At some point, most people begin to wonder whether working with a financial advisor would actually improve their financial life—or simply add another layer of cost and complexity to it. Whether you’re early in your career, raising a family, navigating major life decisions, or planning for retirement, it’s a fair question to ask. And while the answer to this question is generally ‘yes’, it does depend on the value you receive from an advisor (both quantitative and qualitative), and the total cost associated with that engagement.
While the ‘value’ of a financial advisor has historically been tied to the returns they get you on your investments, the commoditization of investing has made that piece alone, less valuable. With the advent of low-cost investment products and platforms, combined with efficient markets, there are practically no barriers to building a well-diversified investment portfolio that can track with broader market returns. So how else do financial advisors today provide value?
At the end of the day, a financial advisor should help you bring structure and clarity to your financial decisions—especially as life becomes more complex. However, financial advisors are different and not all service models are created equal. An advisor that will only manage your investment accounts is different than an advisor that will do that plus other things. Make sure you understand what services an advisor will offer, and which ones they won’t. Examples of services that an advisor may or may not offer:
Whatever services are offered, it’s important to ‘look under the hood’ to fully understand what services you will be paying for. By way of example, if an advisor offers ‘financial planning’ services, what does that mean? How do they quantify that segment of their service offering and what does that process look like? There’s a big difference between performing an upfront financial analysis that grows stale over time, verses actively doing financial planning throughout the course of your engagement with the advisor. Or, if an advisor says they offer ‘tax planning’, is this merely an exercise of the advisor looking at your W2 to help you adjust your tax withholdings, or is it a CPA or CFP® professional engaging in an ongoing process of evaluating & helping you implement short run and long-term tax strategies? Understanding what the services look like, and who performs those services will help you quantify the value they offer.
Depending on their service model, the cost of working with a financial advisor, could come in several different forms – a fee based on assets they manage, a retainer model, or paying commissions from products they sell you. You should certainly understand this cost and then ask if there are any other fees associated with their services. Will you pay extra to have them prepare your taxes or build a financial plan? If they manage investments, are there other fees associated with the portfolio, such as transaction fees, hidden commissions, or fees associated with owning any ETFs or Mutual Funds (referred to as an expense ratio)? Understanding how the advisor gets paid and the total cost for their services will help you measure against the value you would receive from their services.
There are two ways to try and answer this question. The first would be to try and quantify the value a financial advisor can provide and then determine if it’s worth the cost of their services. While this is not exact science, recent industry research has consistently shown that working with a financial advisor can add measurable, long-term value to client outcomes. Vanguard’s well known Advisor’s Alpha Study finds that advisors who implement best practices in behavioral coaching, tax efficient planning, portfolio construction, and withdrawal strategies can add up to, or even exceed, 3% in net returns per year, compared to investors who do not receive such guidance. This value is shown to come less from attempting to outperform markets and more from consistent, evidence-based planning and helping clients avoid emotionally driven mistakes—particularly during periods of market stress. While this percentage of added net returns depends on the breadth of services an advisor offers and the fees they charge, the conclusion of the study is that working with an advisor can add value when compared to a DIY approach.
The second way to answer this question is by re-wording the question to: “is not working with an advisor worth the cost?”. While some people experience dramatic financial events that set them back, a majority of households experience smaller missed opportunities that occur over a long period of time. Just as investment accounts experience compound growth over time, missed opportunities have a compounding affect in the other direction. The more years that go by, the greater the negative impact. Not saving enough, overlooking annual tax saving opportunities, allowing short term market events to disrupt your long-term investing goals – these are just a few examples of costly decisions that will have a negative compounding effect as years go by. The value of a good financial advisor can be found in helping you identify opportunities and risks so that you can act on them sooner rather than later.
Obtaining clarity and confidence through partnering with the right financial advisor can alone be worth the price of admission. This is true when times are good – but certainly magnified when life throws you a curveball. Knowing you’re well positioned to face these transitions with an advisor who has walked through them before with other clients, can give you peace of mind and composure that you’ll be able to navigate it well. What your hopefully left with then, is more time, energy, and resources to invest in those things that matter most to you – your family, vocation, and causes you care about.
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