I came across a very good article by Bob Seawright that takes a look at ways that a financial advisor can be of value to their clients beyond investment performance.
In the article (which can be accessed here) he lists the following key advantages of working with a financial planner:
1. Goal Formation. A good advisor will help investors establish appropriate, realistic and manageable goals.
2. Investment Policy Statement. An advisor will ensure that as part of the broader financial plan the investor defines their investment philosophy, goals, guidelines and constraints to be adhered to with respect to money management. This instills structure and discipline.
3. Asset Allocation. The total return of any portfolio has three components, which may be positive or negative: (a) returns from overall market movement; (b) incremental returns due to asset allocation; and (c) returns due to market timing, security selection, and fees. Research suggests that, in general, about three-quarters of a typical portfolio’s variation in returns comes from market movement (a), with the remaining portion split roughly evenly between (b) and (c). The conclusion is that asset allocation is more important and the elements that comprise (c) are less important. The exercise of allocating funds among various investment vehicles and asset classes is at the heart of investment management. Asset classes exhibit different market dynamics, and different interaction effects. Thus the allocation of money among asset classes and among investment vehicles within asset classes will have an enormous effect on the performance of an investment portfolio. Competent financial advisors therefore places a big emphasis on matching asset allocation with client objectives and risk profiles.
4. Persistence-Weighting. Various studies demonstrate that certain investment characteristics can and do outperform with persistence over time (even though they can and do underperform for significant periods). These include size (the small-cap premium), value, momentum, low beta and concentration. By following competent advice, investors can and should take advantage of these opportunities.
5. Risk Management. Good advice can provide investors with tools for managing risk, including asset/liability matching and tactical adjustments due to long-term factors such as a secular bear market or low expected returns.
6. Behavioral Management. We are all prone to behavioral and cognitive biases that impede our progress and inhibit our success. We are prone to flitting hither and yon chasing after the next new thing, idea, strategy or shiny object. Our behavior typically corresponds to the following chart. A good advisor can mitigate these tendencies.
7. Senior Protection. Research confirms what most of us have seen among our families and friends. The ability to make effective financial decisions declines with age. To put it starkly, research shows that financial literacy declines by about 2% each year after age 60. Despite that decline, our self-confidence in our financial abilities remains undiminished as we age. That’s a scary combination that a good advisor can guard against.
8. Tax Efficiency. Experienced money managers routinely argue that you shouldn’t “let the tax tail wag the investment dog.” And it’s true that a poor investment isn’t often salvaged by good tax treatment. But tax efficiency still matters a lot and a good advisor providing the best approaches for dealing with taxes offers tremendous value.
9. Financial Planning. Each item on this list relates to financial planning in one form or another. Yet consumers often mistake investment management with financial planning. Financial planning is much broader, involving far more than the managing of investments. It involves budgeting, goals, appropriate insurance, comprehensive planning for lifestyle, retirement, legacy and more. It also involves crisis prevention and management. Great investment management can be undone in a hurry with poor financial planning. A good advisor can work to help individuals formulate, monitor, adjust and meet their personal and financial goals.
Bob Seawright concludes his assessment of the value that can be added by working with a competent financial planner stating: “Ultimately, a good advisor can and will influence and even change your behavior. In a world where personal financial issues have become increasingly and often unnecessarily complex, a good advisor can help you figure out what is true and what isn’t, what works, what matters, what is useful, and what can go wrong. There are few enough people with the expertise sufficient to begin to do that for themselves. Nobody can do it objectively.”