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Alternatives to having a financial advisor: How to build wealth without one
Financial advisors can provide objective and educated support for reaching your wealth goals. Still, according to the latest surveys, plenty of Americans aren’t working with a professional advisor.
Common reasons people choose to go it alone financially include a strong preference for independence, the perception that advisors are expensive, and a lack of perceived need for professional help.
Whatever the reason, the decision to forgo an advisor is valid. It does, however, come with the responsibility for research and learning. When you have no expert to guide you, mastering a few basic money skills can help you reach your financial goals faster and with less stress.
To set you up for confident, advisor-less money management, let's explore the alternatives you have and the skills needed to build wealth with each one.
Two alternatives to a financial advisor
There are two primary alternatives to retaining a financial advisor. You can use a robo-advisor to help manage your money, or you can choose your investments yourself.
Learn more: What is a financial advisor and what do they do?
No. 1: Robo-advisors
Robo-advisors are automated investment programs designed to suit common financial goals. Typically, you complete a questionnaire and, based on your answers, the service provider recommends one of its investment programs. You then deposit money into an account and it is invested according to that program's rules.
Learn more: Robo-advisor: How to start investing right away
The advantages of robo-advisor accounts
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Investing is managed for you. You provide the funding but make no investing decisions.
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The fees are lower. Robo-advisor fees usually range from 0.25% to 0.90% of your account balance annually, or a low monthly fee. Human advisors normally charge around 1% or more.
Learn more: How much does a financial advisor cost?
The disadvantages of robo-advisor accounts
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You may not be able to ask questions. Some robo-advisor services do not include access to a human advisor.
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The investing strategy may not suit you. Robo-advisors address common levels of risk tolerance and common financial goals. If your situation is unique, the service provider may not have an investing program that aligns with your needs. For example, you may want to retire in your 40s. Or, you may have just launched a business that requires you to invest conservatively in the short term.
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Robo-advisors only handle investing. Many financial advisors do more than handle your investments. They can provide guidance on budgeting, planning, life insurance, and taxes too.
Learn more: Questions you should ask your financial advisor
No. 2: Managing money yourself
Managing money yourself also has pros and cons.
The advantages of self money-management
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You won't pay any advisory fees. You may, however, pay trading fees to your brokerage.
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You have flexibility. When you are making the decisions, you have the freedom and flexibility to invest however you would like.
The disadvantages of managing your own money
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You have no guidance. As with a robo-advisor, the do-it-yourself approach offers no access to an expert who can field questions and concerns.
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Your strategy may be inconsistent. Operating without professional guidance is potentially more problematic when you are making your own investing decisions. Without an expert available, there is a greater chance you will stray from a consistent investing strategy. Inconsistent decisions can impede your long-term wealth creation.
Learn more: How to start investing: A step-by-step guide
3 skills for building wealth with a robo-advisor
Whether you use a robo-advisor or manage your portfolio yourself, three strategies can contribute greatly to your success: budgeting, maximizing your time in the market, and automating the process.
No. 1: Budgeting
Creating a budget and living into it are prerequisites for successful investing. Your budget defines how much you should invest and in what cadence. And, when your budget balances, you minimize the risk of having financial emergencies that require cash you don't have. Avoiding these scenarios is critical because they can force you to liquidate investments early. This usually limits your time in the market and undermines your long-term return potential.
No. 2: Maximizing your time in the market
Maximizing your time in the market lowers risk and increases returns. This is because volatility in the stock market decreases over longer timeframes.
Learn more: Get up to a 3% IRA match with a Robinhood Gold account
Consider these two facts: Many times, the market has lost or gained double digits in one year, but it has never lost value over 20 years. Staying invested for decades gives you the best chance of making money.
This is why legendary billionaire investor Warren Buffett has said his favorite holding period is forever.
No. 3: Automating the process
Automating your investing has several benefits:
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Establishes commitment. Setting up automatic transfers into your brokerage account requires a commitment to your wealth plan. Ideally, the money transferred in would be automatically invested into assets you select — similar to how 401(k)s work.
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Removes emotion. Trading decisions driven by fear or greed often do not produce the results you want. Automated trades are mechanical, not emotional.
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Implements dollar-cost averaging (DCA). DCA is the practice of making small, periodic investments rather than one large investment occasionally. DCA minimizes the risk of poorly timed trades and can contribute to a lower average cost per share when stock prices are rising. The lower your cost basis, the greater the opportunity for gains.
Learn more: Is this a good time to invest in Bitcoin?
Creating your own portfolio
The three steps above position you for success with a robo-advisor. If you plan to manage the investments yourself, you additionally have the job of choosing investments. Even if you know nothing about stocks or investing, this does not have to be complicated. You can begin with a simple portfolio and add complexity as you gain confidence.
A simple portfolio may have two positions: a stock fund and a bond fund. Buffett has this approach specified in his will. The will states that funds left to his wife should be invested 90% in an S&P 500 index fund and 10% in short-term government bonds. Any investor can replicate this approach for easy diversification and wealth building.
Note that the allocation of 90% stocks and 10% bonds is aggressive. If you prefer lower volatility or are just starting your investing career, less exposure to stocks is appropriate. Historically, a 60/40 split between stocks and bonds has been popular, since this formula balances growth potential with stability.
Wealth on your terms
Can you grow your net worth without a financial advisor? The answer is yes — assuming you are willing to learn and implement a few basic money skills. Mastering the art of budgeting, maximizing your time in the market, and automating your portfolio can put you on a course to a wealthier future.
