Brad Tinnon

Brad Tinnon

Does It Pay To Pay An Advisor? Part III

Over the last two weeks I’ve blogged about the do-it-yourself investor’s hesitancy to pay an advisor and the growing number of inexpensive investment solutions that have cropped up resulting in a misguided belief that “cheaper is better”.

In this last article of the series, I discuss whether or not there is “real” evidence and value supporting the decision to hire a financial advisor.

FEE IS NOT JUST FOR INVESTMENTS

Many people have the perception that a financial advisor just manages investments. In many cases this is accurate, but a financial advisor who focuses on financial planning also evaluates many other areas. The goal of this is to help people make good financial decisions and avoid bad ones. It’s ultimately in this realm that value can be discovered and hence the reason that some people (even do-it-yourselfers) pay the fee of a financial advisor.  But is there a way to truly quantify what you receive in exchange for the fee?

QUANTIFYING THE VALUE OF AN ADVISOR

Over the years, there have been a number of research papers that have attempted to answer the question of whether or not there is a financial benefit when working with a financial advisor.

Michael Kitces, owner of Nerd’s Eye View Blog, provides a wonderful graphic on Quantifying the Value of Financial Planning Advice. In this piece, he identifies specific, research-based evidence on the financial gain achieved by engaging in various financial planning strategies. Depending on the person, the benefit could be thousands if not hundreds of thousands of dollars. Note that not every strategy is driven by financial gain when working with a financial advisor. In some instances just having peace of mind, happiness, and time savings is a big benefit in and of itself.

One of the sources that Michael Kitces’ sites is Morningstar’s 2013 article Alpha, Beta, and Now…Gamma. In this paper, the authors conclude that retirement-based decisions such as asset allocation, annuity allocation, withdrawal strategies, matching asset allocation with goals, and asset location result in an extra 1.59% return per year for retirees. If you’re not aware, even a 1.00% gain in return every year could amount to a lot of money. For example, a $100,000 investment that earned 7% over the next 30 years would result in an ending value of $761,000. However, earning 8% results in an ending value of just over $1,000,000. That is a $239,000 difference. 

Vanguard published an article in 2016 titled Putting a Value on Your Value: Quantifying Vanguard Advisor’s Alpha. In this article Vanguard states that financial advisors can add up to 3% return per year by focusing on rebalancing, asset location, suitable asset allocation, using cost effective investments, and other items.

I’ll understand if you doubt the legitimacy of these research papers, so let me tell you some of the ways that we’ve financially benefitted our clients. This is not meant to be self-serving or a solicitation to use our firm, but is instead a way to show that if a firm engages a person in financial planning then true financial benefits can be obtained.

Recently we had a retiree who had planned to take Social Security early. Had she done this, her money was expected to run out at age 81. By recommending a divorced spousal Social Security claiming strategy, investing excess cash, and reducing expenses by a mere $3,000 / year, it is projected that the retiree’s net worth will increase by $240,000 and her money will last her entire lifetime.

Another example involves a client who is renting a home to his son. The father wants to sell the house to the son and the son wants to buy it. By coordinating the sale of the house with recommending that the client make Traditional IRA contributions (as opposed to Roth IRA contributions), it is projected that the client will save several thousand dollars in capital gains taxes when the house is eventually sold.

As a final example, when reviewing a client’s estate planning documents we discovered that language in their Trust (which is based on old tax law) will potentially cause significant capital gains taxes for their children. As a result, we will be referring them to an estate planning attorney to rectify this situation.

So, between the various research papers that have been written and our own experience with clients there appears to be evidence supporting the idea that it can in fact Pay to Pay an Advisor. 

In concluding this 3-part series, my hope is that I have given you some food for thought on whether you wish to handle your own finances, use the services of a robo-advisor, or pay for the services of an advisor.

Thanks for tuning in over the past few weeks. If you’re new to our blog and wish to remain connected and receive future articles, please sign up for our eContent

Brad E.S. Tinnon
CERTIFIED FINANCIAL PLANNER™
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