Better to Focus on the Value that the Cost of a Financial Advisor Brings You

Picture this: You and your spouse are mid-life, mid-career, and in the middle of accumulating enough wealth to see you through to retirement, and beyond. Until now, you’ve been doing okay on your own. But beyond managing your money, related questions have been popping up lately with increasing regularity.

If organizing your financial interests has become an endless game of whack-a-mole, the cost of a financial advisor might be worth it to help you tame the tangle. Today, let’s take a closer look how an independent financial advisor can assist you.

“Free Advice” Can Cost You

Let’s begin at the beginning: Is it worth paying an independent advisor a separate fee to provide a broader, fiduciary level of financial advice? After all, it may seem as if you can receive plenty of free advice from the folks where you already do your banking.

The problem is, bank employees are not so independent. Instead, they’re often subject to corporate incentives that can interfere with offering truly objective advice. For example, a bank employee may earn financial rewards for pointing you to one product over a comparable one—not because it’s better for you, but because it’s more profitable for the bank. Or they may encourage you to sign up for services you may or may not need. Bank employees also may face career risks for not doing enough to promote their employer’s preferred offerings.

In other words, “free” advice often comes at a steep price. The costs are unlikely to be as obvious, but they’re usually still there. Plus, the actions you end up taking can detract from, rather than facilitate your greater financial goals. Here’s a handy rule of thumb:

If you’re not paying clearly and directly for the financial advice you receive, it’s probably still costing you real dollars; you just don’t know how, or how much.

Fee-Based Advice: Becoming the Boss of Your Financial Interests

So, yes, if you’re going to seek best-interest financial advice, we suggest hiring an independent advisor, typically in the form of a Portfolio Manager.

Fiduciary: A Portfolio Manager has a fiduciary duty to serve your best interests ahead of any other incentives they may have.

Far-Reaching: To serve in a fiduciary capacity, your advisor should take the time to build a deeper, more personalized ongoing relationship with you. How else can they deliver best-interest advice in the context of your particular needs? For example, let’s say you’re a small business owner, planning to transition into retirement within the next 15 years. To organize the dizzying array of tax, retirement, insurance, estate, and general financial planning details, you’ll require far more than stand-alone, one-off advice.

Fee-based: Your advisor also should be fee-based. This means the fees they charge for the advice they offer should be their only source of compensation … no commissions or similar incentives for recommending one product or service over another. With a fee-based engagement, the cost of your financial advisor is clearly disclosed, so you become the boss to which they are beholden, not some invisible third-party corporate entity.

The Scope of Financial Advice

The cost of an independent financial advisor should cover far more than merely helping you buy or sell this or that security in your investment portfolio. Here are some of the ways an advisor should be able to justify their fees.

Minimizing investment costs: To you, one U.S./Canadian large-company stock fund may look the same as any other. But check out each fund’s management expense ratio (MER), and you can find underlying fees ranging from a miniscule 0.01%–0.02% annually, to a bloated 1%–1.5% for essentially the same asset class exposure. Simply identifying cost-efficient funds to provide the desired investment experience can save thousands of dollars annually all by itself.

Maximizing long-term investment returns (in relation to your risk tolerance): At the same time, the cheapest investments aren’t always the most cost-effective overall. At Lowrie Financial, we start by creating an Investment Policy Statement to guide each client’s investment experience. Then we design an evidence-based investment portfolio, tailored according to their personal goals. Only then do we select the most cost-effective funds to build out the portfolio. Having a clear plan to stick to through thick and thin can save untold time and money otherwise spent chasing after flights of fancy.

Minimizing taxes: As I covered in “Tax Strategies to Boost Your Financial Savings”, there are endless ways to judiciously manage your lifetime tax planning to save hard, substantial tax dollars. Integrated tax planning also is important for small business owners, as they decide how to structure their business and draw money from it over time.

Avoiding costly investment mistakes: This is among my favorites, because I believe the hidden costs of “do it yourself” investing are often the most expensive, avoidable ones around. The cost of good financial advice can pay for itself if your advisor prevents you from fearfully bailing out, and selling low during a scary market bottom, or abandoning your plans and piling into a high-priced, overly concentrated trend. Better still if they guide you through periodically rebalancing your portfolio to stay on track toward your personal financial goals.

Coordinated planning: Sooner or later, you’re also likely to engage in financial planning, retirement planning, and estate planning, and purchase insurance coverage to protect the life you’ve built for yourself and your loved ones. If you seek each of these as stand-alone services, you’ll incur costs for each. Some of these costs—such as retirement and financial planning fees—can instead often be bundled into the costs of your fee-based financial advisor. Others, such as estate planning fees, may remain separate. Either way, by working with a financial advisor to integrate your various financial interests into a holistic plan, it’s more likely your results will be on-target and your money well-spent.

Saving you time: Last but not least, part of the reason to engage a financial advisor is to delegate some of the chores involved in managing your financial interests, so you can spend less time tending to your wealth and more time truly enjoying it. While the value here is more qualitative than quantitative, it can be worth every penny if you’ve found an advisor who is a good fit for you.

So, what is the long-term value of financial advice? You be the judge…

Here are few key findings of several independent studies quantifying the value of working with a financial advisor:

Advised clients have greater net worth over time. “3.9 times as much over 15+ years.”
Source: The Gamma Factor and the value of Financial Advice, Claude Montmarquette, Natalie Viennot-Briot, 2016

Advised clients are more successful at saving. “80% of investors say their advisor helped them save.
Source: Canadian Investors’ Perceptions of Mutual Funds and the Mutual Fund Industry, Pollara 2019.

Working with an advisor encourages higher savings rates. “10.8% savings rate for advised clients vs 6.7% for No advice clients.”
Source: The Gamma Factor and the value of Financial Advice, Claude Montmarquette, Natalie Viennot-Briot, 2016

Working with an advisor encourages longer-term investing. “81.1% allocation to non-cash investments for advised clients vs 53.6% for No advice clients”
Source: The Gamma Factor and the value of Financial Advice, Claude Montmarquette, Natalie Viennot-Briot, 2016

Advised clients have a positive sense of well-being. “76% of investors that use a financial advisor report having a positive sense of well-being.”
Source: BlackRock Global Investor Pulse, 2019

I hope I’ve given you some insights you can use to assess the value of independent financial advice vs. just looking at the cost of a financial advisor. Let’s continue the conversation soon.