Financial Advisor vs. Self-Investing - SmartAsset (2024)

Self-investing is the act of making your own investment choices instead of hiring a professional, such as a financial advisor. This can help you save on professional fees but it could cost you. Working with a financial advisor can increase returns, reduce risk and help you better manage your taxes. Most people choose to invest on their own, without turning to a financial advisor, but using a financial advisor is becoming more common. If you don’t feel comfortable investing on your own, a financial advisor can help you with important decisions and be financially prepared for the future.

Self-Investing Basics

Self-investing means that an individual looking to invest money into the stock market does not use professional guidance and instead makes their own investment decisions.Self-investing is the way most people decide to go, especially those that do not have a high net worth.

A 2022 survey of 2,000 Americans conducted by The Harris Poll for financial advisor software firm Intelliflo found 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 2021 poll of 2,300 people 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 in 2021 found that free online financial content was the most popular source of information used by their clients as well as by people who weren’t working with paid advisors.

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

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, but 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, including financial advisor, investment advisor, wealth manager and financial planner. They may or may not have specialized training and certifications attesting to their expertise.

The Bureau of Labor Statistics in 2021 counted 257,200 people working as personal financial advisors helping people manage their money and plan for their financial futures. The 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 and 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, and 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

One of the reasons people don’t hire financial advisors, according to the Intelliflo survey, is that they think they don’t have enough money to make it worthwhile. However, a SmartAsset survey of advisors captured a number of advisors saying that trust was also a major blocking point.

Among the pros of self-investing are the absence of advisor fees, the satisfaction of making one’s own decisions and the freedom to invest as desired. Among the cons of self-investing are the time and energy required, lower returns (on average), less familiarity with tax laws and regulations and less attention being paid to risk reduction.

Financial Advisor Pros and Cons

Despite their apparent advantages, financial advisors haven’t yet won over the bulk of the investing public. From the perspective of investors, using a financial advisor also poses benefits and disadvantages. Among the pros of using a financial advisor are better returns, a holistic financial plan, more diversification, tax planning and estate planning. Among the possible cons are fees and trust issues.

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.

Tips for Investing

©iStock.com/FG Trade, ©iStock.com/GlobalStock, ©iStock.com/Anchiy