When you think about hiring someone else to complete a task that you think you could or should do on your own, you may hear a scolding inner voice saying, “Save the money – just do it yourself.” We often ignore that inner voice. We go to the car wash instead of grabbing the hose and sponge, we have a housekeeper restore order to rapidly advancing chaos at home, we hire a landscaper instead of pushing a lawnmower and raking leaves.
Ironically, many of the tasks that we willingly pay someone else to do, most of us could do without any particular training. And yet, many people struggle with the idea of paying a financial advisor, who has the expertise, experience, and resources that they don’t have, to provide a service that benefits them and their families in many ways. The reality is, the fees you pay to an advisor should be far less than the value the advisor generates by managing these things for you. Consider this: Although you brush your own teeth, you also pay a qualified expert to monitor how well you handle that task, and to identify, diagnose and fix problems like cavities or gum disease that you would likely miss, showing you how to address those problems before they cause significant pain. That’s money well spent.
Studies suggest many people avoid working with a financial advisor because they don’t want to pay an ongoing fee for advice they think they need only occasionally. They promise themselves they are going to focus on their investment portfolio, make that Roth IRA conversion, analyze various 529 Plan options and decide how to allocate savings between college education and retirement accounts very soon, for sure next week, when a few other things are out of the way. Of course, for most people, it doesn’t turn out that way. People are busy, new demands come up, weeks turn into months and that portfolio rebalancing, Roth IRA contribution, and other important financial management tasks, like getting up to speed with the new tax laws, are put off. Also, there is no one to hold them accountable for things like overspending or not increasing their savings when they get a promotion and/or a raise.
The longer these financial chores are neglected, the greater the cost. Instead, you could pay a financial advisor to create a disciplined plan to help you save more, identify ways to reduce your taxes, weed out investments you don’t need with high fees you shouldn’t be paying, and keep you from making other financial mistakes.
Advisors Make Money, Save Money and Prevent Costly Mistakes for Clients
When your inner voice says “why pay an advisory fee?” keep in mind there are very real costs to living a sub-optimal financial life. These costs are virtually guaranteed to be much greater than whatever fees you would pay an advisor to put things on the right path and keep them there. Here are just some of the ways a financial advisor can either save money for you, or generate income that you would otherwise fail to capture. Each one of these has the potential to result in thousands of dollars of real savings and/or additional income:
Asset allocation - keeping your mix of stocks and bonds, US and international exposures, real estate positions, etc. on target, determined by your risk tolerance and financial goals
Asset location – holding different types of investments in different account types, such as 401(k)s, Roth IRAs and taxable accounts, to minimize taxes
Tax-loss harvesting – intentionally recognizing losses when the markets are down to offset taxable gains in the current year or into the future
Reducing/deferring income taxes – taking advantage of various types of tax-deferred investing accounts and methodologies
Tax bracket management – identifying ways to avoid being pushed into a higher bracket or filling up a tax bracket on purpose when taxes are relatively low
Goal planning and budgeting - establishing a clear plan to achieve savings goals (for college educations, home purchase/remodeling, desired retirement lifestyle, etc.), instead of “winging it” and hoping for the best
Maximizing corporate employer benefits - including stock options, pension payout options, deferred compensation and HSA’s
Simplifying and consolidating - reducing unnecessary complexity in investment portfolios and combining accounts when possible
Optimizing insurance coverage – the value of avoiding financial disasters by using life, disability, umbrella and other policies is priceless; eliminating superfluous insurance saves money
Social Security and Medicare planning - determining which elections are best based on a particular individual’s circumstances, goals, and life expectancy
Withdrawal sourcing - developing and executing a strategy to withdraw funds from various account types in retirement to minimize taxes and reduce the risk of outliving your savings
Giving to charity - reducing taxes by donating assets optimally, and/or utilizing a donor advised fund
Estate planning – strategizing how to eliminate or minimize your estate taxes and make sure your loved ones inherit what you want them to have
Staying calm in volatile markets – providing a steady hand, a long-term perspective, and knowledge that comes from experience; volatility induces panic, which often leads individual investors to make costly mistakes
Doesn’t a Financial Advisor Mostly Focus On Choosing Investments?
This is a common misconception. The truth is, the investment side of the advisory business is not where a good financial advisor “justifies” his or her fee – except when a new client comes in with a portfolio of high cost, high risk, poorly performing investments. In that case, the value created by putting the portfolio back on track more than covers the advisor’s fee. But, on an ongoing basis, investment management is not where a quality financial advisor adds the most value.
Is that a surprise? You shouldn’t hire an advisor with the goal of creating a portfolio that “beats the market”. Good advisors take a long-term perspective and use investments to deliver the returns each asset class (stocks, bonds, etc.) offers. You should expect to earn the returns those asset classes deliver, minus a management fee. You should pay a financial advisor for advice about what mix of assets is right for your situation and how to achieve it at a low cost, in a way that minimizes your tax burden, and how to keep it in balance and adjust it as your life changes.
Even though a financial advisor does much more than help you invest wisely, as a new client your advisor will definitely spend time reviewing your investments. Why? We can look back on all of the clients who came to us for help in managing their financial lives, as well as those who asked us to review their investments but decided against hiring an advisor. How many of them had created a portfolio on their own that was optimal for them and their current situation? None. Zero. Why? Because investment portfolios, even thoughtful ones created with the best intentions, go awry over time. Markets shift, people invest in a hodge-podge of stocks and funds over the years without considering how they work together, and everyone’s financial needs evolve. Bottom line: the fees you pay an advisor to look over your investment portfolio will be money well spent.
The media has been shining a spotlight on mutual fund fees and commissions paid to brokerage firms, urging people to seek out index funds with low fees. That’s a legitimate issue, but it can have the unintended effect of making people think they shouldn’t pay for financial advice, including financial planning, investment oversight and implementation, even though fund management fees and financial advisory fees are completely different animals. You pay an advisor to create and regularly update an optimal plan for your investing and impose a discipline on that process, in addition to doing all of the other things listed above, so that you can focus on living your life.
A True Advisory Relationship Is More Than a “Check the Boxes” Exercise
A financial advisor who understands what is going on in your life, not just in your investments, can provide extremely valuable advice in ways you probably can’t foresee. Here’s an example:
A Gold Medal Waters advisor was talking with a client about his family and the client mentioned that his widowed mother was in poor health. The advisor asked whether the client had discussed estate planning with his mother, and learned that although the client’s mother owned valuable real estate, she had not done any estate planning. Furthermore, she did not have liquid assets that her heirs (the client and his brother) could use to pay substantial estate taxes when she passed away. The advisor was able to help the client set up an estate plan for his mother while she was still alive, addressing the eventual tax burden. If that conversation had not taken place, the outcome for the client would have been far less favorable (measured in $000,000’s of dollars).
Financial Planning is a Process, Not a One-Time Event
It is important to recognize that paying an advisor to keep your financial life on track is an ongoing process, not a “set it up and you’re done” chore. You don’t see a dentist once and expect to your teeth and gums to stay healthy for the rest of your life.
There are financial benefits to having an advisor manage and monitor all of these things for you, and there are also very real emotional/mental health benefits. Paying someone to take care of things that are not the main focus of your career or your family shortens your to-do list. That reduces your stress and gives you more time to do what you do best and what you enjoy, whether work-related, or spending time with family and friends or other things. Paying an advisor to manage your financial life, even if you think you could do it yourself, is liberating. As one of our clients said, I want my skis to be in good shape when I’m ready to hit the slopes, and I could tune them up myself, but paying Joe at the ski shop to do it takes that off my plate – and he’s the expert so he does it better than I would.
There are various ways to pay an advisor - a percentage of the value of your portfolio is one way, but a fixed fee makes sense for many clients. At Gold Medal Waters, we offer a choice. Whichever approach you prefer, we can state with absolute confidence that the value we provide will far exceed whatever fees you pay.
Gold Medal Waters is a fee only financial planner located in Boulder, Colorado that specializes in serving the unique needs of physicians and high net worth clients. Coordinating a great financial plan isn’t easy. Learn more about what sets us apart, or talk to an advisor and get a free meeting to see if we are the right firm for you.