How Does An Advisor Show Their Value?
A lot of financial planner colleagues, myself included, believe in a buy-and-hold approach, global diversification, keeping costs, and minimizing taxes in an investment portfolio.
It is very difficult to beat the market consistently year over year without taking on substantially more risk.
Certain asset classes have shown to outperform the market over time such as value, small-cap, and highly profitable companies.
Outperformance is more likely to happen over long periods of time such as multiple decades. Anything can happen year to year, so comparing returns over a 3 or 5 year period is not enough data in my opinion to shed light on better performance.
Other professionals have an opposite point of view and that’s totally okay. There are countless strategies and ways you can make money in the market.
Financial Planning and Taxes
The reality is that investment management is only one piece of the puzzle. A good advisor will analyze someone’s entire financial picture and get the right professionals involved when needed.
This includes cash flow, debt, retirement, insurance, investments, taxes and estate planning to name a few areas.
Tax planning presents a MASSIVE opportunity for advisors to provide value.
The tax code is extremely complex and convoluted. People often make mistakes in this area by not taking advantage of all the deductions available to them, not setting up their business entity properly, not understanding how their income is taxed, or not understanding the different features of retirement plans to allow them to save and invest the most money. The list goes on and on.
Investment returns only get you so far once you reach a certain level of income in comparison to tax savings. If you can get creative around tax planning, the savings can be substantial for high-income individuals.
Time, Interest, and Behavior
People need the service and appreciate the advice. Half the battle is getting people to take action and create behavior change. It’s about getting organized and creating a plan.
A lot of people just aren’t interested or don’t have the time to manage their finances, let alone an investment portfolio, on their own.
Facilitating behavior change can be encouraging people to save more money or getting an agreement to make changes to their portfolio. It’s not all about maximizing returns and swinging for the fences.
It’s about managing risk and accomplishing your goals.
You don’t know what you don’t know and having someone on your side to offering an objective point of view and asking the right questions can be very valuable.
A hypothetical example is an individual who is very financially conservative and is holding on to multiple six figures in cash.
If this is well above their need for cash, but for some reason or another they have a mental block around investing it or only view their retirement accounts as assets to invest in, this creates a huge opportunity cost.
If I can help them think through their goals and get them to invest the money appropriately this could add hundreds of thousands of dollars to their portfolio over time. That is very material to someone’s livelihood or legacy.
Another example would be encouraging people to stay in the market. The market crash last year at the start of COVID is a perfect example of this. If people pulled out at the bottom, they missed out on a positive 20% return or so by year-end depending on what asset classes you look at.
If you have seven figures invested that’s at least $200k by staying the course. It’s easy to dismiss this aspect of investing if you understand markets and have a high-risk tolerance. However, the emotional part during a market decline is very real to a lot of people and they struggle to handle it, regardless of logic.
Alternatively, if you helped someone invest cash on the sidelines at the bottom last year they could be up roughly 40%. Again, it’s about behavior change and getting a plan together.
The industry norm is charging a fee for assets under management such as 1%, but there are other business models like monthly subscription fees or hourly.
At the end of the day, everyone has to get paid. It’s just figuring out the best way to do so and what is going to be the best for clients.