For many financial transactions in life, cost may be the most important factor. After all, once you know that you need a particular tool or you have your mindset on a certain appliance, the only thing that’s really important is where you can find it for the best price.
But when it comes to your long-range financial goals and strategy, the matter of getting what you pay for becomes a bit more complicated—and more important. In other words, measuring the value of a financial advisor and counselor should be more than a simple matter of calculating the expense.
Recent studies drive home the fact that helping clients select, buy, and sell investment vehicles is only a small part—perhaps the smallest part—of the value financial advisors offer their clients. Instead, the most valuable services advisors provide typically have more to do with “coaching” and overall strategies related to investing, spending, and planning behaviors. Here is a list, from a recent report released by the Vanguard Group, of the principal sources of advisor value, in descending order of importance:
1. Behavioral coaching—guidance in adhering to a financial plan and strategy
2. Advising on tax-efficient allocation of assets and use of tax-advantaged accounts
3. Developing efficient strategies for drawing down savings in retirement
4. Access to investment vehicles with lower transaction costs
5. Advice, guidance, and management of disciplined rebalancing
6. Security selection
The Vanguard report suggests that these benefits conferred by working with a professional, qualified financial advisor may add as much as 3% to portfolio returns over time. Certainly, each client’s needs are unique, and the same could be said of the precise value added for each client by the advisor. But the point remains that an advisor’s worth to clients goes far beyond mere consideration of fees.
If you’ll think about it, the order of importance above is almost exactly the reverse of what many investors consider when they think about their financial advisors. This is understandable; for decades, the popular image of “stockbrokers” was of persons who had “hot tips” and got their customers into investments that were supposedly ready to explode on the upside. For many years, the financial industry has been transaction-driven: dependent on somebody selling something to someone. Financial consultants were expected to go out and convince everyone they could of the superior returns the consultant would generate for the client. Over time, of course, relationships built on such unrealistic expectations will almost always prove disappointing, especially for the client.
But this business model is fading away—and justifiably so. More and more, clients are turning to advisors who, rather than trying to sell the client the latest hot stock, are seeking to build long-term relationships founded upon always seeking the client’s best interests above all. To do that, professional advisors must prioritize exactly as the Vanguard study suggests. Our most important job, as trusted advisors, is to help our clients take actions that will lead to long-term success and achievement of their most important goals, whether those include financing a child’s education, funding a secure retirement, preserving an estate for future generations, starting a business, or assuring the availability of necessary health care in later years. To do this, we must be much more than “stock pickers.” We must coach, teach, advise, reassure, and explain. We must help clients overcome their own tendencies to act out of emotion—either fear or greed—and instead lead them to stick to a strategy that we have helped them design, taking into consideration their long-term goals, risk tolerance, resources, and dreams.
A 2013 study by investment research provider Morningstar, Inc. aligns with the concept that “better financial decision-making” such as that outlined above can add significantly to portfolio value. Over time, such “best practices” can be expected to add as much as 29% to retirement assets. Such hard-dollar benefits are certainly significant. But beyond the mathematical value, the benefit of professional, evidence-based financial advice, delivered and implemented in the client’s best interest, goes far beyond anything that can be entered in a spreadsheet or listed on a tax return.
If you’d like to learn more about how our professional, certified advisors can help you build a plan tailored for your specific dreams and goals, we would love to have a chance to talk with you. And to read our recent post, “Tax Strategies 2020 Retirees Should Keep in Mind,” please click here.