A financial plan is a comprehensive evaluation of an investor’s current and future financial state by using currently known variables to predict future cash flows, asset values and withdrawal plans. The CFP® Board of Standards explains financial planning as six-step process:
- Establishing and defining the relationship with the client
- Gathering client data
- Analyzing and evaluating the client’s financial status
- Developing and presenting financial planning recommendations
- Implementing the financial planning recommendations
How Much is a Financial Planner Worth?
If you work with a financial planner you will incur fees/expenses. Keep in mind, if you do not work with a planner you still incur fees. But is working with a planner worthwhile?
Vanguard, which is the world’s largest mutual fund company and is known for catering to “do it yourself” investors, admits that working with a financial advisor pays off. The conclusion of Vanguard’s study, “Quantifying Vanguard Advisor’s Alpha” is that working with an advisor increases client’s investment returns by 3%.
This study mentions there are five ways financial advisors produce extra returns for their clients. The most significant value-added component is behavioral coaching. Said another way, the discipline and guidance of an advisor produces an extra 1% to 2% in net return. You may be saying 2% is not much. To put it in perspective, 2% of $250,000 is $5,000 and compounded over five years is $276,020.20. If you were working with an advisor providing 5% in net return your total value would be $319,070.39 compounded over five years.
A good advisor emphasizes the importance of behavioral coaching because investors are emotional. Too many investors chase returns and make irrational decisions which bring down investment returns. In my previous article, “There is a Better Way! – Why No One Talks About the Stock Market the Right Way,” explains how our tactical portfolio management process is based on time-tested evidence and analysis and not emotions.
The importance of sticking to a regular investment plan is critical for our clients to achieve their financial goals. If clients focus on the long-term and are consistent to a steady investment plan their return is increased up to 1.5%. Our planning process is built upon the client understanding that they have a plan is place to protect their investment portfolio and grow it at the same time.
Vanguard’s study also mentions that another 0.45% can be generated in returns when fees are reduced. Vanguard is known for its low fees and of the five major components on how an advisor can improve a client’s financial life fees/expenses rank fourth on the list. In other words, low fees are not that important in order to achieve an investor’s financial goals. Fees are only an issue in the absence of value. Therefore, investors do not need to make their investment decisions based on fees. Expenses need to be fair and just for the client and there needs to be investment value to the assessed fee. However, the driving force in order for clients to achieve their goals is a disciplined and time tested approach to investment management.
Vanguard’s study does not address the additional services we offer. For example, I refer clients to a competent CPA/accountant for tax planning advice and/or an estate planning attorney for proper legacy planning. How much more value does this bring to a client’s financial situation? Well above 3%, stated within Vanguard’s article. The Proverb which states: “Without counsel plans fail, but with many advisors they succeed” is true to this day.