Financial Advisor vs. Self-Investing

Self-investing means managing your own investment decisions without the guidance of a financial advisor. While this approach may save on advisory fees, it could come with hidden costs, including missed opportunities or increased risk. Financial advisors can help optimize returns, manage risk and improve tax efficiency. We’ll explore the key differences between financial advisors and self-investing, and how to decide which approach is right for you.

A financial advisor can help you create a plan for reaching your financial goals.

Self-Investing Basics

Self-investing means that an individual invests money into the stock market making their own investment decisions. This is the way most people decide to go, especially those that do not have a high net worth.

According to recent data from The Harris Poll for Intelliflo, fewer than one-third (32%) of people regularly went to a financial advisor for advice. A somewhat larger number (38%) said they currently worked with a financial advisor when asked for a poll of 2,300 people that Harris did for Northwestern Mutual.

Instead of using paid financial professionals, investors cited a number of other no-cost sources they went to for information, advice and guidance in making investing decisions. A survey of financial advisors conducted by SmartAsset found that free online financial content was the most popular source of information used by their clients. This was also true of people who weren’t working with paid advisors.

Investors questioned in the Harris polls listed several specific sources of information used for investing, including:

• Themselves
• Family members
• Spouses and partners
• Social media
• Blogs
• Podcasts

Using a financial advisor may be getting more popular. The Northwestern Mutual-sponsored survey found that 15% of respondents said they didn’t have a financial advisor before the pandemic. However, they were now working with or planned to start working with one.

The trend may be most pronounced among younger people. The Intelliflo survey found 71% of Gen Z respondents and 72% of Millennials strongly or somewhat agreed that there were financial topics they wanted advice on without knowing where to turn.

Financial Advisor Basics

Financial professionals who advise individuals on investing may go by a number of titles. These include financial advisor, investment advisor, wealth manager and financial planner. They may or may not have specialized training and certifications attesting to their expertise.

According to recent data from the Bureau of Labor Statistics, about 257,200 people work as personal financial advisors helping people manage their money and plan for their financial futures. Their work involves meeting with clients, discussing their goals, assessing their risk tolerance, explaining investment options and recommending or selecting investments. Advisors may also help with planning to pay for education or retirement. They can also help monitor and adjust investment portfolios to reflect life changes or market evens.

Personal financial advisors median annual earnings amounted to $94,170, according to BLS. Fee-only advisors are paid only by the clients they advise. Fees often are calculated as a percentage, typically 1% percent, of the value of the client’s assets they are managing. Other advisors may charge clients nominal or no fees. They instead get part or all of their compensation as commissions or other payments from providers of investment products, such as mutual funds and annuities.

Using a financial advisor tends to offer significant benefits, including higher investment returns on average. Studies by Vanguard and Fidelity found investor-advised portfolios generated 3% and 1.8% percent more per year, respectively, after accounting for the costs of hiring an advisor. SmartAsset’s survey also found advisors were helpful in increasing diversification, reducing risk, managing taxes, planning for retirement, estate planning and, most important of all, creating a holistic financial plan.

Self-Investing: Pros and Cons

Self-investing appeals to many individuals who prefer a hands-on approach to managing their finances. According to an Intelliflo survey, one of the top reasons people avoid hiring a financial advisor is the belief that they don’t have enough assets to justify the cost. However, trust is also a major barrier; many investors are simply hesitant to let someone else manage their money.

Pros of Self-Investing:

• No advisory fees: You won’t pay management or planning fees, which can save money over time, especially with lower balances.
• Full control: You maintain direct control over all decisions, giving you the freedom to choose investments that reflect your goals, interests, or personal values.
• Satisfaction and learning: Many self-directed investors enjoy the learning process and take pride in managing their portfolios.

Cons of Self-Investing:

• Time-intensive: Monitoring the markets, rebalancing, and staying up to date on financial news can require a significant time investment.
• Lower average returns: Research shows that DIY investors often underperform professionally managed portfolios due to emotional investing or poor diversification.
• Lack of tax expertise: Without professional guidance, you may overlook tax-saving strategies, like tax-loss harvesting or asset location.
• Risk exposure: Without a formal risk assessment or plan, your portfolio may be exposed to more volatility than necessary.

This tool provides a side-by-side look at your projected net worth with and without an advisor, helping you weigh the potential tradeoffs of advisor fees.

Working With a Financial Advisor: Pros and Cons

Although financial advisors offer a wide range of services, many Americans still choose to go it alone. This may be due to perceived high costs or uncertainty about finding a trustworthy advisor. That said, data shows that professional financial advice can improve portfolio performance and enhance overall financial well-being.

Pros of Using a Financial Advisor:

• Improved returns: Studies have found that individuals who work with financial advisors often achieve higher long-term returns due to disciplined investing and portfolio optimization.
• Comprehensive planning: Advisors offer more than just investment advice — they can help with budgeting, debt management, insurance needs and retirement planning.
• Tax and estate planning: A good advisor can help minimize tax liability and create a legacy strategy that aligns with your estate planning goals.
• Risk management: Advisors can assess your risk tolerance and create a diversified, balanced portfolio that aligns with your financial objectives.

Cons of Using a Financial Advisor:

• Loss of control: You may have to relinquish some decision-making authority, which can be uncomfortable for those who prefer a DIY approach.
• Fees: Depending on the advisor’s compensation model, you may pay a percentage of assets under management (AUM), a flat fee or hourly rates. These costs can add up.
• Trust concerns: Some investors are cautious about transparency or potential conflicts of interest, especially with commission-based advisors.

When to Self-Invest and When to Hire an Advisor

If your finances involve a single retirement account, a straightforward budget and no major tax decisions beyond filing a standard return, self-investing is a reasonable choice. You can build a diversified portfolio with a few low-cost index funds, automate your contributions and check in once or twice a year to rebalance. The decisions at this stage are not complicated enough to justify paying someone else to make them for you.

Once your income crosses into higher tax brackets and you have money in multiple account types, the decisions stop being simple. Choosing between Roth and traditional contributions, deciding which account to hold which investments in, and timing tax-loss harvesting across taxable and retirement accounts all require coordination that gets harder to manage on your own. If you are leaving money on the table through missed tax strategies and do not have the time or knowledge to identify those opportunities, the cost of not having an advisor is already higher than the fee you would pay one.

Retirement planning is where professional help pays for itself most clearly. Social Security timing, withdrawal sequencing, required minimum distributions, Roth conversion windows and Medicare premium management all interact with each other. Getting one of those decisions wrong can cost tens of thousands of dollars over your lifetime, and unlike a bad stock pick in your 30s, there is no time to make it back. If you are within ten years of retirement and have not modeled how all of your income sources work together, that is a strong signal to bring in an advisor.

Life events that change your financial picture overnight also warrant professional guidance. An inheritance, a divorce, the sale of a business or the death of a spouse all introduce decisions that are time-sensitive, high-stakes and often irreversible. A self-investor who was managing fine the week before may suddenly face questions about stepped-up cost basis, trust funding, beneficiary redesignation or splitting retirement accounts in a settlement. These are not situations where learning as you go is a safe option.

The most practical approach is to match the level of help to the level of complexity. Self-invest when the decisions are simple and the cost of a mistake is small. Hire an advisor when the tax, retirement or estate planning decisions become too interconnected to manage confidently on your own. Some people cross that threshold at 35 when their income spikes. Others cross it at 55 when retirement planning gets serious. There is no single right age or asset level. The right time is when the financial cost of getting it wrong exceeds what you would pay someone to get it right.

Bottom Line

While most investors don’t use financial advisors and practice self-investing, going to professionals for investment advice is becoming more common. Those who use financial advisors typically get higher returns and more integrated planning, including tax management, retirement planning and estate planning. Self-investors, on the other hand, save on advisor fees and get the self-satisfaction of learning about investing and making their own decisions. Be sure to weigh using a financial advisor vs. self investing before deciding on your financial plan forward.

Tips for Investing

• If you’re not sure you’ll make the wisest investment decisions on your own, a financial advisor can help put your mind at ease. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
• For many people, the best approach is using both. Let an advisor handle the plan and the big decisions, but learn enough about investing to follow along and ask the right questions. You do not need to be an expert, just an informed participant. If you are looking to broaden your portfolio, here are 13 investments to consider.
  

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