If I plan on investing in index funds, do I need a financial advisor?
I am planning to invest in Vanguard's index funds. Their advisory services charges 0.3% of your assets per year. I am planning to invest $50,000 no matter what. I am also going to be expanding my portfolio as per Vanguard's advice. Should I opt out of their service that they provide so that I have more funds to invest with?
Just to invest in index funds, you don't need a financial advisor, but that assumes you have come up with an asset allocation that is appropriate for your circumstances. Generally, asset allocation will be determined by your time horizon, investment experience, risk tolerance, and need (if any) for current income. If you have several decades ahead of you and can deal with periodic market corrections of 10%-15%, you may consider going ahead on your own. Even so, you need to be aware of market valuations both in the U.S. and abroad. The U.S. markets are valued toward to the top end of their historic range. By contrast, the relative valuation of emerging markets is about 50% lower. Developing markets are about one-third lower. With that said, I suspect that the best bang for the buck will be found in Vanguard's Total Intermational exchange-traded fund. If you have a more limited time horizon, you may want to supplement that with Vanguard's Total Bond Market Fund. I don't know that even with the modest fee they're charging what more Vanguard can do for you.
Your logic is sound. Less money towards advisory fees means more money towards investing.
Financial advice is more than just investment advice, however. What makes sense for you will be highly dependent on your personal circumstances and needs.
What you will want to do is contact your advisor/service provider and find out exactly what services are provided/included for the annual fee. You might find that the services offered are quite valuable to you, and the fee is, therefore, a bargain. On the other hand, after learning what you would be paying for, you might feel that the dollars otherwise allocated to the fee would be better spent on stand-alone services from other providers or directed towards further investment.
In any event, it would be difficult to make an argument for paying even a fraction of a fraction of a percent in fees if you don’t know exactly what you’re paying for. So, if nothing else, get your hands on as much information as you can before you pay anyone anything.
If you do your own research, you can build an "asset allocation" porfolio yourself if you subscribe to the buy-and-hold approach. If you decide to take this approach, Vanguard Indexed ETFs are a great way to go. A very easy way to do this is to look at the "lifestyle" funds like the 2035, 2040, or 2050 funds based upon your age & risk tolerance, then look at their allocation and simply replicate.
I am not recommending this approach as I believe there are better ways to invest, but if you go the buy-and-hold approach, you do not need an advisor in my opinion.
Hope this helps and best of luck, Dan Stewart CFA®
It sounds like you are on autopilot with your investments for the foreseeable future.
That being said, what a financial advisor can, and should, do for clients goes well beyond just advice on your investments. They can save you the time and energy involved in managing your own finances, prevent you from making costly mistakes, and last but certainly not least, build a financial plan based on your goals that will guide your financial decisions. I could see any one of these services being worth .30% – if each one is worth that to you, then it’s a no brainer. It all depends on how much value you personally get out of the relationship. Just for reference, a typical advisor charges closer to 1% of assets for these services; our clients pay our fees with happy dollars as they feel the value we provide to their life is worth multiples of what we charge.
I recently had a friend in a similar situation (investing in index funds on autopilot) ask me this same question. He has more money than he will ever spend, doesn’t react emotionally to market swings, invests in a globally diversified index fund portfolio that he is comfortable with, and doesn’t mind taking the time to manage his own finances. For him, it was probably not worth it to use their services.
Perhaps you could give it a try and see if they can create enough value for you to justify the fee? If they don’t, opt out and save the fees.
It is pretty easy to create a diversified portfolio. You can certainly do this yourself. Or you can use Vanguards Target Date or LifeStrategy funds which match your goal.
Where an advisor traditionally adds more value is in the areas of tax planning, financial planning, keeping you on course when markets go berserk, helping with myriad of other financial decisions that come up in life (insurance, government or employer benefits, etc.), taking a deeper dive into your investment goals and providing education regarding investing and risk, and coaching and encouraging you along the way to achieving your goals. I am somewhat skeptical that this kind of advice is being provided by an internal Vanguard advisor. These services are more likely provided by an individual CFP, who would typically charge a higher percent of assets than what Vanguard offers (in return for the higher level of service). In short, if all they are doing is picking a portfolio of funds for you, you can probably do as well yourself with a little research.