“Why doesn’t everyone use Vanguard? In the last nine years, the market has returned over 11%.” That was the exact question and comment I received last week. The next comment, “My brother-in-law, got me 8% last year which is good, that’s what we wanted. I seem to pay him a lot though, and I’m not sure it’s worth it.” I’ll leave out the exact details of the rest of the conversation, but I do what to address one thing. What do financial advisors do?
The dialogue above ties the value of advice on his or her investment allocation recommendations. I didn’t ask this to him, but how does he know 8% is what he wanted? He proceeded to ask me what I thought he would need to retire. After being a little stunned, I asked whether planning was included in the cost he was paying. After thinking and stumbling through his words for 30 seconds, he didn’t really have an answer. Without a plan and goal in mind, he could be taking far more risks than required. Sadly, this is now too common that an “advisor” is merely an investment allocator. 
So what should an advisor be doing for clients? Before tackling that question, if you are only looking for investment allocation, rebalancing, and tax loss harvesting and don’t want advice, I’d suggest you check out Betterment and Wealthfront. These platforms are advanced and robust options. An advisor should never be leading with his or her remarkable skill in selecting investments better than someone else. Why may you ask? The unfortunate truth is they, myself included, aren’t any better than these automated platforms. There are no “research reports” or better “investment insights” today from one firm in the industry; the world has too much free-flowing information for that to be true. The value of an advisor is the advice given. Novel concept, right? The issue is that the far majority of advisors use investment and insurance as a means to administer advice. That’s backward. You want to have a plan and direction in place and compliment those plans with the investments and insurance as needed. This all ties back to how is this advisor compensated. The topic is too broad to jump into now, but I will address it.
What does financial advice look like?
- Talking and meeting with you on a consistent basis.
- Providing education on financial matters.
- Understand and knowing you and your family and what is going on in your life.
- Developing and building sound financial behaviors.
- Assisting in understanding how and where you spend money.
- Assisting in helping you understand the best methods to save and where to put those savings
- Setting real risk and return expectations of investments.
- Setting and establishing an investment policy statement (IPS)
- Explain how taxes impact your investments
- Be the voice of reason when
- The market is down 30%, and you want to sell.
- You want to move a large percentage of your investable assets into something too speculative.
- Reviewing your balance sheet for opportunities to pay off or lower debt payments.
- Taking time to evaluate your insurance both personally and professionally for cost savings or gaps.
- Helping you decide on health insurance decision and explaining the pros and cons
- Collaborating and brainstorming with you on life.
The above shows there are some areas and elements of investments that an advisor will advise on, but is that the majority of their value? The quick answer is no. The value of an investment allocation is one that aligns with what is needed per your plan, as well as, what amount of loss you can take. Let’s evaluate other values of an advisor. Suppose they introduce you to someone in healthcare real estate and that introduction helps you save $30,000 over the course of your new 10-year lease. Is that impactful? If they review your homeowner’s policy and find you don’t have umbrella insurance coverage, then refer you to an independent agent to address that substantial liability. Is that impactful? If you are weighing do I pay down my house mortgage or invest and they can come back and demonstrate the various benefits and opportunity costs (forgone benefits by selecting one vs. another) of each. Is that impactful?
I’m a believer that sound and conflict-free advice from an advisor can be worth every penny you pay that person. In the final part of this series, I’ll explicitly state what the non-negotiables are, what are common payment methods, what is the “average cost,” and a process on how you should select someone. I will direct you to resources for questions to ask when you meet with advisors. There will always be exceptions, but these guidelines will help eliminate 90% of the bad apples and help put you on a path to finding advice that aids in growing your net worth.