Working with a financial advisor can help you make key financial decisions, maximize your portfolio’s returns, and reduce taxes. These are just a few of the many benefits. However, if there are so many benefits to working with a financial advisor, why do many people take the do-it-yourself approach, put money into index funds, and never work with an advisor?
That’s because they don’t know the value these professionals bring.
If you’re on the fence about hiring a financial advisor, we will walk you through the value you’re missing out on by taking the DIY approach to your financial future.
What is the Value of a Financial Advisor?
There’s a lot of buzz around index funds. Invest your money into an index, sit back, and watch your portfolio grow. However, when the markets drop, and you don’t adjust your strategy, you’ll see your portfolio’s value drop.
John Bogle, the founder of The Vanguard Group, created index funds because advisors were not providing value to their clients. Instead, these advisors were seen as being “overpaid” because of the lack of value they created.
Index funds track a broader market, and while they perform well, even Bogle warned about the concentration of index funds being too high at the 2018 Bogleheads Conference.
Financial advisors look beyond index funds and use market indicators to rebalance portfolios and safeguard against losses. A Vanguard study aimed to find the true value of a financial advisor and concluded:
- Advisors can add up to 3% in additional net returns per year
- Added value fluctuates and depends on each client’s unique circumstances
And while many clients are happy with an additional 3% in net returns each year, the value of a financial advisor goes far beyond this percentage. As Vanguard states, advisors can help protect your wealth, increase your wealth, and smooth consumption.
Value Comes in Many Forms
Advisors live and breathe finance, and the experience that they have continues to grow year after year. Making a nice return on investment is always a major goal for investors or someone planning their retirement, but an advisor also helps with:
- Adding guaranteed income to your retirement
- Total wealth allocation, such as Social Security planning
- Boosting tax efficiency through smart asset allocation
- Smart, dynamic withdrawal spending
- Allocating assets based on future spending goals and needs
- Estate planning and other forms of financial planning
- Providing peace of mind
- And more.
If you’re working through your financial future on your own, it’s crucial to know that a one-size-fits-all approach is not a good approach for you. Perhaps you want to travel the world, pay for your grandkid’s education and leave money to charity. Alternatively, you may want to pay off your home, not travel, and don’t need to worry about legacy planning.
Based on just these two examples, an advisor would provide a wealth of information to ensure that your retirement goals can be met.
Decision-making, built upon years of experience, is where the true value of a financial advisor comes out.
Understanding the Value of Better Financial Decision-Making
Financial advisors make recommendations and provide value by helping you make the right decisions with your money. An advisor provides rational decision-making recommendations, such as:
- Reducing risk when you’re nearing retirement
- Maximizing investments as the market changes, even during market downturns
- Etc.
Morningstar conducted a study and found that better financial decisions, on a utility-adjusted basis, helped increase retirement income by 22.6%. For many retirees, this increase means financial freedom and the ability to do things, such as splurge on a vacation or just live a more comfortable retirement.
However, it’s crucial that you work with a financial advisor who looks beyond investments and wants to add value to their clients. Choosing a value-driven financial advisor from the start can help you make smarter financial decisions for your future.
The right advisor will help you with portfolio construction and allocation, wealth management, and behavioral coaching. With that said, an advisor will also provide deeper value by helping you with:
- Encouraging Consistency. Consistency is key with savings, investing, and expenditures. An advisor encourages their clients to put money into their retirement accounts and continue investing consistently. Often, clients either wait too long to start saving and investing, or they are on the right path to financial success, and then something happens. Markets fall, volatility hits an investment portfolio, or something similar comes along and quickly stops the person from being consistent. An advisor helps you stay on track, even when you’re ready to pull out of the market.
- Managing Expectations. Everyone has expectations and behaviors that must be managed, especially in investing. Advisors work through expectations to show investors a clear picture of their financial health and how their decisions will impact their portfolios in the short-term and long-term.
- Asset Allocation. Market movement dictates how a portfolio grows or declines. Through proper asset allocation, it’s possible to combat risk, reach your goals, and adjust to fluctuations as they occur. An advisor that actively manages a portfolio and works on asset allocation can help you adapt your portfolio to meet your goals and manage ever-changing risks.
- Portfolio Rebalancing. Rebalancing works with asset allocation because you’ll likely need to adjust risks over time. A good advisor will help you rebalance your portfolio in a way that manages your risks while also being as cost-effective and tax efficient as possible.
If you work with a financial advisor who focuses on your financial goals as a whole and continually tries to add value, you’ll often be far better off financially than if you tried to follow a DIY approach.
Final Thoughts
A financial advisor can provide immense value to their clients, improve retirement income, and boost net return on investments. However, it’s up to the client to heed the advisor’s advice. Working with a value-driven professional will allow you to maximize your investments, protect your wealth, help you make smarter financial decisions and reach your financial goals.
The key to a successful relationship with an advisor and extracting as much value as you can comes down to choosing the right advisor, communicating with them about your goals, and working together to implement their advice.
Natural behaviors and cognitive bias can cause one to want to ignore key advice from an advisor that costs them money. And while you need to weigh your options and make smart financial decisions, you should consider the advice of your advisor because there’s a reason you hired them: they have the experience you don’t have to make smart financial decisions.
To learn more about how KPN Enterprises can help you with advisory services or to schedule a call, contact us here.
