DIY Investing vs. Working with an Advisor: How to Decide

As you accumulate wealth, one of the most common questions is whether to manage your investments or work with a financial advisor. In today’s blog, we’ll explore the pros and cons of each approach and highlight considerations as your wealth grows.

Do-it-yourself (DIY) investing has become increasingly popular with the rise of online brokerage platforms, easy access to information, and the ability to trade with minimal fees. Many people find the idea of managing their own money empowering. However, it’s not without challenges, especially as your wealth and financial responsibilities grow.

What’s involved with DIY investing?

Let’s look at various reasons why DIY investing might be right for you: 

• Lower Costs: When you invest on your own, you eliminate the need to pay advisor fees, which can save money over time. With minimal management fees, every dollar saved remains invested, allowing you to keep more of your returns.
• Full Control Over Investment Choices: When you act as your advisor, you can make your own decisions and change your strategies as you see fit. This control can appeal if you’re confident in your investment knowledge and enjoy keeping up with market trends.
• Access to Research and Trading Tools: Today’s brokerage firms offer various tools for independent investors, including research reports, portfolio analyses, and performance tracking. For investors willing to put in the effort, these resources can be valuable in guiding decisions.

Now, let’s look at the reasons why DIY Investing may not be the right choice for you:

• Time Commitment: Managing investments is time-consuming. Regular research, monitoring market trends, rebalancing portfolios, and tax planning are all time-intensive tasks. Finding the time to manage investments effectively can be challenging for someone with a busy schedule or family responsibilities.
• Knowledge and Skill Gaps: DIY investing requires a solid understanding of finance, tax laws, risk management, and long-term planning. You may need help with complex situations, such as retirement planning, estate considerations, or tax-efficient withdrawals, even with some knowledge.
• Risk of Emotional Decisions: Markets can be volatile, and managing your investments alone can lead to emotional decisions, like panic-selling during market downturns or impulsive purchases. This emotional element can derail long-term financial plans and reduce potential returns.

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The Pros and Cons of Using a Financial Advisor

Buffalo Grove financial advisors can help bring structure, expertise, and accountability to your financial life. This can be especially valuable as your wealth and financial responsibilities grow, and the need for comprehensive planning becomes more prominent.

Here are various reasons people elect to use a financial advisor:

• A financial advisor brings extensive knowledge to retirement planning, tax strategy, estate planning, and risk management. As your wealth grows, so do the complexities of managing it, making an advisor’s expertise increasingly valuable.
• Working with an advisor saves time by offloading research, planning, and strategy decisions. This is particularly useful if you’re busy with your career or family and lack the time or inclination to delve into every financial detail.
• A financial advisor provides an outside perspective, which can help you avoid emotional decision-making. This objectivity is especially valuable during periods of market volatility, where an advisor can provide reassurance and encourage sticking to your plan.
• Advisors don’t just focus on investments; they take a holistic approach to your financial life, helping you create a strategy that accounts for retirement, education savings, and other goals. They can also assist with tax-efficient strategies, saving you money over time.

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Here are reasons why working with a financial advisor may not be the right fit for you: 

• Fees and Potential Costs: One of the most significant drawbacks of using a financial advisor is the cost. Advisors typically charge a percentage of assets under management (AUM), hourly rates, or flat fees, which can impact your overall returns.
• Loss of Control: With an advisor, you delegate decision-making to some degree. While most advisors work collaboratively with clients, some may feel uncomfortable with reduced investment control.
• Finding a Trustworthy Advisor: With over 650,000+ financial advisors in the United States, finding a reliable advisor who aligns with your goals and charges fair fees requires research and due diligence.

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Understanding how financial advisors are compensated

Here’s a breakdown of common compensation models and what they might cost you if you have $500,000 in assets.

1. Percentage of Assets Under Management (AUM)

This is one of the most common models in which advisors charge a percentage of the assets they manage for you. Fees typically range from 0.5% to 1.5% of AUM annually.

Example: If you have $500,000 in assets and your advisor charges a 1% AUM fee, you’d pay $5,000 annually to the advisor. This fee is typically deducted from your account quarterly.

2. Flat Fees

Some advisors offer a flat fee for specific services or an annual retainer. This approach can work well if you seek a comprehensive plan without ongoing management.

Example: A flat fee could range from $2,000 to $7,000 annually for clients with complex needs or around $1,000 to $3,000 for basic planning.

3. Hourly Fees

Some advisors charge hourly fees for those who want advice on an as-needed basis. This can be a more affordable way to get professional guidance without committing to ongoing management fees.

Example: Hourly rates typically range from $150 to $400. If you need ten consultation hours, this could amount to $1,500 to $4,000.

4. Commission-Based

Commission-based advisors earn money through product sales, such as mutual funds or insurance products. While this model can sometimes mean lower upfront fees, be cautious of potential conflicts of interest, as advisors may recommend products that earn them higher commissions.

Example: Suppose you invest $500,000 in a mutual fund with a 5% front-end load (a common commission type on some mutual funds), meaning 5% of your initial investment is taken as a commission before the rest is invested.

Calculating the Commission:

• 5% of $500,000 = $25,000
  • A 5% front-end load would cost you $25,000 upfront. This amount is deducted from your investment, leaving $475,000 invested in the mutual fund.

Remember that mutual funds with a front-end load are just one example. Other commission structures include back-end loads (fees charged when you sell), level loads (ongoing annual fees), or even no-load funds, which have no sales charge but may include other fees. Understanding these costs is essential, as they directly affect your investment returns over time.

Closing Thoughts

Choosing between DIY investing and hiring a financial advisor depends on your goals, skills, and comfort level with financial decision-making. The need for professional guidance may also grow as your wealth grows, helping you protect and make the most of your assets. Ask yourself if you have the time, inclination, and knowledge to manage your wealth during your working years and retirement. Whatever choice you make, ensuring that it aligns with your needs and long-term goals will set you toward a secure financial future.

Before you make this critical decision which can impact your financial future, ask yourself these questions:

1. Do I have the time to manage my investments? 
2. Am I comfortable making complex financial decisions? 
3. Do I understand the impact of taxes on my investments? 
4. How will I handle market volatility? 
5. Can I objectively assess my financial needs and goals? 
6. Do I have the expertise to manage my investments in different economic climates? 
7. Am I prepared to handle estate planning and legacy goals? 
8. Would I prefer to spend my time elsewhere?

Contact the Buffalo Grove CFP® professionals at SGL Financial to discuss your investment strategy.