What is financial advice worth? Is working with a financial advisor worth the cost? Let’s discuss the value of financial advice with updated research data through last year.
Previous Research on the Value of Financial Advice
Vanguard performed a study several years ago which showed that someone working with a financial advisor benefited by about 3% per year over someone who didn’t work with a professional advisor.
Of course, the actual benefit depends on several factors, two key factors being:
- Does the advisor provide comprehensive financial advice or just manage the client’s investments?
- Does the client actually follow the advisor’s advice (is the advisor coaching the client)?
I’ve previously shared thoughts on whether financial advisors are worth the cost.
The conclusion of that article? If your advisor is just dropping money into an investment account and that’s all, perhaps it isn’t worth the expense.
But if your advisor is a comprehensive financial planner* who is reviewing your estate plan and insurance coverages, providing guidance for goals like college, a house purchase, starting a business, and retirement, helping you with tax planning, and more – then yes! An advisor with that level of service can be extremely valuable well in excess of their fees.
*Whether you work with us or not, I strongly recommend working with a fee-only CERTIFIED FINANCIAL PLANNER™ professional. This type of advisor gets no sales commissions so recommendations will be unbiased and in your best interest.
Value of Financial Advice Updated Through 2020
Vanguard’s latest research doesn’t give a nice clean single number like it did in the past. And honestly, that’s a good thing! There is tremendous value in comprehensive financial planning, but it isn’t always easy to put a number on it. For certain clients, this value might be 3%, or 1%, or 5%. It all depends on a person’s specific situation.
Investment Allocations and Returns
What is easily quantifiable though is how an individual’s financial behavior impacts their investment returns. So let’s start with that number – knowing there is a lot of added value beyond the portfolio performance.
Vanguard found, after analyzing tens of thousands of investor’s behaviors, that the average investor held their money in these allocations: 58% equities, 26% bonds, and 16% cash. That’s very close to a standard 60/40 portfolio, except this large amount of cash drags down returns over time.
Let’s pretend that the average investor instead worked with a financial advisor who placed them in a very simple portfolio with these allocations: 60% equities, 39% bonds, 1% cash. As part of this reallocation I would expect the advisor to explain inflation, how bonds and equities have historically performed, and the benefits of a diversified portfolio.
How Would the Two Portfolio Returns Compare?
While past returns definitely do not assure similar future returns, we don’t have a functional crystal ball so we’ll use recent returns as a comparison.
Over the past thirty years, portfolios like these two would have likely returned 8.39% per year for the studied investors and 8.99% per year for the advisor-suggested 60/40 model.
(Here is a link to Portfolio Visualizer if you want to see the specific back-testing [which updates every day, so the numbers won’t align exactly to this article].)
The difference is .60%. That’s not huge – certainly not 3% as mentioned in the previous study.
But that 6/10ths adds up to a substantial sum over time. Over the past thirty years, if you started with a $100,000 portfolio value, the ending value of the advisor-suggested portfolio would be over $218,000 higher! And remember, that’s just the investment part – ignoring all the other value that a fee-only CFP® might provide!
Making Financial Advice Worth the Investment
Of course, if you found yourself working with a financial advisor charging 1% or more of your portfolio total each year, just for investment help, you’d lose money in this example.
Thankfully there are a lot of financial advisors whose average cost is well under 1% for investment management. Also, remember that there are fee-only comprehensive financial planners you can work with who would add value way beyond investing. Those numbers are harder to quantify, but what price would you personally put on:
- Making sure your house, auto, life, umbrella, and other insurances are appropriate?
- Having help planning for big goals like a home purchase, a child’s college, or retirement?
- Working with a professional to explain all the legal documents needed for your estate plan?
- Long-term tax planning to legally minimize how much you pay to the IRS?
- Having a financial plan that integrates the business you own toward maximizing your goals?
- And more?
These items have tremendous value! Yet they don’t always show up when analyzing the value of financial advice from a pure numbers perspective. The feedback I get from clients is more often related to one or more of these topics than just how their investments are performing.
Financial Planning for Business Owners & Entrepreneurs
Finding a Good Financial Advisor to Work With
If you understand that the value of financial advice would be beneficial for you, here are a couple of suggestions to help find your ideal advisor.
- Go with a Fee-Only Financial Advisor. A fee-only advisor does not get any commission from putting you in specific funds, nor do they sell annuities, insurance, or anything else. They’ll help you find the best product for your specific needs, but they won’t get paid more for one product over another. Beware of advisors advertising themselves as “fee-based.” That just means that they get fees from you AND they can receive commissions from selling you certain products.
- Go with a Financial Advisor who is a CFP®. A CERTIFIED FINANCIAL PLANNER professional has not only a 4-year college degree but has also passed at least six intense classes on topics specific to financial planning (like insurance, taxes, etc.). After that, they need to sit for a 6-hour+ test (7 hours with a break!) and obtain a passing score. Even once that is done they need to have been in the industry for at least three years working with clients on financial planning.
- Find someone you like and trust. This third point is a bigger deal than many people realize. A good financial advisor will need to know a lot about you, your family, your finances, your fears, and your dreams. This is a very personal relationship so you need to work with someone you like, trust, and feel comfortable with. You will get “financially naked” so take time to find the right person. Make sure you have confidence in and are comfortable with, the financial advisor you decide to work with.
If you want to chat with me to see if working together makes sense, just reach out. We can spend a little time on the phone first, then have a longer meeting to explore the idea. Those first two discussions are no-cost and no-obligation. They’re just to explore if it makes sense for us to work together.