Being one’s own financial advisor has historically been unapproachable for those who don’t have a strong financial knowledge base. Many do not trust themselves to take risks with their livelihoods in the stock market or merely don’t have the time to do the needed research to make sound investment decisions.
Thus, some are drawn to investment vehicles to make decisions on their behalf. One of the biggest trends in personal finance are pre-packaged mutual funds and exchange traded funds (ETFs). For a fee, large firms manage these funds with a variety of different philosophies behind them. These services can be enticing because they are oftentimes actively managed by professionals or follow a diverse index. However, there are drawbacks to outsourcing to fund managers.
Collecting a hodge-podge of mutual funds and ETFs can leave investors overexposed to specific sectors and companies without realizing where each fund overlaps, creating inefficiencies in portfolios. In fact, a significant drawback of mutual funds is their tax implications. Investors bare the tax consequences of trades made within the fund without their knowledge, (SEC, 2024).
Mutual funds and ETFs can only offer a one size fits all solution. Although investors are paying a fee, these managers do not work directly for any specific investor. Managers do not have anyone’s specific life goals in mind when making decisions that directly impact investors. For investors who want to tailor their portfolios to their own specific risk tolerances and preferences, a personal financial advisor is an excellent choice. An adept and experienced advisor can target a select list of high-quality stocks and actively manage those holdings to exactly fit an investor’s tastes. Reducing the number of holdings can mitigate inefficiencies because the advisor knows exactly what each investor’s portfolio holds and how to manage the associated tax consequences and timing. A professional advisor has the expertise to know which prospective holdings are appropriate for which clients. In addition, they have the flexibility to assure that portfolio holdings reflect each investor’s personal preferences and values.
For investors going through a life transition, planning for children’s college, or trying to figure out how to afford a dream vacation to Africa, a financial advisor could be worth their weight in gold.
Work Cited
“SEC.gov | Mutual Funds and Exchange-Traded Funds (ETFs) – a Guide for Investors.” Www.sec.gov, www.sec.gov/about/reports-publications/investor-publications/introduction-mutual-funds#BeforeInvesting. Accessed 9 July 2024.
