The Added Value of Financial Advisors
By Mike Desepoli, VP of Heritage Financial Advisory Group
As financial advisors we are often asked whether it is worth the cost to hire a financial advisor. I know, very ironic. After all, there is a cost to make you money. People say they can listen to the news to find out where and how to invest, so, “Wouldn’t I be better off just keeping that fee for myself?” That is an excellent question with an answer that depends on many factors.
Good financial planning decisions extend well beyond where and how you invest. Two major research efforts have attempted to quantify how good financial decision making can enhance one’s lifetime standard of living. It is important to understand what this research means, because this may not always equal a higher portfolio return in the short term. Financial advisors have a range of tasks they manage for clients, and how well they do it can add to the bottom line of your portfolio.
The research identifies how good decision making can enhance sustainable lifetime income on a risk-adjusted basis. The ability to spend more than you could have otherwise can be interpreted as meaning that the assets earned a higher return net of taxes and fees to make that spending possible.
Recent research conducted by financial giant Vanguard took a closer look at the value a financial advisor can add in real percentage terms. Their research indicates that overall, the estimate for value added by an advisor annually is 3%. While there are many different aspects of the financial planning process, they found that advisors add value in 3 key areas.
Constructing a well-diversified portfolio that is both tax and cost efficient is one of the ways a financial advisor helps increase your investment returns. They will also help make sure you stay diversified, and don’t fall victim to the temptation to put all your eggs in one basket. Many do it yourself investors find themselves chasing the latest hot stock, usually at the tail end of a long run. Investors without a plan will ultimately buy high, sell low when they run out of patience, and repeat the process into oblivion. Having a well-constructed portfolio accounts for just over 1% of the overall annual return.
Your advisor has the ability and the time to evaluate your portfolio investments, meet with you to discuss your objectives, and help get you through tough markets even when your emotions try to get in the way. All of these factored together potentially add value to your net returns over time. The single greatest cause of failure in the investment markets can be attributed to emotional decision making. It is no secret that people are emotionally with their money. We work so hard for it who can blame us. However, allowing your emotions to cloud your judgement and decision making is sure to drag down your portfolio. Work with a financial advisor who will keep you calm, cool, and collected even when the chips are down.
This part of the job entails making regular changes to your portfolio to help reduce risk. It also involves helping clients navigate withdrawals in a way to help limit the taxes they will pay. Many investors incur taxes that could have otherwise been avoided or delayed had they navigated their withdrawals differently. It is very important to understand the taxable status of money that you are transferring or withdrawing from your account. If you are dealing with a retirement account, it is imperative to know if the funds are pre or post tax. We’ve come across many folks in our travels that created a taxable mess by simply being uninformed. If you don’t know, ask your financial advisor or accountant.
Heritage Financial Advisory Group is a Long Island based Financial Advisor that specializes in investment management and financial planning. We work primarily with families, entrepreneurs, and Doctors to create financial strategies that have a lasting impact. For more information, say hello to our team of professionals.
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