How do we put a price tag on the value of long term financial advice?
Financial planners and investment advisors are paid for their services in a variety of ways ranging from salary, fee based account management, service trailers from MER’s (Management Expense Ratios), and fee for service or flat fee arrangements. How is my advisor paid to manage my investment funds?
Investors want to know they are receiving value from their advisor. Naturally, professional advisors are interested in making sure they are providing value and cultivate long term relationships with their clients. Let’s take a deeper look at what makes up the best long term value.
True value is in the holistic approach and overall financial advice. It’s in the creation of a plan that incorporates the consideration of tax, investment, and retirement planning, forecasting, reducing investment risk, asset allocation, rebalancing, building and protecting wealth.
Some investors inaccurately believe they are paying for investment returns but the truth is it extends beyond mere returns. An advisor can’t control the markets but they can use their expertise to craft a plan to meet financial goals, design and manage a portfolio balancing growth and preservation as desired and provide peace of mind for the investor. Advisors provide investors with a greater understanding and confidence to attain their goals.
Investors want to know the service fees paid to investment advisors are aligned with value provided. Industry experts try to ascertain whether investors truly understand the value they receive.
Tax strategies alone can save thousands of dollars and do not show up on any type of investment statement. But make no mistake, these have a very real impact on wealth creation and management nonetheless, and are easy to overlook.
Various studies show that advised households are indeed better off than non-advised households. This benefit is significantly amplified the longer the investor-advisor relationship lasts. The Investment Funds Institute of Canada’s The Value of Advice Report 2012 discovered clear value. After 4-6 years, households that receive financial advice have 1.58 times more financial assets than households that invest without financial advice. After 7-14 years they have 1.99 times more and after 15 years they have 2.73 times more. Households who have the guidance of an advisor accumulate more financial assets than those who invest on their own.
Canadians want effective and comprehensive financial advice any many prefer to consolidate using one advisor to rely on for all aspects of their financial matters.
Most investors have a holistic view of their advisor realizing they bring much more to the relationship than investment transactions. However, not everyone will be so quick to see the value. There will still be some people who struggle to connect the dots between price and value for a number of reasons. It can be hard to directly quantify value. There is a great temptation to define an advisors value-added as an annualized number and it isn’t that straight forward.
True value is measured over the long term of the advisor client relationship. As Vanguard Putting a Value on your Value 2014 indicates “…the most significant opportunities to add value do not present themselves consistently, but intermittently over the years, and often during periods of either market duress or euphoria. These opportunities can pique an investor’s fear or greed, tempting him or her to abandon a well-thought-out investment plan. In such circumstances, the advisor may have the opportunity to add tens of percentage points of value-add, rather than mere basis points, and may more than offset years of advisory fees. And while the value of this wealth creation is certainly real, the difference in your clients’ performance if they stay invested according to your plan, as opposed to abandoning it, does not show up on any client statement.”
Investors who are most satisfied have financial advisors who offer a full suite of services. If a portion of your investment management fees are used to compensate your advisor, you may as well deal with an advisor who you are getting more value from than what you might get elsewhere.
Some of the best value-added practices offered by wealth advisors in their office include:
- Tax planning strategies
- Suitable asset allocation and cost effective implementation
- Asset location and rebalancing
- Retirement forecasting, education savings
- Budget and debt management strategies
- Behavioural coaching
- Informed withdrawal and spending strategies
- Legacy, succession and estate planning
Let’s take tax planning as an example. Using tax advantaged strategies for saving, managing wealth, and designing flow of income in a tax efficient manner can have a huge impact on the bottom line for long term wealth. Tax strategies alone can save thousands of dollars and do not show up on any type of investment statement. But make no mistake, these have a very real impact on wealth creation and management nonetheless, and are easy to overlook.
In many cases the fee an investor pays to an advisor for their advice (in whatever form it takes) can be easily made up with tax savings or other gains earned on account of sound financial advice.
In many cases the fee an investor pays to an advisor for their advice (in whatever form it takes) can be easily made up with tax savings or other gains earned on account of sound financial advice. Sometimes people overestimate their investment abilities with their finances, with confidence powered by an armful of do it yourself information. While this may be the path for some, most people can’t replace the value of the advice of an expert. Without advice you may never know what you have lost in the long run.
Column originally appeared in Elgin this Month October 2016. Updated 2021.
Stephanie Farrow, BA., CFP., Stephanie has over 27 years' experience in the financial services industry, a diploma in Financial Planning from the Canadian Institute of Financial Planning and Certified Financial Planner designation. Stephanie has been writing a financial column for local business magazine Elgin This Month/This Month in Elgin since 2010. Stephanie and her husband own Farrow Financial Services Inc. About our Farrow Financial Team.