If you have investments of any kind you know there are costs associated with owning those investments. In addition, if you’ve been thinking about working with a financial advisor, you also know you’ll pay him or her a separate fee for their ongoing counsel.
The bottom line question you should be asking is this: Will I be better off, net of fees, by working with an advisor than if I try to navigate my planning and investing on my own?
According to a study by financial industry giant Vanguard, the answer is: Yes. Vanguard’s study has determined that financial advisors increase their clients’ investment returns by about three percentage points annually. In particular, Vanguard points to five key areas where advisors produce extra returns.
1. Keeping your eyes on the prize.
The overwhelming amount of financial media we have at our fingertips – some good, some not-so good – can make a lot of investors anxious. When the market fluctuates, they worry that they’re missing out on the latest trend, or that a dip in their portfolios is a permanent crater. In these cases, a good advisor acts as a behavioral coach. For example, during the 2008 crisis, people who worked closely with a financial advisor didn’t sell off all their investments in a panic. Instead, they called their advisor, reviewed their plans, and made the necessary adjustments to weather the storm. According to Vanguard, advisors who help clients stay focused on long-term planning add an additional 1.5% to the overall value of their clients’ investment returns.
Most people know that diversifying your assets is a smart investment strategy. But according to Vanguard, investors who let the pros handle their asset allocation get up to 0.75% more value out of their investments than those who go it alone. At Keen Wealth, diversification is one of the bedrock principles of our preferred investment strategy. Diversifying your portfolio can add a lot of value, but it can also add a lot of complexity. Vanguard believes a professional financial advisor can help you navigate that complexity to maximize your returns.
3. Keeping your fees low.
If you invest by yourself online or through a broker with hidden costs and layers of expenses, you might find yourself buying investment products or services subject to a lot of long-term fees or commissions. Or you might spend more than you should on things like retail mutual funds. Fiduciary advisors, like my team at Keen Wealth, add more value to your investments by reducing or even eliminating those kinds of fees, leaving more money in your pocket – another 0.45% increase in value.
4. Rebalancing your investments.
If your portfolio is diversified to maximize its value, there will be times when you have to adjust how your money is distributed between your various investments. A lot of solo investors just don’t do this, or confuse this concept with less reliable market-timing. These investors are missing out on an additional 0.35-0.40 percent return they’d be getting from an advisor who’s reviewing their portfolios regularly, and looking for rebalancing opportunities.
5. Planning for retirement.
Retirement changes where your money comes from, how you pay taxes on it and how you spend it. An advisor will evaluate your taxable, tax-free, and tax-deferred assets to minimize the taxes you’ll pay in retirement, and figure out a spending and withdrawal plan that keeps your retirement fueled. That can add up to another 0.70 percent increase over folks who try to manage their retirement finances alone.
How huge is 3%?
If you’ve been adding up as we go along, you might be thinking that 3 percent is small potatoes. But if an advisor increases your ROI from 6 percent to 9 percent, that’s a 50 percent increase on your returns. In most cases, even the shrewdest solo investor isn’t going to see that kind of growth without professional guidance.
Finally, don’t forget about the things that Vanguard didn’t measure. Maybe the biggest value that working with a fiduciary advisor can add is in the real and personal relationship that develops between your advisor and your family. An outstanding advisor will understand your family values and, respectfully, hold you accountable to the things you have said you want to accomplish. In addition, that advisor will be there for your family through trying times like an illness, or loss of a spouse. The value of these things could be considered priceless. Working with a fiduciary advisor is about more than maximizing the value of your investments. It’s about personalizing those investments so that they maximize the value you’ll get out of your life, especially in retirement.
So, you’ll decide if your advisor’s fee pays for itself many times over. Many of our clients at Keen Wealth tell me that they consider our fee a worthy investment, not an expense. If you’ve been uncertain, I hope this Vanguard study has helped to quantify it for you.
Bill Keen is a CHARTERED RETIREMENT PLANNING COUNSELOR℠ and independent financial advisor with more than 24 years of industry experience. As the founder and CEO of Keen Wealth Advisors, a registered investment advisory firm, he specializes in providing personalized retirement planning designed to help people thrive before and during their retirement years. With a passion for educating others, Bill regularly blogs about retirement planning, hosts the podcast Keen on Retirement, and has contributed to U.S. News and World Report, Reuters, Wall Street Journal’s Market Watch, Yahoo Finance, and other publications. Based in Overland Park, Kansas, Bill and his team work with clients throughout the greater Kansas City area and across the nation. To learn more, connect with him on LinkedIn or visit www.keenwealthadvisors.com.
Keen Wealth Advisors is a Registered Investment Adviser. Nothing within this commentary constitutes investment advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Keen Wealth Advisors manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed here. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.