Multiple research studies show that people who use financial advisors do better, on average, than those who don’t, so why don’t more people want to pay for financial advice?

There are a number of reasons. With so much information online, and index funds that offer inexpensive exposure to every corner of the investment universe, many investors think they can do it themselves. Some rely on computer models that automatically invest and rebalance their portfolios — without any human intervention. Others are flooded with information from every corner and don’t know who to trust.

HOW FINANCIAL ADVISORS ADD VALUE

People usually decide to hire an advisor when they settle into a career, start a family or experience some other major life event. With busy lives, many find they don’t have the time or inclination to manage their finances themselves. Financial advisors have the training and experience to help put your financial situation on solid footing.

It’s not all about investment returns. The greatest value that an advisor can add is in these seven areas of financial planning:

Values: An advisor can work with you to identify your values and what’s most important to you. Do you want to leave a legacy to your kids? Do you want to own two homes one day? Do you want to make sure that you do not run out of money before you run out of time? Once your advisor understands your values and your priorities, they can ensure that your financial plan is aligned with your long-term vision and determine whether or not you can financially afford to put your vision into reality.

Investment access: Larger advisory firms may be able to offer you investment options at a lower cost than you might get on your own, as well as access to difficult, highly rated, hard-to-access managers that may be closed to new investors. If an advisor is charging you 1% of your assets each year to manage your money, all in, you may recoup as much as half of that amount in terms of lower total costs.

Asset allocation strategy: An advisor’s fee should include creating an asset allocation strategy tailored to your individual goals and risk tolerance. Asset allocation is the process of spreading your assets across various types of investments, such as stocks, bonds and cash, and has the biggest impact on your investment results. You receive value when the advisor monitors your account and manages any future adjustments to keep that allocation strategy on target — either quarterly or annually. This can save you valuable time.

Retirement planning: Many investors don’t understand the different ways that various retirement-focused accounts can be used in income planning: 401(k)/403(b), traditional IRA, Roth IRA, income ladders, annuities or taxable accounts. When an advisor helps you diversify your tax exposure — which should also be included in their annual fee — you may be better positioned to make your money last longer in retirement.

Asset protection: Once you have accumulated financial and other types of assets, you need to protect them from loss. An advisor can help you purchase various types of insurance, including property and casualty, life, liability/umbrella, and special policies or riders to cover valuable art or collectibles.

Cohesive tax strategy: Probably half of the tax returns we review each year show that taxpayers don’t claim the right amount for Qualified Charitable Deductions (QCDs), especially if they are paying them directly out of an IRA. And many don’t understand the different tax treatments that apply to 401(k), traditional or Roth IRAs or taxable accounts — or how to diversify their tax exposure. Advisors can help you decide when to take Social Security benefits or required minimum distributions (RMDs) — which can be surprisingly complicated, depending on your situation.

Estate and gift planning: A full service advisory firm should be able to quarterback the creation of your legacy planning and gifting strategy — with input from your attorney and tax professional. This includes the creation of trusts to pass your wealth efficiently to future generations, or to distribute gifts of cash or securities to your loved ones or favorite causes in a tax-smart way.

Comprehensive planners will be able to address all seven of these areas of financial planning.

HOW TO CHOOSE AN ADVISOR

If you’ve decided that working with an advisor could be helpful, it makes sense to interview two or three candidates before you make the hiring decision. If you know a trusted friend or family member uses an advisor and has had a good experience, ask for a referral. As part of your research, you should evaluate each candidate using these criteria:

• Can you have a conversation with this person? Do they listen to you? Did they seem to care about you?
• What is the advisor’s experience and expertise? Has she been through at least one recession? Does she focus on one specialty, such as retirement planning, or is she more of a generalist?
• What is their training and credentials? Are they a Certified Financial Planner (CFP), Certified Financial Analyst (CFA) or Certified Public Accountant (CPA)?
• Finally, pay attention to how the advisor is paid. While a registered representative and a registered investment advisor (RIA) are both legally bound to work in your best interest, the way they are compensated will tell you a lot about where their monetary allegiances may lie. It always is a good idea to conduct a background check through the FINRA, SEC or CFP Board websites.

A great advisor should be able to demonstrate their value many times over in a number of areas of your financial life.

This article was originally published in the Pioneer Press.



The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. 

Bruce Helmer and Peg Webb are financial advisors at Wealth Enhancement Group and co-hosts of “Your Money” on KLKS 100.1 FM on Sunday mornings. Email Bruce and Peg at yourmoney@wealthenhancement.com. Securities offered through LPL Financial, member FINRA/SIPC. Advisory services offered through Wealth Enhancement Advisory Services, LLC, a registered investment advisor. Wealth Enhancement Group and Wealth Enhancement Advisory Services are separate entities from LPL Financial.