When Should You Pay for Advice?

For investors with less time or knowledge to manage their investment portfolio, it might be wise to consult an independent advisor.

Robert van den Oever 20 May, 2021 | 4:28AM
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Financial advisors meeting with clients

Active investors are keen on managing their investment portfolio themselves: they like to make their own decisions and compose the portfolio on their own merit. For them, it’s almost a sport to try to beat the market and outsmart others.

But not all investors are that active. Many investors are not able or willing to spend that much time and effort on their investments. They are mainly interested in the result of their investments, not in the process to get there. In that case, it can be wise to let an independent advisor figure out the best solution for your individual financial situation.

When is it useful to call in the expertise of an advisor? To determine that, as yourself these questions:

 

What Are Your Goals?

What is the goal that the investor is aiming for? Is it an extra, sort of a hobby to generate some extra money when successful, with no harm if it fails? Or is investing part of a long-term financial plan which your financial situation depends on to a large extent?

In the latter, limiting risk and guarding safety are important. There the advisor comes in: a professional can outline a path for the future around your financial possibilities and wishes, selecting the right investment products and their risk levels.

Do you want to build in financial safety for your pension? The advisor can compose a portfolio with weighted risks for the timeframe towards retirement. Or do you want to generate extra money on a shorter term to pay down a mortgage or to speed up repayment? Then the advisor can help you select investments that take more risk to find higher returns.

 

Do You Have Enough Time?

Do you have time available to manage investments and are you willing to spend that time on that task? Or would you rather spend that time on something else? In that case, use the time of an expert. That will cost you money, but the chances of achieving higher returns driven by expertise versus what you would gain by doing it yourself with too little time and attention, are higher.

Investing takes time and effort and can only be successful if you invest enough time and effort in it. Of course, that is no guarantee, but if you don’t do that, the chances of success are no more than a lucky shot. Doing it all by yourself only makes sense when you do it properly. In all other cases, let a professional have a look.

 

Do You Have Enough Knowledge?

What do you know about investing? Do you know about stocks, bonds, funds, macro-economic trends, companies and their characteristics? Or are you prepared to gain that knowledge? If so, go ahead. If not, then use the knowledge a professional advisor already has.

A well-equipped professional advisor knows the different types of investment products, their characteristics and their risks. That is the basis for exploring the options that suit your personal financial situation best.

If you lack knowledge, you can not match that, and thus you likely can not match the return potential. You would overlook or misjudge products or strategies and end up with a less than optimal investment portfolio.

 

Do You Want a Second Opinion?

Even when you tick all the boxes to manage investments on your own, consulting an advisor is a good way to get a second opinion to test your ideas and decisions. When you have laid out a strategy and built a portfolio, it could make sense to have an independent expert shine a light on your efforts.

Also, the more your financial situation depends on your investments and the more crucial the financial goals are, the more an advisor can add value to your financial strategy.

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Robert van den Oever  Robert van den Oever is Research Editor of Morningstar Netherlands

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