After beginning the year at record levels, global events have caused market volatility to jump and equities to fall. The S&P 500 Index is experiencing its first major correction since 2020, so investors are understandably looking to safeguard their assets. Investment firm Charles Schwab says that increased diversification is the key to weathering such an investment climate. However, according to recent research, most self-directed retirement savers just aren’t protecting their hard-earned funds in the right ways. In fact, investors who engage a financial advisor have saved nearly twice as much for retirement as those who don’t. Here’s why.
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Schwab Research Demonstrates the Power of Financial Advice
Taking data from its Preferred Choice Retirement Accounts (PCRAs), a self-directed brokerage account offered within defined contribution retirement plans, Charles Schwab has found that, for the first quarter of 2022, plan participants who work with financial advisors had an average balance of $535,354–nearly twice as much as the $286,008 held by non-advised participants.
Broken down by age group, Schwab analysts found that, perhaps unsurprisingly, Baby Boomers (aged 58 to 75) held the largest balances of all the PCRAs, averaging $520,616. Gen X participants, aged 42-57, held an average of $299,520 and Millennials, aged 30-41, had $102,113.
Of the total PCRA participants, only 19.2% chose to work with a financial advisor, but of those, roughly half of the advised accounts belonged to the Gen X grouping. Baby Boomers held 32.5% of the advised accounts and Millennials held 14.9%.
Notably, working with a financial advisor meant more trades in the last quarter than not, averaging 19.7 trades vs. 12.3 for the non-advised. Furthermore, advised participants had a more diverse allocation of assets and a lower concentration of individual equities.
How Retirement Savers Can Take Advantage
Working with a financial advisor can help savers pinpoint a suitable strategy for their finances, relieving some of the stress associated with working towards a large financial goal like retirement. Given an investor’s risk tolerance, time horizon and other factors, not every investment strategy may prove suitable.
Schwab’s data provides some food for thought. First, advised accounts diversified their holdings, not putting more than 4.05% in any one exchange-traded fund (ETF). Although advised participants held similar equities to the non-advised–Apple stock coming in strong first for both groups–the percentage was slightly lower, 9.37% of advised equity assets in Apple vs. 12.59% for the non-advised.
Advised participants also held a lower percentage in cash, 5.70% vs. 15.71% for the non-advised. While that may protect assets from a dive in market value, timing the market is difficult and holding a greater percentage of funds in cash could reduce the long-term earning potential of an investor’s portfolio. At the same time, advisors seemed to favor a 17.57% mutual fund asset allocation, whereas non-advised participants held 20.10% in mutual funds. According to the data, advised participants appeared to increase fixed-income assets from Q4 2021.
Recent data from Charles Schwab indicates that retirement plan participants who work with a financial advisor can nearly double the amount they save for retirement. Financial advisors seemed to favor a heartier diversification strategy, reducing exposure to individual assets and thereby reducing risk in this volatile market. While non-advised participants seemed to choose similar equities and funds for their investments, targeted financial advice may have resulted in improved portfolio outcomes.
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