Thanks to a relatively recent innovation known as the Internet, the investing world has changed. The average person now has the ability to buy and sell shares in a company with or without the help of an advisor. Today, if you want to invest, you can open a brokerage account through a company like SoFi Invest or Robinhood and start in a matter of minutes.
On top of being able to invest on your own, there’s an entire subsection of the Internet dedicated to teaching you how to invest. This very article is part of an ecosystem of information to help you become a more successful investor.
As with the evolution of any industry, new questions arise as the investing industry continues on a rapid, technology-driven evolutionary path to bigger and better things. One of the big questions in the field of investing today is whether you should use an advisor or pick your investments on your own.
You can buy and sell stocks. You can get involved in funds, ETFs, and bonds. At the end of the day, you have access to the same investments an advisor would choose for you. Because no one knows your needs quite like you do, is an advisor really necessary? Or will a bit of online research make you a more effective leader of your own investment activities?
Let’s take a closer look.
What Investment Advisors Do
Investment advisors make investment decisions on behalf of their customers and adjust portfolios over time to meet predetermined goals.
Without an investment advisor, it’s up to you to decide things like what assets to hold in your 401(k), how much exposure you want to specific industries, and what percentages of your money to invest in which vehicles.
Of course, the incredible recent technological advancements have greatly disrupted the investment advising industry as well. Today, there are two main types of investment advisors — human advisors and robo-advisors.
Traditional investment advisors bring an element of humanity to investing, while robo-advisors make decisions based on detailed algorithms designed for investors that fall into specific categories. Of course, human advisors and robo-advisors have their own sets of pros and cons, but that’s a topic for a different article. You can learn more about the difference between human advisors and robo-advisors here.
Nonetheless, whether you decide to work with a human, a machine, or both, your investment advisor’s job is to assist you in meeting your long-term financial goals.
Pro tip: If you’re looking to hire an investment advisor, you can use a free tool from SmartAsset. Answer a few questions and they’ll match you with three vetted advisors in your area.
Working with an Investment Advisor: Pros & Cons
There are obvious benefits to working with a professional in any endeavor. You can go to your favorite home improvement store and get everything you need for a beautiful kitchen remodel, for example. With enough research, trial and error, and sweat equity, you could probably do the remodel yourself. But if you’re like most Americans, you’re going to hire a contractor before picking up a hammer.
Regardless of the subject area, an expert is an expert for a reason. They have made it their mission to understand their field of expertise and be able to provide their knowledge to customers as a service to them.
When it comes to something as important as your finances, there are plenty of reasons to consider bringing an investment advisor to the table. Nonetheless, there are always negatives to consider.
1. Informed Investing
Informed investing is often the difference between profits and losses. Sure, you can throw money into whatever investments you’d like, but making investment decisions without adequate understanding of what you’re investing in can lead to tremendous losses.
Most people aren’t stock market encyclopedias. The average American couldn’t tell you what futures are, the difference between small-cap stocks and penny stocks, or the tax benefits that tax-advantaged accounts bring to the table.
Everyone goes to school to learn how to be a productive and profitable member of society, but the average high school doesn’t teach you what to do with the money once you’ve earned it. Although some courses in college do, the vast majority do not. So there’s no shame in not understanding the world of investing. As a society, we simply haven’t placed an emphasis on this type of education.
Investment advisors have.
Human investment advisors spend several years in school to develop their skills. Robo-advisors use algorithms to make investment decisions on your behalf. Both offer a way to make informed investment decisions, and any investor — no matter their account balance — now has access to excellent advisory services thanks to technology.
2. Advisors Save You Time
Making adequate investing decisions doesn’t have to be done by an expert. However, it can be a time-consuming task.
If you’re a beginner, you likely know little to nothing about investing. So, before you’ll be able to make your first investment, you’ll have to do research to educate yourself not only about particular companies or funds but about the ideas underpinning investing as a whole.
Taking advantage of services provided by an investment advisor almost completely takes your time investment out of the equation. If you work with a robo-advisor, all you’ll need to do is deposit money in your account, choose your appetite for risk, and let your money work for you. Working with a human advisor is similar but often involves the addition of an hour-long conversation or so to determine your specific needs and goals.
Today’s world is driven by efficiency, and there’s a clear argument that working with an advisor is the most efficient way to invest. Ultimately, investment advisors offer returns without the investment of your time.
3. Protection From Mistakes
Whether you’re learning how to cook, build, or invest, there will always be a learning curve. While you work to learn your new skill, you’re going to make mistakes. The problem with making mistakes in the stock market is that they can be quite costly.
Investment advisors can be looked at as a form of insurance. They’ve already learned about the stock market, climbed the curve, and made their way to the top.
Mistakes that the average investor would generally make can be avoided entirely by working with investment advisors. Knowledge is the most valuable commodity, and advisors have the knowledge when it comes to the stock market.
While some robo-advisors like SoFi Invest and M1 Finance are free to use, some of them charge fees. When it comes to human advisors, all of them charge fees.
The reality is that expertise is often expensive. Think about it: Why do doctors, lawyers, and engineers get paid the big bucks? Because these careers require a high level of knowledge. So too does a career as a financial advisor.
Financial advisors have a responsibility to make sound investment choices for their customers. With responsibility comes risk. If advisors make the wrong moves, those moves become a liability.
As such, financial advisors’ fees often match their level of skill and willingness to take on the liability. In other words, advisors — especially of the human variety — can be quite costly.
2. Loss of Control
As a human being, you likely enjoy control, especially when it comes to your money.
However, when you work with an investment advisor, you’re essentially giving up a lot of control. Although you ultimately have the final say with regard to what you invest in and how much you invest, if you go against your advisor, you’re paying for a service that you’re not benefitting from.
If you want full control over the moves you make with your investment dollars, you’ll have to invest by yourself. Then again, giving up control isn’t always a bad thing. If you ever have a surgery, you give complete control to your doctor in hopes of a better medical outcome than trying to do it yourself.
Consider investment advisors to be the surgeons of the investing community. By giving them complete control, you’re more likely to experience a better end result.
3. Asset Limitations
Finally, investment advisors generally stick to a specific bucket of assets and investment vehicles. After all, it’s impossible to expect a single person, or even a team of advisors, to know what’s happening across every stock, mutual fund, ETF, and other investment vehicle on the market.
Even robo-advisors have asset limitations. For instance, Betterment, one of the best robo-advisors on the market today, has a specific bucket of assets that it chooses from when building your portfolio.
If you want exposure to an asset your advisor doesn’t offer, you won’t gain that exposure unless you go out and buy the asset for yourself. However, owning assets outside of the portfolio you have with your advisor defeats the purpose of having an advisor in the first place.
Making Investment Decisions on Your Own: Pros & Cons
As is the case when working with an investment advisor, there are obvious benefits to making your own investment decisions.
Investment advisors can cut into your profits, limit you to specific financial instruments, and take the control completely out of your hands. Not to mention, when you take the time to research your own investments, you have a better understanding of how your money is working for you.
Nonetheless, there are also serious drawbacks to consider when it comes to trusting yourself with your investment dollars.
1. Detailed Understanding of What Your Money Is Doing for You
When you work with an investment advisor, the investor tells you what is best for you with regard to your money. They may say XYZ stock is a great stock in the airline industry, but what does that mean? What is XYZ doing that’s different from other companies? What potential does the company have that provides a meaningful impact on your investment portfolio?
When you do your own research, you earn a detailed understanding of where your money is going and the value proposition offered by the companies supported by your investment decisions.
This better understanding means you’ll know when to expect what, and you’ll have the ability to react personally when catalysts take place in the market, whether positive or negative.
2. No Advisor Commissions
Nobody works for free. Investment advisors are no different. Becoming an investment advisor isn’t easy. It takes quite a bit of schooling and state exams. Of course, that means their services aren’t cheap — at least not human advisors’.
Conversely, you’re not going to charge yourself anything to choose your own investments. By making the decision to buy and sell stocks or other financial instruments on your own, you avoid the middleman markup.
3. No Limit on Assets
When making your own investment decisions, you’re not limited to a predetermined bucket of assets chosen by the best brains at Betterment or some other robo-advisor. Instead, the entire world of financial instruments is at your fingertips.
That means you have access to derivatives, penny stocks, funds, and other assets most advisors simply don’t make available to you through their services.
1. You’re at the Mercy of the Learning Curve
Investment advisors make good money for good reason. Understanding money and investing to the extent that these professionals do is extremely difficult.
As with anything in life, investing comes with a learning curve, and beginners are expected to make their fair share of mistakes. Unfortunately, these mistakes can be quite costly.
For example, let’s say a beginner investor takes a liking to a penny stock and decides to dive in with a $1,000 investment. However, that investor didn’t realize that the penny stock barely trades.
When the price of the stock starts falling, the investor runs to sell their shares, but there’s nobody out there to buy them. Now, the investor is left holding a falling knife that no investor in their right mind is going to take off of their hands, leading to tremendous losses.
These mistakes generally aren’t made by investment advisors, but they’re the cost of learning the ropes when you decide to take control for yourself.
2. It’s Easy to Get Pointed in the Wrong Direction
There are tons of articles online that will tell you how to invest, provide strategies, explain how the market works, and more. Unfortunately, not all of these articles can be trusted. Worse yet, some of the online content about investing has ulterior motives, such as trying to convince readers to buy a particular investment or product.
Today, anyone can start their own website and claim to be an expert in any area. Not all sites have an editorial process to vet information, and not all websites provide the best advice. You have to be cautious of investing “gurus” who promise a quick path to riches, but who make their money selling information products or courses rather than by making sound investments in the market.
The bottom line is that it’s easy to get pointed in the wrong direction when you first get started. That only increases the potential for costly mistakes an investment advisor would generally avoid.
3. The Investing Process Can Be Overwhelming
Investing may seem simple, but doing it properly takes a bit of work. Until you start learning how things work and making winning moves in the market, making your own investment decisions may be overwhelming.
Feelings of being overwhelmed often lead to emotions like fear and greed, which are extremely dangerous when making decisions in the market.
How to Decide Between Working With an Advisor & Making Your Own Investments
The first part of the decision has to do with the amount of money you have to invest. If you’re just starting out with under $1,000 to invest, your decision is essentially made for you. Most advisors won’t work with customers who have less than $1,000, and many require $10,000 or more as a minimum starting balance.
Once you have $10,000 to invest, it may be time to consider looking for the help of an investment advisor. To make this decision, ask yourself the following questions:
- What’s Your Understanding of the Market? Did you build up from $500 to $10,000 by making smart moves in the market? Have you already gone through the learning curve? Do you believe your understanding of the market is strong enough to avoid costly mistakes? If so, you may not have a need to work with an investment advisor.
- Do You Need Help Picking Investments? Do you feel like you’re great at deciding which stocks, bonds, funds, and other vehicles are best for your portfolio? If so, you may not need an advisor. However, those who would appreciate guidance on which assets to purchase could benefit greatly from hiring a pro.
- Do You Know How to Diversify? Investment advisors aren’t just picking stocks. They also help diversify your portfolio to protect you from losses. If you believe you know how to diversify your portfolio, you may be able to invest on your own. However, if you need help deciding what percentage of your money should be invested where, an investment advisor can prove to be quite valuable.
The decision to invest with or without a financial advisor is ultimately a decision about whether or not you trust yourself with your hard-earned money. If you’re willing to risk your money on your knowledge of the market, you can do that just fine on your own. If you’re not confident, you’re most likely to benefit from professional assistance.
If you decide to invest on your own, always remember that knowledge is power. The more research you do, the better understanding you will have of the moves you make, and the better your returns are likely to be.
Do you invest on your own or work with a financial advisor? What was the deciding factor when it came to making this decision?