If you ask me, my services to my clients are priceless, but I know that’s not a very satisfying response. The true answer for your family of how much return on investment you get from a financial advisor will, of course, depend on your specific situation.
Here are some thoughts on how to answer this question for your family:
- How much is at stake? When there is more at stake, mistakes cost more. And clients with more money are often targeted by advisors who are motivated to sell you great products that serve their company better than they serve you. If you find yourself in situations like these, it might be worth paying for some truly independent advice.
- Have you saved for 30 years and are now contemplating how to shift from accumulating wealth to consuming wealth?
- Did you just inherit uncle Lou’s big estate that he always wanted you to have?
- Did you just win the lottery?
- Do you have a history of bad experiences with financial matters? Are you more worried than most folks about financial news and changes in financial markets? If so, you might be prone to make emotional choices that can be extremely costly. This could make it worth more to pay for some truly independent advice.
Historically, investor behaviors such as overreacting to financial news can be expensive for families. This cost is often described as the Behavior Gap.
- Do you pay a lot of taxes in a normal year? If so, then the way you save and invest can make an important difference in your year-end tax bill and in the overall performance of your investments. This could make it worth paying for some good advice.
- Do you have a lot of different accounts? The more places you have money, the more statements there are to review, more account fees to pay, more investment choices to make and to monitor, and more chances for a mistake or oversight that could cost you money. If you have some accounts like these you might want to pay for some truly independent advice:
- Bank savings
- IRA
- Roth IRA
- Old 401(k)
- Current 401(k)
- Online investment account
The Vanguard Group, a pioneer in low-cost investment products, recently did a research study to measure the benefit of getting financial advice. They found that the benefits to investors can be more than 3 percent each year. Considering that a great financial planner will typically cost you about 1 percent per year for the assets you place under their care, that’s a great return on investment.
| The Vanguard Group Estimates Added Value of Financial Advice | |
| What an Advisor Can Do. | Typical value added to the client’s investments. |
| Selecting a suitable mix of investments for client goals. (Asset Allocation) | Important, but hard to measure -- 0 |
| Selecting cost-effective investments. (Expense Ratios) | 0.4% |
| Rebalancing to the target allocation. | 0.35% |
| Behavioral coaching. | 1.5% |
| Asset Location. (What money is in which accounts.) | 0.75% |
| Spending Strategy. (Withdrawal order.) | 1.1% |
| Total return versus income reinvested. (How dividends and interest are manage.) | Important, but hard to measure. -- 0 |
| Total potential value added | More than 3.0% per year |
Source: Vanguard: Putting a value on your value: Quantifying Vanguard Advisors’ Alpha
But where can you find this great advice?
I suggest you start by locating a CERTIFIED FINANCIAL PLANNER™ professional.
If you meet with a planner who is always an advocate for the client– a fiduciary advisor – and only works for the client – a fee-only advisor – you can be confident that the financial advice you get is focused on your best interests and is a good fit for your complete situation.
CFP® professionals take a multi-faceted approach to your financial planning process that includes budgets, risk protection, retirement planning, investment management, taxes and estate planning. All these related aspects of your financial life are what really matter when it comes to reaching your goals.
A CFP® professional can help you create a financial plan that is driven by your goals and priorities and addresses all aspects of your financial life. With a big-picture approach, you will be better prepared to understand your options at every step along the way.
Yes, I am a CFP® professional. I’m always a fiduciary and I only work on a fee basis. And yes, I’m still taking on a few great families to be part of my financial planning practice.
If this article has you ready to get to work on your financial plans, contact my office at rdunn@dunncreekadvisors.com. I am always happy to meet with people who are working on their financial goals. Dunncreek Advisors does not provide legal or tax advice, nor is this article intended to do so.