What’s The Value Quotient of a Financial Advisor?

Value is a quotient between what you pay to what you get.  Half of the quotient is cost, the other half is perceived value.  The cost side is what you pay, and that’s a highly measurable thing.  It’s easy to understand that people want to get what they pay for… or preferably more.  However, the value side is subjective and a highly individualized measure.

Do you “Get what you pay for”? 

It’s time to update the old adage “You get what you pay for”.  I’d suggest that “You get no more than what you pay for, and you usually get less”.  That’s not being a pessimist, but I have removed the Pollyannaish rose colored glasses to look at reality.  So, how often do you actually feel like you get MORE than what you paid for?  Think about that.  What was so extraordinary that you felt like you really scored a great value?  A new car?  That new kitchen in your house?  An expensive meal?  Private school for your kids/grandkids?  Buy one get one free Hefty bags at the grocery store?  What is it?  People look at what they spend, so the expense part of the value quotient is what people use as a basis to determine what they should get for what they spend… at a minimum.

Is cheap food a good value?

If you need nutrition, you can eat a Hungry Man meal three times per day.  That will likely provide sufficient nutrition to survive.  But, over time, you may feel nausea, watch your body shape change and possibly be subject to long term physical and nutritional deficiencies… but you’ll survive.   This idea was tested in the movie “Supersize Me!”, and it did not turn out so well.

However, if you want a meal tailored to your body size, your metabolism rate and any dietary constraints (oh, it should taste really good, too), you’ll have a meal plan designed to provide sustenance, good health, energy while being mindful of our natural resources… that’s different.   We tend to think of ourselves of the latter, but with the economics closer to the first.  If that were to be the case, would that be good value?

A Value Financial Advisor?

So how does value get translated to an investment planning and investment advisory experience?  Smart advisors have aligned themselves with their clients’ interests.  So when you think about value, let’s look at price.  If your advisor is truly serving you, only receives compensation from you and receives no fees, incentives or commissions whatsoever from any investment, the logic and prudence would dictate that the advisor would seek low cost solutions if available.

High fees lead to long term underperformance.

We know that.  You’ve intuitively known that for a long time.  Let’s actually do something about that.  Using deep resources often not available to individual investors, advisors found ways to help clients get really skinny on the fees where ever we could… and they get skinny.  There are extremely similar if not identical index based investments that advisors can select for investors that have costs as low as 0.04% – 0.05% (IVV – iShares Core S&P 500 ETF, VOO – Vanguard S&P 500 ETF) versus expenses for comparable funds that can be as high as 2.31% (Rydex S&P 500 Class C).  The same investments in different packaging and branding can have widely varying costs.  When a talented advisor is armed with information to make smart and thoughtful decisions, staying skinny on price just makes sense and makes a long term difference to an investor’s outcome.

Understanding Advisory Fees. 

When you work with a fee based advisor, you compensate the advisor to work for you, typically directly from the assets they manage for you.  Also, check with your tax advisor on this as certain investment advisory fees may be deductible to certain limits.  That can be an added bonus.  So, there are investment advisory fees, and the investment fees still exist.

So here is the value question.  What does a financial advisor need to do to create value?  Well, that’s pretty subjective.

Don’t forget about the smoke and mirrors of internal fees.

Has Wall Street ever seen a fee it did not like?  OK, that’s a rhetorical questions.  If you are with a brokerage firm that pays its representatives from “trails”, or fees from the investments themselves, you don’t see the fees, but they are in there.  As you are likely aware, just because you don’t see a fee does not mean that they do not exist.  Investment fees are absolutely clearly disclosed in a prospectus, offering memorandum, Limited Partnership Agreement and the like.  But are you reading them?  Is someone reading them for you, or is someone finding the best investment for you instead of the investment that pays them best?

In an Investment Advisory environment, it’s very different from the big brokerage world.  Fee based advisors don’t collect a fee from commissions, investments or custodians.  Fee based advisors are 100% and directly compensated by their clients… thus, reducing or eliminating related conflicts of interest.

Getting value may mean providing solutions and simplification that you can’t do on your own.  

Consider these realities:

  1. Another full time job. You may be single, a spouse, a parent, a grandparent, an employed person and someone with outside interests and obligations.  Take a look in the mirror.   Do you have the time, desire, objectivity and/or talent to carefully and simultaneously consider 100’s of factors related to your personal financial goals and act on them?  Can you determine what things are certain and/or uncertain that will impact your path towards prosperity?  Managing wealth around guidelines of financial goals is a full time job.  Are you genuinely prepared, interested and able to do that?  What are your true limits?
  2. Information overload. There are just too many things out there from which to choose.  As of April 28, 2017 (based on Morningstar data):
    • There are tens of thousands of individual stocks.
    • There are hundred of thousands of individual bonds.
    • There were a total of 27,414 U.S. mutual funds of varying fund families, styles and expense structures.
    • There 2,021 U.S. traded ETFs.
    • There are another 13,722 strategies of separate accounts.
    • There are over 10,000 global listed Closed end funds.
    • There are 10’s of thousands of specialty investments with Limited Partnership structures.

How do you get your arms around that? How do you identify, track and monitor these ideas for your financial future?  How do you makes decisions to add or change an investment?  How do you complete proper due diligence to learn more and make informed decisions?

3. Access: Most retail investors don’t have access to compelling niche investments, these things have typically been reserved for only the super-wealthy.  However, with the right advisor, smart and compelling investments can be accessed and included in your investment portfolio.

4. Technology: Great advisors have embraced technology to make the client experience better.  Big technology helps connect a client to their entire financial picture, helps an advisor to stay connected with their clients and helps advisors to effectively manage wealth.  Without these tools, most investors are at great disadvantages.

Here are some ways advisors use technology:

  • Simplification/Organization: Have you ever seen every aspect of your financial picture in one place at one time?  I’m not talking about that excel spreadsheet you keep.  Advisors have access to great tools to track assets, liabilities, spending, budgets, insurance impacts, estate impacts and more…. all in one place available to clients at any time.   With all data being in real time in one place, there is a great power to help you see where you are today, and create possible future scenarios to see how those things may impact you.
  • Planning: There is great power in preparing for the future even if you can’t predict the future.  What if you took a snapshot of your life, and could see in real time what your life would financially look like if you bought a new home, had a college savings plan, prepared for the care of an aged parent, prepared for the potential loss of a spouse, projected an inheritance or more.  Great advisors have tools that can create these scenarios in moments.
  • Investing: Tools are used to identify, track and monitor investments in your portfolio on an ongoing basis.  In fact, many advisors use alerts to signal them if there is a material change with an investment they use, for instance, the primary manager of the fund leaves.  That’s important to know.  Also, most advisors have portfolio management tools to allow them to keep your investments within the guidelines in which you have agreed, and also monitor portfolio changes with alerts to be sure you stay on target.
  • Tax Efficiencies – It’s not what you get, it’s what you keep: Great advisors look at both sides of the balance sheet and provide tax smart guidance.  If one smartly manages liabilities for maximum deductibility, and uses tax smart trading tactics to reduce overall tax impact, that translates to more in your pocket.
  • Portfolio Reporting: A portfolio report card is great for investors to understand if they are on track for their goals.  For the advisor, it’s a great way to turn the mirror towards themselves to understand what’s working and what is not.  These reporting tools also help carve up portfolios in a variety of fashions to focus on a certain element.
  • Communication:Whether by land line, mobile phone, texts, social media or screen sharing technology, great advisors make themselves available to their clients using the method that the client prefers.
  • Experience and Educational Competencies: Sometimes the best way to learn how to do something, is by doing it.  With advisors, that’s only part of it.  The first hurdle is achieving licensing standards required by regulators.  Many great advisors seek additional and outside education such as a CFP®, CIMA®or CFA®.  These credentials are typically directly related to the clients they serve to provide a deeper knowledge on certain subject matters.
  • Objectivity: OK, this is your life, can you be objective?  Investors have made naïve or emotional decisions that have impacted their financial lives.  Part of the role of the advisor is to bring an element of pragmatism to the table, and even in emotionally straining times, to help evaluate an entire situation to help a client make thoughtful choices.  Often times, the value of human capital is erroneously reduced or marginalized.

Is this value?

What is the value of having a personal CFO for you and your family that can do all of these things?  If you had to hire one that would only work for you and you alone, what would that cost?  For those that are having an experience that brings these things to clients, I submit to you that those clients are getting great value.  But if you have never had such an experience, I’d have better success in convincing you that I took a close-up photograph of Sasquatch.

Value and financial prosperity is created by a combination of successful elements.

It’s part talent, part listening, part problem solving, part technology, part experience, part patience, part care and part courage to think outside of the box.  These things don’t happen overnight, but are matured over decades in creating prosperous lives for a small number of families.

Being better, not bigger.

Many advisors and clients have been with really big firms, and there used to be advantages to that type of scale.  But, that perceived advantage may now be an impediment, and the façade of big company advantages has disappeared. Great advisors focus on one client at a time, and take the steps to make them think that they are the only client they have.

Advisor Gamma – A Calculated Value.

Fees are largely measurable, but value is generally not.  Morningstar completed a study to help understand the added value of an advisor versus an uninformed investor.  These factors were published in the Journal of Retirement (Fall 2013) and Journal of Personal Finance (Fall 2012).

The study evaluated an outcome over 30 years of working with an advisor versus making uninformed decisions.  It looked at 6 retirement matters:

  1. retirement withdrawal strategy
  2. total wealth asset allocation
  3. tax efficiency
  4. liability optimization
  5. Annuity Allocation
  6. Social Security Claiming

The gamma, or the improvement of using an advisor over uninformed decisions, was 2.34% per year over a 30 year period.  Even if the advisor has a 1% advisory fee, investors using advisors were still advantaged by 1.34% per year.  So what’s 1.34% more per year?  I’t doesn’t sound like much.  Let’s assume you have $1,000,000 invested and instead of making 5% per year, based on the Gamma assumption, you make 1.34% more, or 6.34%.  Based on compounded returns, here is the theoretical benefit over certain time periods:

  • Over 5 years: $34,225 better
  • Over 10 years: $75,173 better
  • Over 20 years: 242,388 better
  • Over 30 years: $633,351 better

This is a cumulative benefit, and sure adds up over 30 years.

Value is personal.

So, when you look at fees and determine what you get for those fees, you can figure out your Value Quotient.  Sure, if you pay fees and get nothing above, crummy value.  But, if you find the right advisor for you that incorporates these things in their practice, provides clarity around your family’s future success and manages all of these other financial functions, that seems like a good value.

Now, it’s up to you. If you are in a great value relationship, that’s terrific.  If not, maybe it’s time to be curious about what you have been missing.

To learn more about Matthew Lapides at Ethos Private Wealth, view his Paladin Registry profile.  

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