal bonds, should be placed in your taxable account, while securities that pay taxable interest or dividends should go in your tax-deferred account. Further tax savings can be obtained by offsetting realized capital gains with realized losses and utilizing the tax credits from international mutual funds.

You've heard the saying, "time is money." In fact, time is much more valuable than money. The main advantage of hiring an investment advisor is to free up your time for more important things, such as your family and career.

October 1, 2002

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