Why choose a financial advisor who charges a fee when you can invest in a certificate of deposit (CD) with a higher return and no fee? That’s the argument made by Chris, a retiree who believes that CDs are a better investment option than working with an advisor. However, while CDs may seem like a low-risk and guaranteed return opportunity, relying solely on them may not meet all of your financial needs and objectives. Here are a few points to consider before dismissing the value of a financial advisor and opting for CDs alone.
Firstly, it’s important to determine whether a CD aligns with your specific goals, objectives, and needs. While a CD can be part of a financial advisor’s strategy, diversifying your investments across different types of assets is more effective in managing risk. Studies have shown that proper asset allocation based on your personal situation is the best way to protect yourself from over-exposure to any single sector, investment, or risk factor. This is especially relevant for retirees, who face the risk of outliving their assets. A CD-only strategy may not adequately address longevity risk, unexpected expenses, and rising healthcare costs.
Secondly, the relationship between a client and advisor extends beyond just investments. Advisors provide comprehensive plans that consider factors such as Social Security, taxes, risk management, estate planning, and other aspects of managing your assets. While it’s true that advisors charge a fee, this fee covers the value they bring to the table. According to Vanguard, an advisor can generate an additional return of 3% or more relative to an individual investor. This additional return more than offsets the advisory fee and provides clients with the added benefit of wealth planning beyond just investments.
Additionally, while CDs may appear low-risk, they are not risk-free. They expose you to reinvestment risk, where you may not find a similarly high rate available when your CD matures. There is also the risk of shifting promotional rates, where promotional rates expire and you may be locked into a longer-term CD at a lower interest rate. Brokerage CDs also carry the risk of being called, meaning the issuer may redeem your CD early if they anticipate interest rate declines. Furthermore, the real return on a CD is affected by inflation, and a CD alone may not preserve your purchasing power if inflation persists at current levels. Lastly, CDs may tie up your money for a specific term, making it difficult to access funds in case of unexpected expenses.
In conclusion, while CDs may seem attractive in the current interest rate environment, relying solely on them may not be the best strategy for everyone, especially retirees. CDs do not replace the value that a financial advisor can offer, and they do not eliminate all risks. The holistic approach that an advisor takes to managing your wealth can increase your chances of achieving your financial goals. It’s important to consider all aspects of your financial situation and consult with a trusted advisor before making investment decisions.
