Episode 86: Why Should I Hire A Financial Advisor

Transcript

Hello and welcome to the balanced wealth podcast. My name is Gavin DiStasi.

On today’s episode I want to talk about professional money management and the pros and cons of hiring someone like us to manage your money, rather than going it alone.
In my mind, there are two fundamental questions surrounding professional investment management and its value.

The first question is, why pay an advisor to manage my money at all? And the second, why should that person be me, or anyone else you might be considering?
So let’s start with the first question, why should I pay an advisor to manage my money. Which, to me, again comes down to two primary reasons. There are other ancillary benefits which add to the equation over time and we will talk about them, but at the core, there are two.

And, neither of them is because we, or anyone else for that matter, know where the market is going in the short term, or because we have access to exotic or obscure investment products. Which, if you spend any length of time following financial news media, you would think is what so many out there suggest they can do or have access to. No, the first and most important reason to hire a professional to manage your money, and coincidentally, the one clients tend to be least open to, is client behavior.

It is counterintuitive for a client, who has been successful in their lives and always been able to rely on their intellect and acumen, to hear to us or anyone else tell them that investing can be quite simple at its core. And yet, if they try to go it alone, they are quite likely to make multiple damaging mistakes over the years. And I get that. But the evidence is overwhelming. Countless studies and academic research, in all kinds of market conditions, and throughout the history of capital markets come to the same conclusion; client behavior is the single biggest factor for adverse results in managing investments. When faced with outsized stress or volatility in up markets or down, individual clients, going it alone, will more often than not, make decisions with their money that can cause major damage to their overall financial plan.

Now, many clients believe when they hear this, that because they are smart successful people, they will not succumb to this type of mistake, and that those in the studies and the research must not have the same intellect or acumen as they do, but these studies, including the annual Dalbar report that we often refer to, only include people who invest in the markets. People who have enough net worth and disposable income to invest in capital markets. These are not minimum wage workers, but wealthy successful people just like them. Behavioral finance is not only real, but is one of the only undeniable truisms in investing, which is why it is the cornerstone of our investment philosophy.

The second, and just as, if not more significant reason to hire a professional to manage your investments, is quality of life. Call it peace of mind or any other catch phrase you want, but it really comes down to knowing that your financial portfolio is being vigilantly managed and monitored at all times, by seasoned professionals, freeing you up to focus on the things that are most important in your life.

Because even if we decide that you are the 1% of people impervious to the missteps of behavioral finance, the amount of time needed to research, monitor and manage your various financial accounts, is significant, and is time taken away from other, more life affirming pursuits. If a client is able to spend even 1 extra hour per week with their family, playing golf or riding their bike, volunteering for their favorite charity, whatever it is that makes them happier healthier people, then 1% seems a very small price to pay. It’s the quality of their time that counts, and what we find is that people who have the peace of mind that goes along with professional money management tend to be happier, more stress-free people.

The second fundamental question of professional management is, why us? There is the personal side of it of course, trust and communication. And while trust is something that is built over time, it is important that you feel comfortable, at the least, with what we are doing and our philosophy from the start. This is a relationship business, and it is vital that we are on the same page when things are good, because when things get rocky, and they always do in the markets, it is this comfort level that will give you the strength to forge ahead with the plan. We all talk about providing great service, but this again is something that is revealed over time.

From a personal standpoint, I firmly believe that because we are a relatively small (you might say boutique) shop, and because the place we practice is also the place we grew up, and where our children go to school and so on, our sense of community, and our reputation in the community is extremely important to us. That’s not to say there aren’t other perfectly qualified advisors out there capable of providing a great experience. There most certainly are, and we happen to know quite a few. The point I think, is that it’s about finding that comfort level with whomever you choose to work.

The truth is that not every client is a great fit for every advisor, no matter how good they are. And one thing that I think experience helps teach us is when that fit isn’t right. Early on in an advisor’s career, we tend to think every potential relationship is vital. That’s partly out of necessity, since we all need clients to build our business and make it viable. But it’s also a lack of experience in being able to identify a relationship that just doesn’t quite mesh.

Now from a technical standpoint, meaning how we actually work with our clients, for the most part we provide two separate, but complimentary services: Financial planning and investment management. These two terms contain a vast array of subservices, and we won’t get into all of that today, but for most of our clients we are acting as a sort of financial quarterback. A starting point for all things financial in their lives that need to be addressed as they progress through the different stages of their financial journey so to speak.
Because of the nature of how advisors charge for their services, which is normally as a percentage of the assets under management, usually somewhere around 1%, one of the most common questions we get from potential clients is: are we able to beat our benchmarks by over 1% each year, thus compensating for our management fee.

The answer to that questions is no, but despite that being a seemingly reasonable question, we feel it is simply the wrong question to ask. The right question is, do we feel the services we provide will be worth more than 1% per year to your bottom line over the long term? And the answer to that question is a resounding YES, and much of the latest research suggests the number is likely much higher than 1%. Vanguard released a study a few years ago that put the annual worth of professional advice and management at closer to 3% per year, and that’s without even considering the quality of life piece of the equation. So, when seen through that prism, it could be suggested that 1% is a steep discount to the overall value an advisor can provide.

With all that said, it’s still a very personal decision. Some people simply cannot fathom the idea of paying someone else for something they think they can do themselves. I get it, and if you truly feel that way, you probably shouldn’t hire a professional because you are unlikely to fully commit to the plan, which is vital for a financial advisory relationship to work over time. But if you do feel that hiring an advisor is for you, I highly recommend that you take the time to find someone you believe is a good fit for you from the start. Because when things get rocky, and the markets are wavering, you need to feel like you’ve been on the same page as your advisor from the outset, to get through those tough times, in order to achieve the long term results we’re all hoping to achieve.