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Are financial advisors worth the fee?

Financial advisors can help with tricky financial questions. When is paying for their advice worth it? 

I recently read an article on how to save $1 million. The answer: 鈥淔ire your financial advisor.鈥�

As a financial advisor and the father of four young children, it got me thinking: Do I need to switch careers? And, more broadly, do financial advisors and financial planners really add so little value that clients would be better off without them?

To the author of that article, the answer was yes, but it challenged me to dig a little deeper for the real answer.

Just what is a financial advisor?

Many different kinds of professionals offer financial advice or sell financial products, so it鈥檚 important to understand聽what a financial advisor is. A聽true financial advisor should take聽a comprehensive, holistic view of your entire financial picture, looking at聽investments, tax planning, debt management, cash flow, insurance, college planning, estate planning and more.

All these elements are important to your financial life and should work together. For example, you could have an excellent investment strategy, but if you鈥檙e not saving any money it might not聽matter. Or, you might make mistakes in designating beneficiaries on your IRA or 401(k) accounts that could materially increase taxes for your children.

As you can see in these examples, focusing only on your investments 鈥� as an investment manager or wealth manager would do 鈥� is not taking a holistic view of your situation.

However, the financial advisory industry has not done a good job of educating consumers on the difference between a holistic financial planner whom you can trust and someone who only manages money. A recent study by Cerulli Associates found that 166,000 financial advisors self-identified as members of a financial-planning-focused practice but that only 38% of them actually provided holistic financial-planning advice.

People are wary of paying for advice

It鈥檚 not surprising, then, that people are wary of paying for professional advice. Ric Edelman, a well-known author of financial books and owner of an investment advisory firm,聽聽in 2014 to determine why people do not hire financial advisors. What he found is that the vast majority of individuals wanted and needed advice but did not want to pay for it.

I understand this. I鈥檓 a frugal consumer who tries to save money whenever I can. But at what point does not spending money actually end up costing you money?

For example, Vanguard released a paper in 2014 that found a financial advisor can add as much as聽approximately 3% of value in net portfolio returns per year through smart financial decisions. A study by Morningstar found that advice from a financial planner can add 29% more聽wealth through retirement. And a recent study by John Hancock Retirement Plan Services found that 70% of those who work with a financial advisor or planner are on track or ahead in聽saving for retirement, compared with聽33% of those not working with an advisor.

How can one author state that firing your financial advisor will save you $1 million, while these studies suggest the opposite?

The reason is that many people don鈥檛 understand what a good financial advisor does. Many people think聽a financial advisor is a stock picker or someone who sells聽investment products that may or may not be in the best interests of the client. True聽financial advisors who uphold the fiduciary standard 鈥� putting the client鈥檚 interests first 鈥� perform a far more transparent, holistic and client-centered role.

What a true financial advisor does

Below are a few examples of how good planning in conjunction with a financial advisor can leave you with more money rather than less.

A true financial advisor聽can help you:

• Stick to an investment plan to avoid panic selling and buying at market tops 鈥� moves that impact your long-term wealth much more than an advisor鈥檚 fee. Vanguard estimates that just two or three聽major decisions over a 30-year relationship can make up for the annual fees.
• Track your contributions to and withdrawals from your accounts and compare them with聽your goals, helping you聽reach or exceed those targets.
• Adjust your investment strategy to account for聽major life changes such as buying a house or聽starting a new job.
• Determine when and how to claim Social Security benefits.
• Maximize financial or tax aid when your children go to college.
• Determine how much聽life insurance you聽should have.
• Use tax planning to determine which聽accounts to save in during your working years and withdraw from during retirement.
• Allocate assets聽across all your accounts and rebalance your portfolio regularly.
• Maintain peace of mind about your retirement savings.
• Buy a new or second home.
• Minimize taxes聽after your death聽by assisting with the proper beneficiaries titled on your retirement accounts.
• Review your tax returns to maximize your savings through tax credits and deductions.
• Review all these items and others regularly聽to optimize聽your financial situation.

One of my favorite sayings is 鈥減enny wise, pound foolish.鈥� I could try to draft my own estate documents or use an online tool, but are the savings worth the potential repercussions of not having my estate set up properly for my wife and four kids? Everyone pays for medical or home insurance in case of an emergency, but many don鈥檛 consider paying for financial advice, even though not making smart financial decisions can lead to a financial emergency.聽If you needed major surgery would you find the cheapest doctor?

How to find someone you can trust

As you review your financial situation, ask yourself if you can do better on the items previously listed than a trusted professional. If this article has persuaded you that having a financial planner鈥檚 help would be valuable, you may still wonder how to find someone you can trust.

After you make聽a list of potential financial planners through trusted relationships or聽, here聽are some questions to ask them:

• Are you聽a fiduciary?
• Do you聽provide comprehensive financial planning services?
• Are you fee-only (meaning they聽work for a set fee and do not earn commissions based on which investment vehicles they place you in)?
• Are you聽a certified financial planner?
• What are your聽fees? Fees are important, but as the studies by Vanguard and Morningstar have noted, a few important pieces of financial advice can offset many years of the fee.

If you don鈥檛 have the knowledge or time to create a well-rounded, lifelong financial plan on your own, I recommend you work with a professional financial advisor. We aren鈥檛聽all as bad 鈥� or expensive 鈥� as you think.

This article first appeared at . Learn more about Mike Eklund on NerdWallet's 'Ask an Advisor.'