Written by How do you know when the financial advice you are receiving is “worth it”? Oftentimes, value is seen in the eyes of the beholder, but there are times value is evident in the facts.
Deal or no deal
You may not agree with the $455,000 MSRP of the 2020 Rolls-Royce Phantom. Yet, if you were told you could purchase the car for $15,000, you would probably jump at the opportunity. In fact, you would likely do everything you could to make sure you don’t let this opportunity pass you by. If you had to liquidate some assets or sell your current vehicle, you would do it without hesitation. In the first scenario, you understand you are purchasing the vehicle for the “generally accepted” value. For the second scenario, you know you have built in equity in your purchase.
In other words, you don’t need to be a fan of the Phantom to know it would be a steal to buy one for $15,000. If for some reason you don’t want to drive a Rolls-Royce in a couple months, you are confident you can sell the car for a sizeable profit.
Finding the “generally accepted” value in financial advice is much more difficult. If you receive the right financial advice, it is not an overstatement to say it could save or make you millions of dollars. However, it is also true you could receive financial advice that isn’t worth the paper it was printed on.
Customized to fit your needs
Another thing to consider is the fact that financial advice is not a one-size fits all service. There are a variety of factors unique to you that need to be considered when making your financial plan. Your time horizon (the length of time until you need the money), risk tolerance, whether you have dependents, expected lifestyle and tax implication are all factors that could alter your financial plan. For this reason, your plan is going to be most valuable to you. One of the most beneficial aspects of having a financial planner is the fact that you are mitigating one of the greatest risks to financial success – human behavior.
A Losing Strategy
Human behavior tends to cause you to buy high and sell low; which is a losing strategy by any metric. Yet, when the hot stock is rising and everyone is talking about it, you feel like you are missing out. As a result, when you join the fray, you are likely buying the stock when it is at its highest. Conversely, when the stock you are holding continues to fall, you become nervous and feel the need to cut your losses. You end up selling the stock when it is at its absolute lowest. By having a sound advisor to coach you through market volatility, Vanguard estimates you can gain a ~3% greater return than going at it alone. Having a sound plan that removes emotion and leans on a comprehensive strategy can provide you the confidence needed to weather any storm.
In it for the long haul
An additional benefit to hiring a financial planner is the fact that your planner is going to help you stay the course. Having an accountability partner significantly increases the likelihood you will stay the course. “The Investment Funds Institute of Canada released a report that revealed that clients who paid for financial advice have a 1.5 times higher probability to stick with their long-term financial plan than those who didn’t.” This is due in large part to the benefit of leaving money in the market. JPMorgan put a report out that showed the benefit of investing $10,000 from January 3, 2000 to December 31, 2019. The study found your money would have grown to $32, 421 if you left the money alone and received the annual average return of 6%.
However, if you missed only the best 10 days out of the 5,000 available, you would have less than half as much money. If you miss the best 20 days, you would have essentially broken even and grown by a mere $176 over 20 years. If you miss any more of the best days, you would have lost money. You heard correctly. You would have a negative return over a period of 20 years if you miss less a month’s worth of the best days. By having financial advice, you can trust, you increase the probability of you staying the course.
Increase your quality of life
The Investment Funds Institute of Canada also showed those who pay for financial advice enjoy a higher quality of life. If you are working with an advisor you can trust, then you have peace of mind that others don’t. Ideally, you want to find an advisor who is competent and aligned with your values. Too often people trade their family, health and happiness for money and then they spend the rest of their life spending their money to secure their family, health and happiness. By measuring success by more than the financial return, you allow yourself to have a comprehensive view of what success looks like in your life. The greatest value of money is the ability to buy your freedom. There is no benefit for a person to sacrifice what gives their life meaning to gain wealth.
Final Thoughts
The numbers show professional financial advice is expected to provide you a return greater than the fee you are charged and greater than if you went it alone. In addition to the behavioral control, they help you exert; your financial planner can help provide you the confidence needed to remain the course. This benefit helps you to avoid shiny object syndrome where you are constantly changing your strategy. A planner can also ensure you remain focused on the reason you are accumulating your money. You are not accumulating money for money’s sake, but because you are seeking freedom and the ability to provide for those you love. This ultimately means you don’t need to add the additional risk to seek the highest return if you can accomplish all your goals with a more moderate strategy.
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