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Rethinking the Value of a Financial Advisor

The Allure of Certificates of Deposit (CDs)

With interest rates on the rise, certificates of deposit (CDs) have become an attractive option for savers and investors. A two-year CD, for instance, can offer a seemingly low-risk, guaranteed return of over 5%, with no fees. This might lead some to wonder: why pay a financial advisor 1% of your assets per year when you can earn a higher return with a CD?

The Limitations of a CD-Only Strategy

However, relying solely on CDs may not be the best approach for achieving your financial goals. A trusted financial advisor can create a personalized asset allocation strategy that provides liquidity, flexibility, and risk management throughout various stages of your life. CDs are just one tool an advisor may use, but allocating your investments across different types can be more effective in managing risk.

The Importance of Asset Allocation

Studies have shown that proper asset allocation is key to protecting you from over-exposure to any single sector, investment, or risk factor in changing environments or at different life stages. Even retired individuals, who may be suited to conservative investments, still face the risk of outliving their assets and need an asset allocation that addresses this.

The Comprehensive Value of a Financial Advisor

Advisory fees can represent a worthwhile investment, as an advisor delivers a comprehensive plan that manages your assets holistically, factoring in Social Security, taxes, risk management, estate planning, and other aspects of your financial life. While it’s true that you might save 1% by investing in a CD without an advisor, studies have shown that an advisor’s fee often pays for itself, generating an estimated 3% of net gains or more.

The Risks Associated with CDs

While CDs appear to be a low-risk option, they are not risk-free and still expose you to risks such as:

• Reinvestment risk: the possibility of not being able to reinvest at the same high rate when the CD matures
• Shifting promotional rates: banks and credit unions often advertise promotional CD rates that expire after irregular terms and are automatically reinvested at standard rates
• Call risk: brokerage CDs may be redeemed early by the issuer, reducing your expected return
• Inflation and real returns: the real return on your CD’s nominal rate may be closer to 0% if inflation persists at current levels
• Liquidity needs: CDs can tie your money up for months or years, making it difficult to access your funds if unexpected expenses occur

Finding the Right Financial Advisor

A knowledgeable advisor can help you navigate these risks and create a personalized plan to achieve your financial goals. When searching for an advisor, consider factors such as their approach to asset allocation, risk management, and comprehensive planning. Don’t be afraid to ask questions and interview multiple advisors before making a decision.

The Bottom Line

While CDs may seem like an attractive option, they are not a replacement for the value that a financial advisor can offer. A holistic approach to managing your wealth can increase your chances of achieving your financial goals. By considering the limitations of a CD-only strategy and the comprehensive value of a financial advisor, you can make informed decisions about your financial future.