According to a Vanguard study, advisors can add approximately 3% in net returns for their clients’ portfolios.  While that sounds impressive, there are other value propositions that cannot be measured in the form of returns. For example, the peace of mind associated with having a knowledgeable professional guiding you along the path to financial freedom conveys tremendous value, saving time, stress and effort. Additionally, financial advisors can create personalized financial plans, the foundation needed to build a portfolio that works for your goals, within your time horizon and in accordance with your risk tolerance.
The section below illustrates some of the value-added services provided by financial advisors that can be measured and quantified:
A primary responsibility of a financial advisor is to ensure the client is invested so the expected return is commensurate with the level of risk they are willing to assume. While this sounds straightforward, this needs to be balanced with a client’s goals, ensuring their investments realistically allow the client to reach their documented milestones. The proper asset allocation is unique to each client, identifying how much of the portfolio to invest across different asset classes. Attaining the right allocation mix and ensuring proper diversification is a fundamental component of financial planning.
Given the proliferation of financial products available today, there is an increased importance on selecting the right security. This includes selecting assets for the portfolio in the most cost-effective manner. The advisor can compare expense ratios, portfolio turnover and tax characteristics to minimize the total cost to the investor, all of which can help improve the net return. Regardless of investment performance, the advisor can still create value through cost minimization.
As the individual investments in the portfolio generate different returns over time, the initial asset allocation slowly shifts out of proportion. This plays a more prominent role in bull and bear markets, where one asset class fares considerably better than others. It can be hard for investors to trim their positions in better performing assets, but given the importance of the initial asset allocation process, it is prudent to stay the course. The advisor removes emotion and remains disciplined, encouraging the investor to rebalance and maintain the initial risk characteristics the portfolio was designed to operate with.
The common investor allows emotion to drive their financial decisions. Emotion is a compelling force, but emotion-driven decisions often produce inferior results when compared to rational decisions. It is tempting to chase the returns of a hot technology stock deemed the next big thing, and equally appealing to panic and sell when market turmoil unfolds. An advisor can insert himself into these decisions, serving as a behavioral guide and preaching commitment to the long-term, rational plan.
Like fees, taxes are an important component when seeking to optimize net returns. Asset location is a tax mitigation strategy, placing emphasis on how to allocate assets across taxable and tax-advantaged accounts. Smart asset location can reduce overall taxes by placing income producing assets in tax-deferred or tax-free accounts and directing more tax-efficient securities into taxable accounts. More importantly, the value gained from this strategy compounds over time.
Many individuals only focus on the aggregate value of their investment accounts, failing to appreciate the impact that a smart withdrawal strategy can have on their terminal wealth. Like asset location, this strategy aims to reduce taxes by deferring them as long as possible. The same Vanguard study found that advisors can generate an additional 1.1% annual return by providing efficient withdrawal advice, without assuming any additional risk. This is accomplished by accelerating spending from taxable accounts and maintaining the benefits of tax-advantaged accounts for as long as possible.
While the above value propositions focus on investment returns, even more advantages are available by working with an advisor and within a comprehensive plan. The accessibility of a financial expert to provide prudent financial advice cannot be underestimated. The peace of mind knowing you have a financial professional charting your path can be invaluable, and so can the trust implicit from working with a fiduciary. Other benefits include financial education, a more enjoyable retirement and financial freedom. Please refer to the “Our Services” category in the “What We Do” section for a comprehensive list of valuable offerings a CFP® professional can provide.