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Why do you need a financial advisor if you manage your own investments?

It’s fairly common to question the need and value of a financial advisor.  It’s certainly difficult to offer any defensible response when financial advisors are often only viewed as investment managers.  But what actual value do financial advisors provide?  Both Morningstar and Vanguard have published their research on the topic, and the results may be surprising.

Financial advisors offer very little additive value when viewed exclusively through the lens of investment selection.[1]

Before you throw in the towel on your financial advisor, we want to make a few points clear.  Specifically, financial advisors can add value through a combination of investment management, financial planning, and coaching.  How much?  The numbers differ based on the studies, methodologies, and focus of research, but Vanguard’s research indicates “about 3%”[2] of potential value added to the client experience.  Morningstar, in its focus on retirement income, concludes that “intelligent financial planning decisions” can add the equivalent of 1.59% in annual arithmetic returns.[3]

What could these value-added services look like?

  • Tax-efficient asset location and withdrawal strategies
  • Retirement income planning and modelling
  • Comprehensive planning using goals or future cash flows
  • Debt management strategies
  • Business retirement plan guidance
  • Insurance and risk management advice
  • Wealth transfer and charitable giving planning
  • Developing savings plans and goals
  • Financial coaching
  • For business owners: qualified plan advice to help attract/retain talent and accelerate retirement savings
  • For business owners: succession planning or business transaction advice
  • Holistic guidance to simplify your financial life by working alongside you, your accountant, and your attorney

We haven’t even mentioned investment management (or low-cost investment selection), so hopefully you can see there’s more to financial advisors than just putting together a portfolio and rebalancing it for you.  However, if that’s all you need at this stage in your life, there’s still value in the coaching aspect of using a financial advisor to avoid panic selling, panic buying, return chasing, or a host of other behavioral missteps.

How do you find the right financial advisor?

Over the last two years or so, the effort by the Department of Labor and the Securities and Exchange Commission to develop a “Fiduciary Rule” has generated a considerable amount of discussion, opinion, and confusion about financial advisors.  For those who viewed financial advisors as wolves in sheep’s clothing, the rule was nothing more than vindication of a belief that the financial services industry needed to be reined in to prevent further malfeasance.  For those who thought more highly of financial advisors, the rule raised a good question: If financial advisors are expected to work in a client’s best interest, why does there need to be additional regulation to force this behavior?

The pithy answer to both views is that not all financial advisors are created equal.

The Investment Advisors Act of 1940 held advisors to the rigorous standard of the fiduciary rule, regardless of client or account type.  The fiduciary standard requires advisors to place their clients’ interests above their own.  Not every advisor works under the fiduciary standard at all times.  As former fighter pilots in the United States Air Force, the fiduciary standard seemed analogous to the Air Force’s core value of “service before self.”  We believe strongly in the fiduciary standard – it’s how we’ve always done business, whether it’s flying jets or helping clients achieve their financial goals.

We believe that your first question when interviewing a potential financial advisor should be “Do you always act under the fiduciary standard?”

We also advocate for fee-only advisors, which means that the advisor’s compensation is not based on product sales or commissions.  Fee-only advisors have fewer inherent conflicts of interests.

We believe the next question when interviewing a financial advisor should be “How do you get paid?”

There are a number of ways that a financial advisor can be compensated, and some introduce conflicts of interest that you should know about.  Some of these conflicts are described in the advisor’s regulatory filing, called the Form ADV.  The Part 2 of this filing is often called the “Firm Brochure,” and you should review this thoroughly and ask questions about its contents.  This filing also includes disciplinary information and background information on the firm’s advisors.

Perhaps it goes without saying, but the prospective advisor’s depth and breadth of experience and education should also factor into your decision.  However, we also recognize that professional certifications and degrees may only be worth the paper they’re printed on; as such, a candid and rigorous interview with any advisor should reveal the important attributes that you find important.

Getting to the heart of selecting an advisor: “How do you add value?”

You’re engaging the services of a financial advisor to achieve a specific outcome.  You should ask questions to that end.  The advisor should be able to communicate his or her value proposition in the context of your unique situation.  As much as the industry moves toward the commoditization of financial advice, we believe that each client’s financial situation deserves a tailored plan.

Your financial advisor should work in your best interest to help you achieve your financial objectives and reach the specific goals that you have in mind.  They should be plainly compensated with very few – if any – conflicts of interest, and the services that they offer as a financial advisor should be explained in a manner that communicates the value that’s added to your experience as the client.

If you’re curious how we add value to our clients’ lives and help them grow, protect, and use their wealth to pursue what’s really important to them, please give us a call:



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[1] Francis M. Kinniry Jr., Colleen M. Jaconetti, Michael A. DiJoseph, and Yan Zilbering, 2014.  Putting a value on your value: Quantifying Vanguard Advisor’s Alpha. The Vanguard Group.

[2]  Ibid.

[3] David Blanchett and Paul Kaplan, 2013.  Alpha, Beta, and Now… Gamma.  Morningstar Investment Management.

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