digest
Short Summary
Main recommendation: Hiring a financial advisor can make sense when delegation is valuable to you, such as when you are uncomfortable with investing, do not want to spend the time managing investments yourself, or want protection against cognitive decline affecting your finances. Ben Felix argues that people keep hiring advisors mainly for non-financial reasons, like peace of mind and trust, rather than for investment performance, noting that low-cost index funds have made it hard for most advisers to outperform a simple ETF portfolio.
Key Points
- Research from Morningstar found that people hire advisors mainly to relieve discomfort with financial issues and to reach specific goals, with behavioral coaching next; non-financial motivations outnumbered financial ones.
- A 2020 study found trust was the most important investor need, followed by self-improvement and knowledge, while investment performance was the least important.
- A 2015 Journal of Finance paper ("Money Doctors") suggests trust in a manager lowers perceived investment risk, letting investors take risks they might otherwise avoid.
- The time cost of managing finances drives delegation: a 2016 study shows investor inertia can be explained by the time costs of managing finances, traded off against job-specific skill building and leisure.
- Delegation's value rises with complexity and declines with age at the time of accessing an adviser: in a related life-cycle model, workers gained about 1.07% in lifetime welfare with early access to an adviser, versus only 0.02% when access started just prior to retirement at age 60.
Details Worth Noting
- Concrete instructions: When choosing an adviser, ask how they are paid. Commission-based advisers face severe conflict-of-interest risk, while fee-based advisers who charge a direct fee for ongoing advice mitigate many of these conflicts.
- Concrete instructions: Ask whether the advisor is held to a fiduciary standard, meaning they must act in your best interest. Canada has no statutory fiduciary standard for advisers, but portfolio managers are highly likely to be held to one by the courts.
- Ask whether the adviser is a fiduciary before hiring, since Canada has no statutory fiduciary standard, though portfolio managers are highly likely to be held to one by courts.
- Self-control problems: One German study found clients with self-control issues who delegated reduced overtrading, which improved performance; another found advice improved savings and stock allocation for low self-control households.
- Financial literacy and advice are complements, not substitutes: more financially literate people are more likely to seek professional help, especially older, wealthier, or more complex households.
- Cognitive decline: A 2024 study using US Health and Retirement Study data linked unawareness of memory decline to wealth losses, mainly in riskier assets like stocks, concentrated in the highest wealth quartiles.
Bottom Line
The decision to hire an adviser is mostly about trust, time, and behavior rather than beating index funds, so the key question is whether delegation is worth more to you than the fees and the conflicts you need to screen for.
