Chaim Steinmetz was in a quandary. As a recent inheritor of $100,000, he wanted to invest the money to help cover future simchos and generally grow wealth. His accountant had given him the names of a couple of financial advisers to interview, and he was ready to send his money to one of them. But his uncle was telling him that today, paying someone to invest your money is a rip-off. All you had to do was dump the money into some indexed mutual funds, he claimed. Obviously, Chaim didn’t want to get ripped off.

Is it true that, thanks to index funds, there is no need for financial advisers anymore?

Taking It Too Far

There is a very strong do-it-yourself (DIY) movement in this country. In the investment domain, some DIY proponents say people should cut all middlemen out of their financial lives. In their view, financial advisers are rip-offs because investors can simply use index funds to grow wealth. But while index funds are indeed simple and fantastic, they have not made financial advisers obsolete. Although someone who is prepared to self-educate extensively may not need a financial adviser, the vast majority of people can use plenty of help managing their money. We’ve touched on this topic before (VOL 12/30/21, “Index Card Finance”), but here is a fuller treatment of a somewhat contentious topic.

Rampant Investment Confusion

Let’s start with the fact that even within the realm of index funds, there is much confusion. The niche contains hundreds of options, ranging from super-simple and safe to exceedingly complex and risky. Many investors, even the wealthy and intelligent, make no distinction among the bunch. For example, the super-popular S&P 500 Index Fund is not a complete portfolio, and lacking basic knowledge, some newbies choose grossly expensive versions of this otherwise excellent mutual fund option. Index funds should indeed be the core of most investors’ liquid portfolios, but many need help securing even these fundamental products.

Simplifying Investment Complexities

Even after one narrows down their list of mutual funds, investment planning is far from over. How much should they put into each of those fund categories (stocks vs bonds, etc.) depends on their individual time horizons and risk tolerance. Very often, an investor has multiple investment goals—say, saving for simchos, a down payment, and a 401(k) plan—all of which require different portfolio allocations. Investors often also face special situations such as correcting for prior selections of inferior funds or gifts of random stocks. And how does one balance their mutual fund portfolios versus real estate and private businesses? Professional guidance may be required. 

Coordinating Financial Planning

Despite the above points, it’s accurate that index funds, target-date funds, and investing apps, has made investment management pretty easy for most investors. But financial advisers can really add tons of value by coordinating intertwining money matters such as improving tax efficiency using IRAs, 401(k)s, 529 plans and myriad other strategies, insurance reviews, estate and charitable planning, and more. Often, multiple experts need to be involved in designing a financial future, including accountants, insurance brokers, and trust attorneys. A good financial adviser can help coordinate the whole team and facilitate these vital tasks.

Necessary Coaching

Another major thing financial advisers can do is make sure that plans are created and implemented. Most Americans don’t even get to first base with wealth. Without consistently spending less than you earn and investing properly, you never get ahead. But there’s always something to spend your money on now, and as incomes grow, we tend to spend more. That fact is why even many top earners have very little net worth. A financial planner who actually gets things done is often worth every penny. Same for life insurance brokers, by the way. A plan is worthless unless it’s actually put in place. 

Courage Booster

In a similar vein, even financial professionals will sometimes hire a colleague to manage their own money to minimize the emotional aspect of investing. Money is something that cuts very deep into our psyche; it is well documented that people become irrationally euphoric or gloomy in relation to money. Jumping onto booming assets at high prices and then dumping investments, even good ones, at the lowest prices is common. Therefore, having a professional steady hand to dispassionately follow procedures and overcome those very human impulses is a wise expenditure for a large fraction of the population. It can be expensive NOT to hire an advisor. 

Convenience and Peace of Mind

Financial planning is not rocket science; you can learn 90 percent of what you need to know in a couple of books. But neither is most of what we do in our lives. We pay for many things to bring simplicity and convenience to our lives, allowing us to concentrate on our professions and the things we care about. Sure, you can self-educate and become your own financial planner just as you can be your own landscaper, handyman, mechanic, lawyer, dietician, therapist, etc. But most people prefer to specialize in what they are best at and pay for the convenience and peace of mind of counting on other specialists. 

But What About the Fees?

DIY extremists dramatize how financial advisory fees are a huge drag on investment returns. And indeed, if you lower investment returns by, say, 1 percent on a decent-sized portfolio, it will cost a boatload of money when compounded over decades. However, that analysis only makes sense if the fees are totally wasted, i.e., the adviser didn’t improve returns. But there are many studies showing that between tax efficiency and reducing technical and emotional errors, a good adviser can often more than cover the fees they charge. In that case, the added services and convenience financial advisors offer are free, not costly. 

Disingenuous Calculations

Even if all an adviser does is save their client time, worry, and distraction, how is that a rip-off? It’s disingenuous to focus only on the cost and not on the service provided. In fact, if you take any significant service fees paid to accountants, personal trainers, therapists, caterers, bakers, barbers, real estate brokers, and others and compound them over 40 years, it will also sum a surprisingly large number. At the same time, we recognize that the convenience, time savings, and assurance that a job will be done effectively and correctly is often worth the money. A financial adviser who adds value is no different.

The Golden Path

I’m not saying everyone needs a financial adviser, definitely not at all times. It’s also not easy to find the right adviser who will help with all of the aforementioned ancillary services, especially for those with smaller asset levels. But the financial DIY movement has gone too far, making it seem like everyone should be a financial whiz when many amateurs are not able or interested in becoming one. The golden path runs down the middle. Do what you can by yourself, if you wish. Find pros for the rest.