It’s now possible to invest for basically nothing. On one side of the cost spectrum are firms like Vanguard and Betterment, who are commoditizing low-cost investing. On the other side are the old-school brokers, potentially selling expensive investment and insurance products to clients.
Somewhere in the middle of the cost spectrum is the comprehensive, fiduciary financial planner. This seems like the “sweet spot” of value for most families. So what value can a fiduciary advisor provide?
Structuring Your Finances
Where should you start when it comes to organizing your finances? Maybe you have accumulated a 401(k) or two after changing jobs. Maybe you have a broker or advisor you don’t really trust, some cash you don’t know what to do with, and a home equity line where you don’t remember the interest rate.
A big part of an advisor’s value is to help you stay organized. A basic step is to create a net worth statement to help you view everything in one place. Some advisors go one step further and include your investment information on a secure portal, where you can see daily whether your plan is on track. From what to do with all those paper statements, how to protect your passwords, and planning for income sources in retirement, adding structure can add major value.
Quantifying Savings & Spending Needs
Saving too little in your working years or spending too much in retirement can lead to some serious pain, no matter your investment return. Everyone’s financial plan is different, from spending needs, savings levels, and capacity to take risk.
As a result of these goal-setting conversations, savers know how to set themselves up for success. Retirees are armed with the knowledge of how much they can reasonably spend, while staying flexible to fund other goals like gifts to family and charity.
Fees are being compressed in the investment world, which is fantastic news for investors. But the old-school financial industry was designed to obscure fees.
Part of a fiduciary’s job is to minimize costs and make sure your fees are worth it. That means converting existing investments to the cheapest share class, or moving into low-cost, tax-efficient funds. It means analyzing your life insurance and annuities to see if there are lower-cost alternatives available or if a 1035 exchange makes sense. And it means no earning incentive, instead using a fee structure that aligns with your best interest, like an asset-based or flat fee.
Comprehensive advisors have their eyes on your full financial picture and can help you think through the costs outside your portfolio, like mortgage/HELOC rates, bridge financing for short-term loans, and income and estate taxes.
There are risks inherent to any strategy. By working with an advisor, you can gain a second set of eyes to help manage the risks in your portfolio.
|Invest in the market||Stocks fall|
|Concentrated stock position||Stocks fall, company management fails, industry dynamics change|
|Invest in bonds||Inflation, interest rates rise|
|Sit in cash||Inflation, opportunity cost|
|Annuity or pension||Inflation, insurer fails, company fails|
|Spend down portfolio||Outlive your money|
|Retire early||Bad returns in early years|
(Note: this is not all inclusive)
Portfolio risk is only one part of the equation, as there are additional risks outside your investments. Changes to your health, unforeseen accidents or liabilities, and shifts in estate tax law can all be aided by proper insurance planning. And a fiduciary advisor (who doesn’t sell insurance) can provide an objective view of your needs.
Finding Tax Opportunities
When is the last time your advisor asked to see your tax return? Part of good portfolio management is managing capital gains, planning for fund distributions, analyzing the value of tax-exempt versus taxable bonds, and tax loss harvesting.
With our complex and ever changing tax code, there are a range of opportunities clients may not know about. Investors frequently miss tax-savings opportunities in giving to charity, planning for Roth IRA conversions, and maximizing retirement savings.
For wealthy clients, minimizing estate tax and ensuring a smooth transition of wealth between generations can be a big concern. The most successful advisor-client relationships often involve the entire family, working with the kids even if they aren’t investing yet.
The truth is that our clients are smart enough to figure a lot of this stuff out on their own if they spent the time. But they see the value of partnership. They want an objective sounding board where they can think through ideas, someone who will educate them about what options make sense, and someone who will hold them accountable along the way.
That means behavioral coaching and guidance to stay the course when the market gets hectic, and someone to help think through life’s uncertainties in advance.
Investment Portfolio Design & Implementation
Traditional investment services, which used to be the core of financial advisor’s value, have become cheaper and easier than ever to access. However, there is still plenty of value in portfolio planning. Nowadays, technology can be used to our advantage, monitoring for rebalancing opportunities to manage risk, using asset location to reduce taxes, and making sure clients are earning a competitive interest rate on their cash.
The core investment services of asset allocation and selecting investments to assemble your portfolio are still crucial, as taking the wrong level of risk can lead to major regret later.
Investors frequently get pitched on illiquid or esoteric investment opportunities; a good advisor should help you understand when it makes sense to get fancy or keep it simple, and help set expectations on what types of returns to expect.
Perhaps most importantly, working with someone may help you avoid some of the common investment mistakes that can put your portfolio at risk, while designing an investment strategy you can stick with long-term.
Are financial advisors worth the money? The truth is it depends on your needs. A client who is extremely organized, familiar with investments, and tax conscious can still gain a lot from behavioral guidance. Likewise, an even-tempered, patient investor can still gain a lot of value from cash flow and tax planning. For most families, a planning relationship that provides good, actionable advice can be invaluable, especially in today’s low-cost investing world.