Most individuals who are exposed to investing know its importance and how savings combined with investments can offer long-term financial security. However, many people cannot decide whether to plan and act upon the investments by themselves or seek the help of a financial advisor. Given the wide variety of investment avenues available today, investors are often confused about where to invest. Many times, investors take investment decisions that prove costly instead of beneficial in the long run.
So, should investors seek the help of a financial advisor while taking investment decisions, or does it make sense to learn about various investments and Do It Yourself (DIY)? Here, we will try to explain the key benefits and disadvantages of each of these approaches for investors to decide which one will be apt for them.
What does a financial advisor do?
Financial advisors or financial planners help individuals chalk out a financial plan to achieve the following goals:
- Paying off a home loan
- Funding children’s education
- Adopting tax efficiency as per income
- Explore alternative investment avenues
- Risk management
- Financial backup plan
How do financial advisors charge fees:
- Fee-only
A fee-only advisor charges either a fixed rate or a percentage of the assets managed on behalf of the client. This can range around 1%.
- Transaction-based
Some financial advisors, especially stock market brokers, charge a commission on buy/sell advice that they offer their clients. Other financial advisors who recommend different financial products also charge for the advice given.
Benefits of hiring a financial advisor
Here are some of the pros of hiring a financial advisor:
- Making the right choice
Since financial advisors adopt a professional approach to selecting the right investment for an investor, it can have positive long-term benefits. This is because the choice of investment is based on the calculation of risk, returns, preference, financial goals, and available funds.
- Reference of past performance
Investors can check for references on the past performance of a financial advisor before hiring the services. This can help in setting expectations about services offered.
- Limited risk
Financial advisors can help in limiting risk by weighing the overall portfolio exposure against the investor’s risk appetite.
- Tax efficiency
An investor can bring tax efficiency to his/her portfolio by hiring financial advisor services.
DIY approach to investing
DIY investing involves self-identification of investment avenues, investing in them, and monitoring progress. It requires a sufficient understanding of various investment formats, approaches to investment, cost factors involved, and also methods of performance measurement.
Benefits of DIY investing
Here are some of the pros of DIY investing:
- Avoid hard-selling
A DIY investor can invest in avenues as per his/her needs instead of going by the sales target of financial advisors.
- Low expenses
It involves lower fees, mainly investment-related, as a DIY investor does not have to pay advisory fees.
- Access to more options
With DIY investing, investors can access a range of investment options available in the market, such as mutual funds, foreign stocks, digital gold, NFTs, PPF, NPS, etc. However, it is important to note that DIY investing requires an investor to understand the different investment options, and the fees associated. This way, they can accurately estimate the investment returns.
- Better learning
Through the DIY approach, one can learn anything about investments, especially how to plan, the process involved, the timeline, and returns calculation. Additionally, investors can also learn how the markets function, the different types of securities available, how to build a portfolio, etc.
Is DIY investing approach risky?
Although DIY investing may seem easy, here are some of the questions that investors must ask themselves before adopting it for financial planning and investing:
- Is it the first time you are adopting a DIY investing approach or do you have experience?
- Ask yourself whether you have the time to conduct detailed research?
- Are you confident and competent to take investment decisions yourself?
- Can you afford to face financial loss with your DIY investment decisions?
DIY investing does not involve any fees because an individual is primarily handling his/her finances to be invested or saved. However, if one adopts it without sufficient knowledge about different avenues, it can prove costly due to the higher risk of investment and non-familiarity with the process/approach.
Conclusion
A DIY investment approach offers an investor freedom of choice and lowers costs, but at a certain degree of risk. With a financial advisor, one can explore a range of investment alternatives to achieve financial goals efficiently. Additionally, a long-term association with a financial advisor can ensure better suitability of investment decisions to the investor’s objectives. If one is not well-versed with the art of financial investment or how markets work in general, it is best to opt for a financial advisor until one gains sufficient comfort.
FAQs
In general, it can cost anywhere between 10 to 50k to hire a financial advisor who will design, execute, and monitor investments for an investor in India. This cost can change as per the level of the individual’s income and investment expectations.
A wealth manager helps in preserving and growing an investor’s wealth, whereas a financial advisor is responsible for managing investments and day-to-day financial planning to help achieve an investor’s long-term goals.
If you have sufficient knowledge of the stock markets, especially in fundamental and technical analysis, you can begin investing in stock markets on your own. Financial advisors can help investors who lack such knowledge of the markets.
Yes, you can directly invest in mutual funds through a good online mutual fund platform. You can do so after researching a variety of funds available, risk-return dynamics, and investment time horizon.
Financial advisors who are equipped with sufficient knowledge of taxation can help investors in saving taxes through appropriate financial planning.
