Value Provided by Financial Advisor Can Exceed Fee

Jane Young, CFP, EA

Jane Young, CFP, EA

Many things can trigger the decision to hire a financial planner.  You may need some direction on how to prioritize your spending and saving to better prepare for the future.  You may be too busy or uninterested in managing your own finances.   You may experience a sudden life change such as a marriage, divorce, inheritance or retirement.   Your situation may be getting complicated and you want a professional opinion or you lack the technical expertise to continue managing things on your own.

Although, you may need a financial planner you may be hesitant to pay the fee.   Fee-only planners can be compensated using a flat fee, a percentage of assets or an hourly rate.   The fee will typically be around 1% of assets for on-ongoing advice.   A recent Vanguard study may help put your mind at ease.   The study found that the added value provided by a fee-only planner can far exceed the cost.

In 2014 Vanguard published the results of a study they conducted on the value added by advisors.  The study found that financial advisors can add up to about 3% in net returns for their clients by focusing on a wealth management framework they refer to as Advisor’s Alpha©.  The study found that an advisor can add to a client’s net returns if their approach includes the following five principles: being an effective behavioral coach, applying an asset location strategy, employing cost effective investments, maintaining the proper allocation through rebalancing and implementing a spending strategy.  These are just a few of the practices and principles followed by most comprehensive fee-only planners.

The exact amount of added return will vary based on client circumstances and implementation.  It should not be viewed as an annual return but as an average over time.  The opportunity for the greatest value comes during periods of extreme market duress or euphoria.  Additionally, Vanguard found that paying a fee for advice using this framework can add significant value in comparison to what the investor had previously experienced with or without an advisor.

Vanguard’s framework places emphasis on relationship oriented services that encourage discipline and reason, in working with clients who may otherwise be undisciplined and reactionary.  Rather than focusing on short term performance there is a focus on sticking to the plan and avoiding emotional overreaction. Advisors, acting as behavior coaches, can help discourage clients from chasing returns and focus instead on asset allocation, rebalancing, cash flow management and tax-efficient investment strategies.

The study found that when advisors place emphasis on stewardship and a strong relationship with the client, investors were less likely to make decisions that hurt their returns and negatively impacted their ability to reach long term financial goals.  According to Vanguard “Although this wealth creation will not show up on any client statement, it is real and represents the difference in clients’ performance if they stay invested according to their plan as opposed to abandoning it.”

Managing a Sudden Windfall

Jane Young, CFP, EA

Jane Young, CFP, EA

If you are fortunate enough to receive a significant windfall give yourself some time before making any major decisions.   A sudden influx of cash from an inheritance, winning the lottery, life insurance or the sale of a business can cause a major disruption in your life.    Over 50% of all windfalls are lost in a short period of time.  NBC news reported that more than 70% of all lottery winners exhausted their fortunes within 3 years.   You need some time to emotionally adjust to your situation and to create a plan.

You may experience a variety of new emotions and it’s important to avoid making decisions for the wrong reasons.  Some common emotions include guilt, loss of identity, isolation, anxiety, unworthiness, fear, intimidation and a lack of confidence.  It’s crucial to recognize and deal with these emotions before making big spending decisions that may hamper your long term financial security.  You also may feel pressure from friends and family.  Stand your ground and take the time needed to develop a well thought out plan.

You also want to carefully select a team of trusted advisors to help manage your windfall.  Most people will need a Certified Financial Planner, a Certified Public Accountant and an Estate Planning Attorney.  It’s essential to develop a financial plan, fully understand the tax implications of your windfall and put a new estate plan in place.

Initially your financial plan should include establishing an emergency fund equal to about one year of expenses, paying off your high interest debt, and making sure your new found wealth is adequately protected.  A significant windfall will probably necessitate the purchase of more liability insurance.  Additionally, you should address any health concerns that you or your immediate family may have been neglecting.  Also consider reducing your overhead by purchasing a home or paying off your mortgage.  This is also a good time to take care of any maintenance and repairs that you have been putting off.

Once your immediate concerns are addressed, think about the future.  If you were unable to cover your living expenses prior to the windfall, make a plan to cover your monthly cash flow needs.  Next develop a retirement plan to make sure your expenses in retirement are covered.  Consider saving for your children’s college and setting aside money for major necessary expenditures such as vehicles and appliances.   If you are in an unrewarding career, consider going back to school to transition into something more fulfilling.

Once you have addressed all of your current and future financial needs feel free to spend on some discretionary items.  You may want to help a friend or family member who is in need, make a charitable contribution, start a business, or plan some vacations.   At this point you can spend some money on having fun.  Unfortunately too many people start with fun and quickly spend through their entire fortune.

Your Money Bus is Coming to Colorado Springs

Your Money Bus is coming to Colorado Springs.

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It’s never too late to secure your financial future.

Re: Free Non-profit Financial Education Event – Please share with friends, family and business associates.

All of us have family; friends and colleagues who are struggling to save money, eliminate debt and find jobs. Please share with them the opportunity to meet for a free one-on-one with local independent financial advisors when the national Your Money Bus Tour rolls into Colorado Springs on July 8th and 9th. Pinnacle Financial Concepts, Inc. is coordinating the Colorado Springs stop of this non-profit tour, visiting more that 25 cities. We will be volunteering at this event along with several other fee-only financial planning firms in town. The Your Money Bus Tour is sponsored by The National Association of Personal Financial Advisors (NAPFA) Consumer Education Foundation, TD AMERITRADE, Kiplinger’s Personal Finance magazine and FiLife.com.

The Your Money Bus Tour will stop in Colorado Springs at the Penrose Library (downtown) on July 8th from 12:00 – 7:00 and at UCCS, Lot 1 on July 9th from 12:00 – 5:00. At each stop, consumers can sit down with locally-based volunteer financial advisors to ask pressing financial questions. All Money Bus visitors will receive a free financial education kit, including a Kiplinger magazine and a budgetary workbook.

Forty percent of American families spend more than they earn and the average American with a credit file has more than $16,000 in debt, not including mortgages. We encourage people to stop byYour Money Bus to learn how to better save, eliminate debt and develop personal financial sustainability habits that will get them through and beyond these tough times.

The NAPFA Consumer Education Foundation is a 501c (3) organization committed to educating Americans on personal finance. Consumers need easy to understand information without any bias, sales, or conflicts of interest. All volunteer financial advisors are fee-only fiduciaries; nothing is being sold or promoted. This is strictly educational and free information for the public. The public is welcome to just stop by or make an appointment ahead of time.

For more information, visit www.YourMoneyBus.com and for up-to-date schedule information contact Krist Allnutt,krista.allnutt@perceptiononline.com.

Warmest Regards,

Jane M. Young, CFP, EA

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