Recently I met with a prospective client who was referred to me by another client that I have known for many years. These days most of my new clients come to me this way – by referral.
While most referrals are happy to hire me based on the good word of a friend or family member, I occasionally run into a referral that asks deep and probing questions like the one above.
I love questions like this because they make me think. Truthfully, I also dread them for the same reason. Thinking can be such hard work.
According to the Bureau of Labor Statistics there are 249,400 of us who answer to the call of “personal financial advisor”. Over 74,000 hold the CERTIFIED FINANCIAL PLANNER™ designation, more than 2,100 in Minnesota alone. So the question of why you should hire one of is entirely appropriate.
With the Department of Labor’s recent regulation requiring all advisors who work with IRA and retirement assets to put their clients interest first, the question of why should you should consider hiring a financial advisor is also especially timely.
Every financial advisor has their own way of doing things, of course. Some focus primarily on investment management or product sales. Others provide comprehensive financial planning services. Many offer a combination these services.
Below is a short list of what a good advisor can do for you.
Comprehensive financial planning and wealth management. Planning for long-term goals like college and retirement, doing the right thing with your retirement plan at work, managing your short and long-term tax bill, and making smart choices with insurance, investments and how you spend your money – personal finance can get complicated in a hurry. It’s no wonder that a recent study by Northwestern Mutual found that 58% of Americans believe their financial plans are lacking and over 1/3 have no plan at all.
A comprehensive financial plan helps you determine how much money you need to meet your various financial goals and outlines the specific steps you need to complete to achieve them. Want to send your kids to college? Retire at 62? Avoid estate taxes and probate issues when you die? All of the above? Your financial plan creates the foundation from which you and your advisor can begin to outline the steps needed to reach these and other goals.
Specific recommendations. A plan without recommendations offers little value. It’s like your doctor telling you your sick, but not offering any treatment. A comprehensive financial plan includes specific recommendations regarding retirement, estate planning, tax planning and other specific needs based on the client – strategies for maximizing social security benefits and paying less for college, for example.
Some recommendations such as establishing a tax deductible IRA or retirement plan for your small business may provide significant value right off the bat. Others will prove their value in the future – proper beneficiary designations on retirement accounts or ideas to minimize estate taxes and avoid probate issues, to name a couple.
Regular monitor and review. To work effectively a good financial plan needs to be monitored and reviewed regularly. Just when you get it all figured out something changes. Tax laws, personal circumstances, the economy, the markets … you name it.
Twenty years ago a financial plan was a big, expensive book that sat on a shelf. Today, technology makes it possible for financial plans to be updated daily with current account values, expense tracking, and other tools to help monitor progress towards your goals. As your needs or circumstances change, your financial plan changes as well. Your financial plan can even be pulled up on your smartphone, just in case you were wondering how you stack up to the millionaire next door.
Asset Allocation. Financial planners also add value by constructing investment portfolios designed to meet a family’s long-term goals without taking more risk than necessary. How much should you invest in stocks? What types of stock and bond investments make sense for your goals and risk tolerance? How and when should you rebalance or replace investments? What other threats to your financial security should you be prepared for?
The best advisors work hard to allocate investment portfolios in a way that makes the most sense for their clients’ goals and time horizon, and also for the level of market volatility they can tolerate. They help ensure clients invest the right portion of their savings into the market for the right reasons and stay invested even through the tough times. Proper asset allocation gives clients a better chance to reach their goals without risking more in the stock market than necessary.
Taxes. Unless a financial advisor is also a tax preparer, most don’t prepare personal income tax returns. However, many do add significant value by helping clients be as tax efficient with their investments and in their personal lives as possible. That may involve managing investments for greater tax efficiency, making the best use of tax-deductible IRA or work place retirement plans, utilizing various Roth IRA strategies, or helping clients set up a retirement plan for their small business.
Other tax strategies minimize estate taxes and/or taxes on investment gains, dividends and charitable contributions. For many clients, tax planning may be one the biggest opportunities for your advisor to add value.
Manage overall investment fees. Next to taxes, investment fees and expenses are probably the biggest drag on most investors’ long-term returns. According to Morningstar, the average mutual fund charges about 1.25% to own their fund. Known as the “expense ratio”, this number is disclosed in the mutual fund prospectus and can often be found in public information available online. However, there are also trading and transaction costs that are not disclosed in the prospectus or easily found online. These trading costs can add another 1.4% or more to the cost of owning a mutual fund. Advisors who do their homework can often add value by putting together investment portfolios with below average fees and expenses.
You are not hiring an advisor. You are hiring a team. Most financial advisors in the industry are solo-operators and work in very small offices. Many, however, work with a team and collaborate with other professionals to help them add even more value to their clients. A team-based approach adds value even when the advisor is not available or doesn’t have the expertise to meet a client’s specialized needs.
In my case, I have a staff of two, plus a virtual assistant who manages my event planning and helps with some of my marketing needs. Together we are able to meet our clients’ service needs more effectively than if I were a single advisor. In addition, Focus Financial has a whole team of people that provide support and services to help me help my clients.
Someday you will be gone. You may know as much or more about investments and personal finance as your advisor, but what happens when you are gone? A lifetime of savings can be cut down in a hurry by others who are well meaning, but ill informed as to the best way to handle your estate when you are no longer able to do so.
No one knows how much time we have and when our spouse or loved ones will have to step in and pick up where we left off. Many of my clients were referred to me because they suddenly found themselves in the position being responsible for the family finances. Not everyone is comfortable in this role. It’s a huge benefit when they can work with an advisor that they already know, like and trust, and who has experience with them, their family and what their goals, and concerns are.
Peace of mind. Clients frequently tell me the biggest value they find when working with a financial advisor is the peace of mind in knowing that someone they trust is looking over their finances and partnering with them on the important decisions they need to make in their financial lives. I often take that for granted, but for some clients that’s everything.
Regardless of your reasons for working with a financial advisor, hiring a financial advisor or CERTIFIED FINANCIAL PLANNER™ takes a leap of faith. While there are many benefits, there is no way to guarantee that you will be better off because you hired a financial advisor.
Still, according to an IRI study published in 2014, people who worked with financial advisors were twice as likely to feel confident about their retirement than those who did not. Another study titled The Future of Retirement found that people with financial plans had accumulated 250% more assets than those who without plans. David Blanchett and Paul Kaplan of MorningStar authored a research report titled Alpha, Beta and Now… Gamma, which found that financial planners added about 1.8% of additional total return for their clients each year resulting in 28% higher income in retirement.
For an excellent article from Forbes.com that references these sources and others, click here.
If you are convinced that hiring a financial advisor is right for you, click here. I just might know an advisor who can help you cross the bridge to a confident retirement.