I often get asked, “What does a financial planner do?” And honestly, I get it. When you pay someone to build you a house, you get a house in return. When you write a check at a car dealership, you receive a car in return. Financial advice is often not tangible, and most of the time it’s not even possible to calculate.
I wouldn’t invest my time in educating others on personal finance if I didn’t believe there was meaningful value behind it. That is why I felt inclined to make an attempt to describe the value that a true financial planner can provide. I say “true financial planner” because there are a lot of financial advisors and planners out there who misuse the title and don’t actually take the time to provide meaningful service and advice to their clients. This is often the case for any of the following reasons: they haven’t sought after or been required to get proper education, it takes too much time, or it doesn’t produce additional revenue for most “product-driven” or transactional based business.
Before I begin, quickly reflect on your potential response to the following questions:
- How much is your time worth to you?
- What would you do with extra time in your day?
- How long will it take you to find the resources you need to find the answer to your financial question in mind?
- What is the potential cost of making the wrong decision due to misinformation?
- What would you rather be doing with your time?
Are you able to attach a value to these? It’s hard, isn’t it?
In order to paint a picture of the value that financial advice provides, I’m going to provide a list of seven ways financial planners add value. While reading them, think about how each one adds to or takes away from your main three resources: 1) Time, 2) Attention, and 3) Money. I say this because the value of advice ultimately comes down to how you personally value each of your three resources. Let’s begin.
“True” financial planners…
1. Act as a barrier between their clients and their clients own behavior and investment mistakes
These mistakes can come in many different forms. They may be small mistakes that go unnoticed or ones that you look back on as the “Big Mistake”. The true enemy of investing is the “Big Mistake” and you never know when it might come. The truth is we are all irrational with our money to some extent and it’s been proven by many research studies that it is hard to separate our emotions from our money.
Financial planners act as an emotional circuit breaker, helping separate clients emotions from their money. They steer clients away from the impulse to chase returns or run for cover in volatile markets. Some planners may even specialize in behavioral coaching, where they actually teach clients the psychology behind managing their money.
Remember, individual financial success is not driven by the performance of the market or investments, but by the behavior of individual investors.
2. Provide direct time-savings
What would you do with more time? I’m willing to guess you’d fill your time with something that would bring you joy or a peaceful mind. Just because I’m a financial planner doesn’t mean I would enjoy doing finance stuff with my free time either! I don’t know anyone that would. A financial planner serves as someone who you can offload and delegate work to that you’ve either been putting off or flat out don’t enjoy doing. By doing this, you’re essentially buying time! As written in Time for Happiness (Harvard Business Review), studies have shown that buying yourself time will actually make you happier.
Now let’s say you choose to not buy back your time. Consider how long it would take you to do your research, find the right (non-misleading) information, and be confident in your solution and direction. The reality is, what could take a financial planner a few hours of paid time could very well take their client days. Just like every profession, there is a lot of background knowledge that is helpful while doing research on a question you need answered. Just being “aware” of potential options, outcomes, and traps is invaluable because it provides context.
At the end of the day, the client has to ask him/herself was this worth my time? What else could have been achieved with this same time? (i.e. Start a business, learn a skill, spend quality time with friends and family, plan the trip you’ve been wanting to take, etc.). If you add up the time and energy spent learning and implementing, the worrying and the record-keeping, how much would that be worth to you?
Remember, while we may not be able to extend our days, we do have the opportunity to buy time that we wouldn’t have had before. And yes, these are opportunities that exist for all income levels.
3. Capitalize on opportunities and mitigate losses
Not including all the irrational decisions that we mentioned previously, there are numerous mistakes that can be made purely based on the fact that people don’t know what they don’t know. And who’s to blame them! Not everyone gets excited to read up on new tax laws, or read a textbook on all the interconnectedness of financial matters. Financial planners have the necessary background and knowledge in the latest laws and market offerings to recognize weaknesses in a client’s financials that the average Joe wouldn’t recognize. They also use this background knowledge to recognize financial opportunities that arise for clients. Since financial planners know what to look for, they are able to spot financial trends and take action accordingly.
Left alone, investors often make choices that impair their returns and jeopardize their ability to fund their long term objectives. This benefit of not allowing current market conditions to force the abandonment of a well-thought-out investment strategy can be underappreciated in the moment.
4. Deliver tailored investment portfolio construction and on-going maintenance
First, consider the obvious benefits that come from proper asset allocation, disciplined rebalancing, strategic cash flow management and tax planning. While each of these warrant a separate article, they are common terms. Let’s instead consider the “top-down” vs “bottom-down approach to investing. While bottom-up investing places an emphasis on recent performance and market trends, the top-down approach starts with the clients goals and constraints. For instance, not every millennial wants to place a high priority on retirement savings like previous generations. Maybe you want to maximize your lifestyle now and seek experiences that you can grow from and take with you. A financial planner can help you prioritize what is important to you and help formulate an investment strategy that is focused around you, such as your goals and appetite for risk.
It’s also important to recognize the gap of an investor’s returns over time versus various indices. Take a look at the chart below:
You can see that over the last 20 years, the average investor returned an annualized 2.6% when the market (the S&P 500) returned 7.2%. That’s a 4.6% difference! You may ask why? The average investor doesn’t actually stay invested. Instead, they do some form of timing the market or stock-picking and in turn miss out on the returns they would have received by simply staying put. As the chart shows, the average investor would have been better off investing in essentially any of the above investments! However, people are enticed by what’s hot, in fear that they may be missing out.
Studies have even shown that four and five-star mutual funds (high-ranked) have historically had worse performance going forward than one-star funds (low-ranked). When considering that past performance plays a big factor in assessing these star rankings, the reasoning behind these results makes sense. Remember, past performance is no guarantee of future results.
5. Present emotional and “feel good” benefits
Imagine a time that you didn’t have to think or worry about money. For many of us, those same memories are attached to reading Harry Potter books, watching That 70’s Show, or playing with our favorite toys. The truth is, money interferes with our thoughts, emotions, and desires, often leading to anxiety and discontentment. Financial planners help provide their clients with better sleep at night knowing that they are being taken care of and on the right track. Ultimately reducing their emotional burden and freeing them to put their attention elsewhere.
If something is important to the client, a financial planner can also align a client’s portfolio with their personal values. Ever heard of Socially Responsible Investing (SRI) or Environmental, Social, and Governance (ESG) Investing? You’re not alone if you haven’t. They are both investment screening strategies that are guided by your own values.
- Portfolio Screening (both positive and negative): “Positive screening is searching only among socially responsible corporations when looking for investment opportunities. Negative screening is excluding companies that are socially irresponsible, but not necessarily socially neutral.”
- Targeted ESG Investing: where the advisor proactively invests in companies that support specific environmental, social and governance issues that are important to the clients
I like to call all that I mentioned above the “Feel Good” benefits because they are the things that are often ignored or unrecognized but have the greatest effect on our mental health and physical well being. Try putting a value to that!
6. Act as an accountability partner
“I never worry about action, but only inaction.” – Winston Churchill
For the most part, we all know what we should do. We know that the keys to being healthy include proper dieting, rest, and working out. Personal finance is the same way. There are key ingredients to being financially fit, but few of us actually follow through with it. A financial planner can act like a personal trainer for your finances: providing you with an assessment of where you’re at currently versus where you want to be, write out a plan for execution, and hold you accountable. Consider the cost of inaction the next time you think about your finances.
7. Sell advice, not products
Next time you are speaking to someone claiming to be an advisor, ask them how they are compensated. If it’s attached to the individual products they sell, you should be scared. There are “product salesman” disguised as financial advisors who don’t actually understand what they are selling, but do know they can make money selling it. As a rule of thumb, if you are being sold an annuity or cash-value whole life insurance product, get a second opinion. You’ll save money and won’t regret it.
Financial planners should diagnose before they prescribe. Imagine yourself going to see a doctor due to illness, the doctor walks in and immediately prescribes you an over-the-counter drug. Wouldn’t you be cautious? The same applies to financial advice.
When it comes to investment management, it’s okay to pay a fee on the percentage of assets that the advisor manages. But if you’re paying more than 1% to someone for managing your money, you’re getting taken advantage of. There is more value to be found through relationship-oriented services than by trying to outperform the market.
True financial planners are in the business of providing unbiased advice that is not influenced by any conflict of interest that is often brought by recommending individual financial products. Be sure that you are paying directly for the advice and not the commission of the products themselves.
To wrap it up…
A financial planner’s value does not often show up on the monthly statement because the value is often lumpy, comes in waves, and can’t easily be attached to a dollar sign. This value can be added over very short periods of time throughout a client’s life but over the long-term you can be sure that this advice will play a significant role in your life’s success.
Financial planning is important because it affects everything else at its roots (i.e. peace, prosperity, freedom). A strong and healthy relationship with money can generate great success over a lifetime. Remember, the greatest obstacle to a clients’ long-term investment and financial success is often themselves.
Many of the above points will each be featured in future articles within “The Value of Advice” series.
Would you like to schedule a free consultation with a Certified Financial Planner™?
- Vanguard, Advisor’s Alpha. By Donald Bennyhoff, CFA and Francis Kinniry, CFA. April 2013
- Russell Investments, The Value of an Advisor. By Brad Jung. June 2013
- Harvard Business Review, Time for Happiness. By Ashley Whillans. https://hbr.org/cover-story/2019/01/time-for-happiness