How much are you paying your financial advisor? If you can answer that question, congratulations! A recent survey showed that over 60% of those who use an advisor don’t know how much they are paying. A lot of people aren’t sure how their advisor is paid. Some are even under the mistaken impression that they are not paying anything because many financial institutions are not transparent when it comes to disclosing their fees.
Generally speaking, advisors are paid either by commissions or through a fee-based model. Commission-based advisors are paid for transactions, when you buy or sell an investment product. For those who pay their advisor under a fee model, it’s important to note that there is a difference between “fee-based” and “fee-only.” A fee-only advisor does not receive commissions of any type and is only compensated as a percentage of the assets they manage, the financial planning services they provide, or by the hour. A fee-based advisor combines fees and commissions. Rall Capital Management is a fee-only advisory firm.
No matter how you pay your advisor, a more important question might be “What value are you receiving from your advisor?” Measuring the value of an intangible like financial advice can be difficult. Value, like beauty, is often found in the eye of the beholder. Services that are valuable to you may not be to somebody else, and vice versa.
There is an inherent value you receive when hiring a professional—in any field. For example, my wife and I are perfectly capable of painting our house. We could go buy the paint, the brushes, the rollers, and all the other tools that we would need. And we could spend hours prepping the house, taping the windows, and applying the paint. But, by hiring a professional painter, we are freed up to spend all that time doing something we would rather do, which would be practically anything! I also know that the professional is going to do a better job than we would. The professional knows the tips and tricks of the trade. We would be paying them more than it would cost to do it ourselves, but we are receiving much more value than we are paying.
It works the same way when you hire a financial advisor. You could do your investment management and financial planning on your own, but a professional advisor will free up your time to do something you enjoy more and will most likely do a better job. We know the tips and tricks of the trade. A good advisor will give you ideas and solutions that you might not think of on your own.
So, how do you measure value? There’s not an easy answer to that question. Many studies over the years have tried to quantify the value that a good advisor can provide. The Vanguard Group did such a study in 2001 and updated the information a couple of years ago. They called their study “Advisor’s Alpha.” It is probably the best one I’ve seen on how to define value. The Vanguard study attempted to measure the value that an advisor would provide in three areas: investment management, financial planning, and overall financial guidance.
When it comes to investment management, a good advisor will develop a portfolio that is appropriate for you, based upon your long-term financial goals and your risk tolerance. They will also help select the most appropriate and cost-efficient investments to build that portfolio. They will also rebalance the portfolio when moves in the market provide opportunities to do so. Finally, a good advisor will help you develop and stick to a long-term strategy, which at times can mean they need to be effective behavioral coaches, keeping you focused on the long term when short-term market moves cause anxiety. The Vanguard study showed that these value-adds could result in 1–2% of increased returns on your investments.
From a financial planning standpoint, value becomes more difficult to quantify, but the results can be more dramatic. Financial planning involves testing different scenarios and strategies that can help increase the likelihood of you being able to reach your financial goals. A good and experienced planner is going to present you with ideas that you might not have considered. I know that whenever I attend a financial planning conference, I always come back with a few ideas that might be able to improve my clients’ plans. How do you put a value on reaching your goals?
The last category, overall financial guidance, includes “everything else.” We try to work for our clients as an advocate in any financial situation. Buying a house or a business, deciding on when to start your Social Security or Medicare benefits, making sure that your estate documents are current and that you have the proper insurance coverages in place are just a few of the areas where a good advisor can provide value.
Finally, you’ve worked long and hard to get yourself in a good financial situation. As you get older, you’ve got less time to recover from making a big mistake that could jeopardize your finances. A good advisor can help keep you from making that big mistake. That’s another hard-to-quantify but very important value-add—one that can have an outsized impact on the rest of your life.
As a financial advisory firm, it is important to us that our clients feel that they are getting more value from our work together than the fees they are paying us. Why would they stay our clients if they didn’t?
Schedule a 15-minute discovery call with a fee-only financial advisor to discuss your personal situation.