I recently attended the NAPFA (National Association of Personal Financial Advisors) Fall 2024 conference in Nashville, TN, and we were having a conversation about the next generation of financial advisors. NAPFA has conducted many focus groups with high school students, and upon asking how many would choose a financial planner as a career path, no hands were raised - by the students or their parents! Upon explaining more about what we do, how we do it, the many facets of our day and the impact we have on our clients' lives, many then indicated that they would be interested in the profession.
Other than the 30 second commercial "It's Gotta be a CFP", the public at large really has not been educated on the value of financial planning and the impact an advisor has on their lives.
So, when people ask what I do, I explain:
"You know how people are worried about running out of money in retirement? Or cuts to social security? Or maybe their investments performing poorly and they have to return to work?" I specialize in retirement income planning and I show them how to protect their family, live a work-optional lifestyle in retirement, and look forward to the leisurely lifestyle they dream of with anticipation.
The Numbers Indicate the Value
Magnify Money recently surveyed 1,500 adults about why they use -- or don’t use -- a financial advisor.
Check out some of the key findings:1
- 60% of respondents with a financial advisor hired one after a specific life event
- 1 in 5 Gen Zers with an advisor hired one after a death in the family and/or receiving an inheritance
- 22% of Millennials with a financial advisor got one because of a marriage or divorce
- 95% of those with a financial advisor think it’s worth the money
- 61% say they pay less than $3,000 per year for advisor services
In fact, a Vanguard study further breaks down the value of a financial advisor's services.
Assuming 5% annualized growth of $500k portfolio vs 8% annualized growth of advisor managed portfolio over 25 years.
Vanguard found that:2
- On average, a hypothetical $500K investment would grow to over $3.4 million under the care of an advisor over 25 years.
- The expected value from self-management of the same hypothetical investment would be $1.69 million – 50% less.
Assuming 5% annualized growth of $500k portfolio vs 8% annualized growth of advisor managed portfolio over 25 years.
The hypothetical study discussed above assumes a 5% net return and a 3% net annual value add for professional financial advice to performance based on the Vanguard Whitepaper “Putting a Value on your Value, Quantifying Vanguard Advisor’s Alpha”. Please carefully review the methodologies employed in the Vanguard Whitepaper. The value of professional investment advice is only an illustrative estimate and varies with each unique client’s individual circumstances and portfolio composition. Carefully consider your investment objectives, risk factors, and perform your own due diligence before choosing an investment adviser.
In other words, an advisor-managed portfolio would average 8% annualized growth over a 25-year period, compared to 5% from a self-managed portfolio.
Of course, the value of working with a financial advisor varies by person and advisors are legally prohibited from promising returns, but research from the Journal of Retirement suggests people who work with a financial advisor feel more at ease about their finances and could end up with about 15% more money to spend in retirement.3
The ABCs of the value of your financial advisor
Active rebalancing and Asset Allocation
A passive approach to retirement investing has far from ever been a satisfactory solution for risk-averse or inflation-sensitive investors. Index funds, which are a passive approach, are not designed to mitigate risk. Portfolios should constantly be managed to avoid unnecessary risk. In today's world, successful retirement investing necessitates an active and risk-savvy strategy for generating long-term income and building wealth. This modern approach emphasizes effectively adapting to global changes while balancing the pursuit of healthy returns with safeguarding assets against significant losses.
Behavioral Coaching
Investors are often swayed by their emotions. In fact, our brains are predisposed to making a bad decision due to the following factors:
- Emotions rule: Our prefrontal cortex is "hijacked" and our emotional thought is to "get to safety."
- Cognitive bias: Otherwise known as "mental shortcuts," our brains leads us to the path of least effort as it loves to detect patterns. Therefore, many poor decisions are made because we have "some" information and not "all" information.
- Herding: "Social proofing" during times of uncertainty encourages us to look to others for advice and to share solutions.
Guiding investors to follow their heads rather than their hearts is one of the most crucial roles an advisor plays. Each year, this role as a behavioral coach proves invaluable. Without our guidance, clients are more likely to withdraw from markets during volatility, follow the herd into popular investments, or make poor timing decisions by buying at peaks and selling at lows—classic behavioral pitfalls.
Customized Experience and Family Wealth Planning
Continuous Discovery for Evolving Needs: Just as every family is unique, so is every investment plan. Each individual has different goals, circumstances, and preferences that evolve over time. Consequently, an investment plan requires ongoing discovery to stay aligned with each stage of a client’s life.
Just as we guide our clients through volatile markets, we also help them navigate life's many changes. Our society has grown more complex, and so have our lives. As a result, many advisors have expanded and deepened the services they offer. We now provide a wide range of services, including fee-only insurance, legacy and charitable planning, family trust setups, and ensuring that our clients' investments align with their values.
We have also established a network of experts—such as estate lawyers, insurance planners, accountants, and lifestyle consultants—to help create comprehensive plans that address all aspects of an investor's life. Additionally, advisors often work with clients’ spouses and other family members to conduct thorough reviews of their financial situations and ensure orderly wealth transfers.
No conversation about financial planning would not complete without mentioning taxes.
Tax-Smart Planning & Investing
Taxes can be intricate and bewildering, presenting a challenge even for seasoned investors. While it’s relatively straightforward to identify the tax implications of capital gain distributions, dividends, and interest (which are outlined in the tax forms provided by investment firms), it can be more difficult to discern how each investment and implementation decision impacts tax liabilities at the portfolio level.
Activities such as asset allocation adjustments, fund changes, rebalancing, and trading all come with tax consequences. Effective management of these taxable events is essential, as tax impacts can adversely affect portfolio performance. This is why we believe that advisors who incorporate tax management as a core component of the investment process can provide significant added value.
Our clients don't see most of the work we do. Russell Investments conducts a study each year, the Value of an Advisor4, that has indisputably shown year after year that an advisor who delivers holistic wealth management services provides value that far exceeds the typical fee charged.
Sources:
1. Magnify Money "Half of Consumers Think Financial Advisors Are More Expensive Than They Are, But Almost All Who Use One Say They're Worth It." (March 2021)
2. Vanguard, "Putting a Value on Your Value." (February 2019)
3. Journal of Retirement Study (Winter 2020)
4. Russell Investments "The value of an advisor: What we have learned in the past 10 years." (May 9, 2023)