19. Can A Financial Advisor Really Help You? - Greg Welborn

Can A Financial Advisor Help You?

Can a financial advisor help you in a meaningful way? The short answer is yes but, we do in fact have the data to back it up. In today’s Bench Talk, we’re going to discuss how a financial advisor can help you in a meaningful way.

Let’s start with a quick example. Most of us reading this have probably tried to do our own plumbing or electrical work at some point in time. When you finished, hopefully, the lights turned on and the sink worked as intended. But did it work as well as it should have? Probably not, and in fact, you may have even ended up blowing a circuit or ended up with a leaky sink. So, would you have been better off using the services of a professional? Probably so, and the same is true in the financial realm.

Working with a financial advisor can help you in a meaningful way. In fact, there are a couple of different areas where this really stands out.

Customizing an Investment Plan

A financial advisor specializes in reconciling your assets, liabilities, and cash-flow into a plan that fits your specific needs and goals. Knowing when to put money in and where to invest it is crucial in building your investment plan. Without the help of a financial advisor, data shows us that the majority of people’s portfolios would not perform as well as they should. Similar to electrical or plumbing work, we aren’t experts and our results will probably be significantly less than that of a professional.

Minimizing Risks and Taxes

Both risk and taxes can be detrimental to your investment portfolio’s health. A financial advisor can help you mitigate risk by diversifying your assets into different portfolio mixes with lower risk. We can also pick tax-deductible investment vessels to ensure that your money stretches as far as it can when saving for your retirement.

Using Dynamic Withdrawal Strategies

A financial advisor can help you give thought to the best place and time to make withdrawals in retirement. This can be crucial when protecting you from taxes. It can also be especially important when it comes to providing an objective opinion in times of potential market downturns.

Properly Managing Liabilities

Not all liabilities are bad, and not all liabilities are good. Knowing which ones to maintain and which ones to pay off can save you and your family a significant amount of time and money.

We live in a technology and media-driven culture. We are bombarded with information every day and not all of it is accurate. Knowing how to filter through the noise and determine what to do and when to do it is where a financial advisor can really help.

The Data We PromisedVanguard Study

Vanguard did a study of their “Advisor Alpha” which is an extensive piece of research on how advisors can add benefit to their clients. The study is extensive and too long to cite here but in summary, they concluded that working with a financial advisor represented a real improvement of 3% per year. Justin Wagner from Vanguard uses a great example that is worth sharing:

“Suppose the overall market return is 8%. Without good financial decision making, the combined impact of fees, taxes, and poor investment decisions is around 4%. This leaves a net return of 4% to the investor. However, for someone working with a capable advisor, they eliminate poor investment decisions, minimize taxes, and only pay the 1% fee, leaving a net return of 7%. That is the Advisor Alpha. The value added by good advice can greatly exceed the fees.”

This quote by Justin Wagner is using a hypothetical example to describe the “advisor alpha”, or in short, the benefit that an advisor can add through their expertise that exceeds the total amount of their fee structure. A 3% improvement may not sound like a lot but keep in mind over a 22-year span that represents a doubling of added value.

Morningstar Study

Another study done by Morningstar reviewed the value of good decision making. They had a slightly different approach to their research and ended up estimating the return was about 1.8% to 2% per year.

Used Financial Advisor vs. Did Not Use Financial Advisor

The last study we will include was a long-term study done on K-12 teachers. In this study, they studied those who used a financial advisor and those who did not. The study concluded that those who worked with a financial advisor had double the retirement assets over the teachers who did not.

Working with a financial advisor represents a real and significant improvement over what you might be able to do yourself. If you think there may be room for improvement in your financial life, we would love to talk with you.