by Harry Sit on March 12, 2014 112 Comments

Should the average investor use an investment advisor? I used to think no, but now I would say yes.

I thought no because investing well isnt that hard on the surface. In its simplest form, you invest in a Vanguard Target Retirement fund closest to the year you will retire. Done deal.

If you cant invest in a Vanguard Target Retirement fund because its not in your 401k, you can mimic it. Look at how much it invests in stocks versus bonds, and how much in the US versus international. You will end up with three mutual funds in your 401k: a US stock fund, an international stock fund, and a bond fund, like this:

How hard can it be?

However, the average investors dont invest that way. My co-workers sitting next to me sometimes talk about their stocks. They talk about when they bought this or that stock and whether its time to sell. When I went camping with a group of people, a woman told the group around the camp fire she switched everything in her 401k account to money market because she thought a crash was coming.

If you ask random people at your workplace whats your asset allocation for your retirement? How many do you think will be able to tell you? If you get to see the investments in their 401k and IRAs, what percentage do you think have a risk-appropriate portfolio thats within plus or minus 10 percentage points of a Vanguard Target Retirement fund?

These average investors will be better off if they use an investment advisor. Not just any random investment advisor, but a good one at an affordable price.

Thats the other hurdle of using an investment advisor. If you dont know where to go, its very easy to find a salesperson as an investment advisor. You cant just go by who appear to be knowledgeable and trust-worthy. When you dont know much, a good salesperson who talk a good talk will appear to be knowledgeable and trust-worthy. Their training makes them master the art of making you trust them.

The best deal in financial advice comes from the Vanguard Financial Plan service. If your household invests $50,000 with Vanguard, you can get a financial plan from a Certified Financial Planner for a one-time $250 fee (free if you have $500k or more with Vanguard).

$250 is very reasonable to have a trained person look over your investments and give you advice. Its reasonable even if you pay the $250 fee every year to keep the plan updated, although its probably good enough to do it once every 3-4 years. Too bad Vanguard isnt marketing this option more prominently. Many people dont know this option exists.

Some may quibble how the Vanguard financial plan isnt perfect. Considering the alternatives for the average investors, I would say its more than adequate. Its better than what the average investors are doing now and its better than what they will likely find if they throw themselves out to the open sea.

If you have $100k or more with Vanguard, you can use the new Personal Advisor Services that charges 0.3% a year. Thats $300 a year or $25 a month on a $100k portfolio. Its less than most peoples cell phone bills. It gets your money invested right and you also get access to a personal financial advisor all year long. In my opinion its the best deal for investing $100k to $1 million .

If you prefer DFA funds, AssetBuilder offers investment advisory service with a low $50k minimum at 0.45% a year. FPL Capital Management charges a flat fee that starts at $1,000 a year.

Once your portfolio goes above $1 million, you have more options, although Vanguards fee at 0.3% per year is still competitive. The fee numbers below are of course subject to change by the respective advisors.

• Cardiff Park Advisors  offers services for a flat fee of $3,000 to $6,000.
• Evanson Asset Management offer services for a flat fee of $2,500 to $6,000.
• Bason Asset Management offers its service at $4,500 per year per client relationship.
• Altiora  charges $6,000 per year for investment planning and management.
• Portfolio Solutions offers its service at 0.37% per year for up to $3 million.

Although most dont like to admit, its very easy to be overconfident in ones ability to resist behavioral mistakes. The hidden cost of such behavior can be many times the investment management fee we pay to an advisor. I think most investors will be better off using one of the advisors mentioned in this post.

In the spirit of do-as-I-say, I started the process of getting a Vanguard Financial Plan .

[Photo credit: Flickr user SalFalko ]

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