Employing a financial planner is not an inexpensive proposition, so the obvious question is, “Are they worth it?” Morningstar and Vanguard have each undertaken studies to quantify the impact good investment advice can have on your experience as an investor. Their methods differed, but both studies concluded that a good fiduciary advisor can enhance the annual returns on an investor’s portfolio by 1.5% or more. These added returns could easily amount to as much as $200,000 during a 25-year period for a retirement portfolio.
In addition, a big part of the enhancement comes from behavioral coaching or, as Bert Whitehead puts it, “…helping you avoid terrible mistakes.” This is especially critical at times of major disturbances in the markets, such as the Great Recession of 2008. If your advisor talked you out of selling your diversified portfolio at the bottom of the market (March of 2009), then you captured a 52% increase in value by 2015, instead of locking in your 28% losses by selling everything in a panic and going to cash at the bottom. The Vanguard study of “Advisor Alpha” estimates the average annual value of behavioral coaching at 1.5%, but when you need it most, it is clearly worth much, much more.
The Vanguard study also estimates the value of other aspects of investment advice. These include setting an appropriate asset allocation, cost effective implementation with low-cost funds, disciplined rebalancing, tax-efficient asset location and withdrawal techniques, and avoidance of “income investing” in favor of a total-return approach. Vanguard pegs the combined enhancements from these other aspects of best-practices advice to be worth another 1.5% per year.
But what do financial planners actually do for their clients? Well, here are some of the things that Certified Financial Planners™ (CFP®) do for their clients:
- They help you evaluate how well you are preparing for retirement, estimate your retirement income needs, and help you develop a plan to reach your retirement goals.
- They help you assess the risk of your current portfolio and determine an acceptable level of risk for your particular situation. Given your acceptable risk, they determine an appropriate allocation for your portfolio. In other words, how much should be invested in stocks, bonds, or other asset classes and what return you can expect in the years ahead.
- They can answer your questions about which investments may be appropriate for your portfolio. Fee-only planners who act as a fiduciary for their clients will also guide them to the least expensive investments that will meet their goals.
- Many planners help you assess the impact that taxes may have on your portfolio and your overall financial plan, and some will even prepare your tax return. Your tax liability is probably the biggest bill you pay every year. They help lower your tax bill by simply organizing your life in ways that take advantage of key provisions in the tax code. They adjust your plans as tax laws change.
- They also help with many other aspects of managing your personal finances, from setting goals to creating an estate plan, from buying insurance to making charitable donations. They can offer budgeting tips and guidelines for your financial life stage.
- Planners can help you determine appropriate moves for your retirement accounts like 401ks and IRAs. For example, would you be well served by rolling your 401k into an IRA at some point, and what custodian should you use? These types of moves can easily go awry and cost many precious dollars if done incorrectly.
- The best planners provide one additional benefit, whose value is, as they say, “priceless”. They keep you on track and make sure that all those plans you made together get implemented and periodically reviewed.
Many folks want a trusted, objective advisor to look over their shoulders; someone knowledgeable with whom to have frank discussions; someone who will, when the situation warrants it, say, “Don’t do that; not a good idea.” Occasionally an advisor will find that he/she has to tell someone that their goal is unrealistic and needs to be reconsidered. But more often, we get to tell someone that yes, you can spend that money and check that item off your bucket list. Financial planners fill many roles for their clients because we talk with people about some of the most important aspects of their lives, their hopes and dreams.
We strive for objectivity in our advice, but we are not disinterested in the outcome. We want every client to become wildly successful. The fees we charge for independent, objective advice may pay our bills, but the psychic reward of seeing a client prosper stokes our passion for the work we do. We are always careful to remind clients that money is never the most important thing, but it is an inescapable fact of life. Money matters, and navigating your money life with the help of a fiduciary tax-oriented financial planner provides benefits worth well more than their fee.
Authored by fellow Alliance of Comprehensive Planner (ACP) members, Mike Ryan, MBA, CFP® and Chris Currin, CFP®. Alliance of Comprehensive Planners