The True Value of Financial Advice Doug Kinsey, CFP®, CIMA® Artifex Financial Group October 2018
As the financial industry evolves from a pure investment management model to one involving comprehensive guidance and support, the old standards for fee-setting are also changing. How does a consumer know when they are getting a good deal? Often times, you really don't know until you become a client. Here are some thoughts and guidelines to consider.
Financial planning as a true profession has only recently come into existence. W hat has become the "gold standard" organization for fee-only financial planners, NAPFA, didn't even exist until 1983, which was about the time a few courageous souls decided to make a living by giving advice and being paid by the client only (not via commissions or payments from product vendors). Now, it is much more possible to find competent financial planners who are fee-only and truly objective in their approach. It's easy to understate the importance of this development, as fee-only fiduciary (client-first) advisors are often lumped in with everyone else in the industry, from "fee-based" (not fiduciary) to "commission-and-fee" to "commission-only", etc. And no standard exists that restricts the usage of the term "financial planner," so virtually anyone can call themselves one.
A real financial planner / financial planning firm exhibits the following traits, among others: -
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A commitment to real knowledge and education. Not just a specious designation provided by some inconsequential industry organization. Years of experience in providing financial advisory services outside of just investment advice or management. A client agreement that focuses on financial advice and preferably has an easy-to-understand or flat fee structure. Staff that includes experts in tax, risk management (insurance), investments, estate planning, and the various financial challenges that people face, such as retirement, education funding, net worth management, etc. A transparent and education-focused processes.
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Tools and resources to assist clients and that enable the advisory team to communicate and work arm-in-arm with them. Objective, independent thinking combined with a capacity for mature and rational judgment.
Increasingly, the value-add realized from a true financial planner is derived from a broader base of advice than the traditional "broker-style" advice that is often found today among non fee-only advisors. Vanguard Mutual Funds has studied this at length and provides some guidance as to what these factors are. In their report, "Putting a val ue on your val ue: Quantifying Vanguar d Advisor 's Al pha," the following advisor activities add as much as 3%of additio0nal value (based on the investment portfolio only) to the client experience: -
Suitable asset allocation using broadly diversified funds/ ETFs Cost-effective implementation (expense ratios) Rebalancing Behavioral analysis and coaching Asset location (managing taxable and tax-favored investments per individual client needs) Spending strategy Total return versus income investing
This doesn't even touch other areas of financial planning delivered by a comprehensive planning firm. Such things as: -
Tax planning and/ or preparation Financial projections and strategy Custom portfolio construction (i.e. ESG or Socially-Responsible investing) Social Security optimization Insurance and risk review Estate plan review and creation Education funding Debt management
The primary challenge for consumers is understanding how the decision to hire a true financial planner can improve their lives. And conversely, the challenge for financial advisors is to determine what they want to be known for and who their ideal client is. To not "take all comers" for the sake of adding clients or revenue, but to focus mainly on the clients who can benefit most from a holistic financial planning approach. To have an effective, productive relationship with a fiduciary advisor requires the acceptance of the following facts: -
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Advice is typically not a one-off experience and is most effective when an ongoing relationship is in place, especially for people who are close to retirement or who have large, sudden pools of capital to manage (retirement plan rollovers, inheritances, businesses for sale, etc.). Fewer than 20%of professional money managers beat their benchmark indexes consistently, so finding a "magic bullet" to beat the markets doesn't exist. As a result, the core of an investment portfolio should be build around reliable, low-cost (not index) funds. Even though you may be competent to do your own planning, taxes, insurance analysis, budgeting, and investment management, hiring a professional to oversee all of these things is often well worth the money. A trusted advisor can free you up to live your life and can also provide a sounding board for ongoing financial decisions. True financial planners do not reside within brokerage firms, banks, credit unions, or any other entity that is not a fiduciary and is not fee-only.
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"An effective financial plan focuses on things you CAN control."
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Good advice is never free. If you are using the services of an advisor now and he/ she cannot specifically list every source of compensation they derive from the relationship on an annual basis, you are most likely paying a lot more than you will with a fee-only planner who provides this itemization to you. An effective financial plan focuses on things that you CAN control, such as taxes, investment expenses, insurance costs, cash flow, your career, real estate or private business interests, etc. and has a realistic view of any potential contributions by things out of your control, such as the public markets or investments managed by a mutual fund. Safety has cost. Too much caution and your plan will be overrun by inflation and other factors. Trying to buy protection (via annuities, "hedged investments," etc. is very costly and usually not worth it. If a solution is too complicated to understand, the person presenting the solution probably doesn't understand it either. Hiring an advisor should be an objective process, and relay mostly on objective factors, such as compliance record, fee structure, services provided, years of experience, years the firm has been in business, staff credentials (CFP, CFA, CPA, JD, CIMA, MBA, or other Masters degree in finance/ business), service philosophy, process, etc. Hiring an advisor should not be based on golfing buddy, golfing buddy's advisor, friend who says "I'm getting great returns with...", etc. These are subjective factors.
There are many other considerations, and not the least of which is "firm-fit" and "personality fit." In other words, are you similar to other clients the advisor works with? You need an honest answer here, as most advisors will just
say "why yes, of course, you are just like everyone else we work with." A good advisor should also be evaluating whether or not they would like to work with you. Personality fit is very important as , in an objective consulting relationship, the advisor has to be able to deliver bad news or information that you don't want to hear. A mismatch in personality style restricts the freedom from both parties to be direct and unguarded in their communication. Unlike a sales relationship, a fee-only planner should not engage in manipulative "feel good" behavior to encourage the client to go along with all recommendations. The advisor should be an extension of you and your family, and should always act in your best interests. If a particular idea or decision is one that the advisor himself wouldn't pursue, then he should be comfortable telling you not to do it as well. So let's take a look at the value an advisor may bring to your life. In addition to a time savings and freeing you up to do the things you really want to do, instead of watching CNBC or boning up on the latest tax legislation, let's just say that an advisor is worth as much as 3%of your asset values per year. If you have liquid assets of $1,000,000, that equates to $30,000 of value-add each and every year. For assets of $500,000, it's possibly $15,000 per year. Sounds like a lot? Take heart, as the laws of economics set in and neither party to an advisory agreement will realize the full value of the potential profit. In other words, the service will neither be "free", totally benefiting the client, nor will it be 3%, totally benefiting the advisor. Advisors need to price their fees competitively and clients understand that quality advice is worth something. So there is generally a middle-ground compromise in the fee structure, although you may realize by now that a traditional 1%asset management fee may not be the most fair approach for a comprehensive planning firm. However, a fiduciary advisor will most likely provide a savings on fund expense ratios and other possible costs that clients incur with traditional
"If a solution is too complicated to understand, the person proposing it probably doesn't understand it either."
commission-based advisors found at banks and brokerage houses (and many independent financial advisory firms. Hopefully this gives you some idea of how to determine the value added in a financial advisory relationship. Artifex Financial Group is a true fiduciary planing firm, and has lived by these best practices since our first day in business in 2007. If you want to talk further about how we can add value to your life, call us at 855.752.6644 and visit us at www.artifexfinancial.com