Tuesday, December 18, 2012

Is Working With a Financial Advisor Worth It?

HSBC recently published an article titled "The Future of Retirement, The Power of Planning" which compares the circumstances of investors who work with a financial planner to those who invest on their own. The goal of the study was to determine if there is a benefit to working with an investment professional.

The survey categorized survey respondents as non-planners, advice-seeking non-planners, self-guided planners, and advice-seeking planners.

Non-planners have done nothing by way of financial planning or obtaining financial advice. This group represented 38% of all respondents.

Advice-seeking non-planners are individuals who do not have a financial plan, though they do seek professional financial advice from time to time. They are likely to seek advice about one particular need rather than taking holistic, comprehensive advice. This group made up 12% of all respondents.

Self-guided planners have a financial plan in place but do not seek professional expertise to help them make sense of their finances. Members of this group are likely to be younger, internet savvy, and mid-to-high income earners. This group accounted for 22% of respondents.

Advice-seeking planners have a financial plan and utilize a financial professional to help manage their finances. Members of this grouping are more likely to be approaching retirement or retired, and are typically more wealthy. They made up 28% of survey respondents.

The most glaring findings of the study was the importance of a financial plan. Those with advisor directed financial plans have nest-eggs that are over four times as large as those without plans. Further, consistently working with a financial planner seems to add significant value; Advice-seeking planners had nest-eggs that were 57% larger than self-guided planners.

Why is this? The Financial Engines & AON Hewitt report that investors who manage their investments with the aid of a financial advisor are more diversified, take less risk, and obtain better returns than self-directed investors. In fact, advisor directed investors were found to increase their returns by 2.92% per year after expenses!

Lastly, if you are curious how the size of your nest-egg compares to that of the average American worker, you might be shocked. Excluding the value of a primary residence and defined benefit plans (pensions), 60% of American workers have less than $50k in savings and investments, according to the Employee Benefit Research Institute. Moreover, 79% have less than $100k saved. Only 10% of workers have accumulated a nest-egg of over $250k.

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