IS HIRING A FINANCIAL PLANNER WORTH THE MONEY?

I will start off by confessing that being a financial advisor, I am not completely unbiased when writing this.  With that said, the short answer to the above question is YES.  That is, if you hire a trustworthy advisor that knows what they are doing.  Personally, I am a value guy.  I am more concerned about value than cost.  If this is you, too, then hiring a financial advisor can be a great value.  A new study¹, soon to be published in the Journal of Portfolio Management, examined investor returns between 1991 and 2013 for 18,665 mutual funds.  What they found was that investors underperformed the performance of the mutual fund by an average of 2%.  In other words, investors pulling in and out of funds hoping to boost returns (market timing) had cost them dearly.  This conclusion is similar to research findings² from Dalbar that indicated that in 2014, the average equity investor underperformed the S&P 500 by 8.19% and the average fixed income mutual fund investor underperformed the Barclays Aggregate Bond Index by 4.81%.  Due to typical investor behavior, part of an advisor’s true value is in designing an investment plan that his client can stick with and in helping them stay the course during volatile market periods.  Vanguard also did a study³ in 2001 to attempt to quantify the value of financial planning advice. What they found is that a planner adds approximately 3% net per year in value by helping a client in the following areas:

0-0.45%           Suitable asset allocation with broadly diversified investment vehicles focusing on lower cost investments

0-0.75%           Locating assets properly in taxable versus tax-advantaged accounts

0.35%              Rebalancing to strategic allocation

0-0.70              Deciding where to draw assets from to meet spending (taxable vs. tax-free vs. tax-deferred)

1.50%              Support to stay the course in times of market stress

Overall net impact of good advice: about 3%

If the client is able to earn 4% more and the advisor charges 1%, this seems like an excellent value.  The investor is ahead of the game by 3% per year.  Additionally, a good advisor should do much more than what is outlined above.  They can help with issues such as maximizing Social Security and pensions, minimizing income and estate taxes, protecting assets from lawsuits, and strategies to protect your family against rising medical and long-term care costs.  I think the above studies are eye-opening, since advisors deal with an intangible world and it is often hard for the average consumer to wrap their arms around their value.  For a more complete picture of these studies, including their limitations and analyses, please read the sources cited below.

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Sources:

¹ Hsu, Jason C. and Myers, Brett W. and Whitby, Ryan J., Timing Poorly: A Guide to Generating Poor Returns While Investing in Successful Strategies (July 1, 2014). Available at SRN: http://ssrn.com/abstract=2560434 orhttp://dx.doi.org/10.2139/ssrn.2560434

² http://www.valuewalk.com/2015/05/mutual-funds-investors-underperform/

³http://retirementresearcher.com/the-value-of-financial-advice

                                            

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