Advice is hard to value, and good advice can be expensive. That’s probably one of the reasons for all the nasty jokes about lawyers, doctors, psychologists and so on. Independent Financial Advisory is a newer profession, so the body of comedy is sparser, but the principle also applies – why exactly should you be paying a management fee on your hard-earned money to that person whom you meet a few times a year?
Let’s look at exactly how an advisor adds value to your personal finances.
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#1 – Keeping you on the right track
The biggest determinant of whether you have a comfortable retirement won’t be exactly how you invest your money. Often, it will not even be how much you earn! The most important factor in your personal finances is ensuring that you plan ahead and save and invest an appropriate portion of your monthly income. All financial advisors know clients who, despite high incomes, spend almost all their earnings and then end up in trouble. And contrary to stereotypes, that’s not because they are stupid, reckless or vain. It’s because most people don’t even know how much they should be saving. It’s because staying on track is hard. It’s because people take cues from their peers, who often aren’t on track either. It’s because nobody is there to give you a reality check – nobody, that is, except your advisor.
#2 – Avoiding BIG Financial Mistakes
There’s a lot that can’t be predicted about investments. On any given day, stocks can go up or down, and the odds are almost 50-50. Over the long term, some of your financial decisions will be disappointments, even if you are well advised. Mistakes are a part of life.
But there are some mistakes you simply cannot afford to make: leaving your cash poorly invested or idle for years on end, putting a large part of your savings in that apparently safe investment that turns very sour, getting your tax arrangements wrong or leaving your dependents vulnerable if you die. All financial advisors know some clients who, despite being careful with their money, one day made one big, bad, avoidable decision. Unfortunately, they often look for advice too late.
Even if you are financially literate and feel comfortable managing your own investments, how sure are you that you don’t have a blind spot? Consider how many years of earnings you are dealing with when you invest. By the time you retire, there will be decades-worth of work there. Are you sure you don’t want a fresh set of eyes helping you?
#3 – Minimising taxes and fees
A couple of decades ago, rich-world interest rates were high. So if a few percent went to fees and taxes, you could still grow your savings. Nowadays, many rich countries have negative interest rates (especially after you take inflation into account), and even investments like corporate bonds and stocks have low yields. Nowadays, minimizing your taxes and fees can be the difference between a retirement that is ‘the holiday of a lifetime’ and one that is a burden for your children. Tax rules and fee structures can vary dramatically among countries, investment structures, and providers. They can also be complex, and change from time to time, so it can be overwhelming to try and find the best option yourself.
#4 – Saving you time
To people who manage their own investments, I often pose this challenge: measure the returns you have over a few months, and also calculate how much time you spent. Then let’s compare that to benchmarks. A fair percentage will actually do well in terms of investment performance. That’s partly because it’s a short horizon, in which risky investments like stocks are almost as likely to do well as they are to do poorly. But no matter how good the investment performance, once you account for the value of the time spent, almost nobody beats the benchmark. Most likely, the time you spend managing your investments would earn you more money if you spent it working in your main career. That’s easiest to imagine if you are a doctor, say – you take an extra consultation. But even if you work for a company, you can spend that time networking, training, or even developing a side business.
#5 – Picking the right asset classes and investments for you.
‘What should I invest in?’ is probably the most common question IFAs hear, and that’s what many people imagine is the focus of an IFA’s work. But in terms of impact, optimizing individual investments is actually much less important than the four points above planning ahead and saving enough, avoiding big mistakes, minimizing taxes and fees, and spending your time well.
Of course, it does also have an impact. Although big and liquid markets (like the market for stocks in the S&P 500) are often highly competitive and hard to beat, there are many situations in which expertise can help improve your returns. For example, studies have shown that if the stocks in an index are, on average, at a historically high multiple of the earnings of the underlying companies, future returns tend to be lower, and you might want to adjust your portfolio accordingly. Or if you know that the star manager of a fund just left, you might want to hold off on investing.
Valuing advice is always hard, and especially when we have some understanding of the subject, it can be tempting to go ahead without it. However, financial advisors do add value in very concrete ways, even to those who are financially literate. If you do not currently have one, you don’t have much to lose in trying one. And if you already have one and are having difficulty seeing their value, it may be time for a change!
Need more information? Download our Financial Planning Guide.
