Many people often wonder if it is worth it to pay a financial advisor to manage their wealth. I hear this question often, and it’s an excellent question with an answer that depends on your personal situation and many factors.
At One Life Financial Group, we work primarily with small business owners, physicians, dentists, and business executives. If you fall into one of these categories, a financial advisor can bring a multitude of benefits to the table for you.
Below, you’ll read about six different ways that hiring a wealth advisor could benefit you and your family. This list is not comprehensive. To be honest, this blog post would have been way too long if I would have kept going!
Guidance from a trusted advisor
In my opinion, the single most significant way an advisor can add value for you is through behavioral coaching and acting as your trusted advisor. This type of advice can be invaluable – and is always tailored to your situation and how you can work towards succeeding in a specific situation.
There is an overwhelming amount of investment information on the internet, but too much information is not necessarily a good thing. How do you determine what information is good? Do you have the time or the desire to sift through this vast amount of material? Which investment and tax planning software can help you develop a strategy that is easy to implement? A wealth advisor can do the heavy lifting for you, so you can spend more time doing what is most important to you—living life.
External insight from your advisor that helps you avoid emotionally driven decisions in your important money matters can significantly impact your portfolio. When the market gets wobbly or crazy, your advisor can help keep your worries in check by giving steady, fact-based advice. It can save you from emotionally driven situations like selling during market lows and buying during highs.
Potentially better returns
While it’s certainly no guarantee, an advisor’s advice can help your bottom line. A study by Russell Investments, a large money management firm, says an advisor who delivers comprehensive wealth management can increase your returns by about 3%.
On the flip side, a Vanguard study of more than 58,000 self-directed IRAs showed that investors who made material changes to their strategy even once in the five-year time frame from 2008 to 2012 suffered a hit to their return of at least 8%.
One of my beliefs is that managing wealth is like maintaining the engine in your vehicle. If you skip doing routine maintenance like changing the oil in your car’s engine, it might not last as long as it should. Similarly, if you set and forget your investment strategy, I think you could miss out on 1% or more in investment returns.
How much could an extra 1% return provide you over the long haul? Let’s take the example below:
Bob and Betty are 40 years old. They have $500,000 in their 401k plans at work. They save $20k annually into their retirement plans, and their employers contribute $10k /year.
If they earn a 9% investment return, they will have $6,158,018.87 in 25 years. If they earn just 1% less (8%), they will only have $5,003,325.90 – that’s a difference of over a million dollars! As you can see, missing out on just 1% in returns can be costly.
If you haven’t changed your vehicle’s oil within the last year, it might be time for a trip to the mechanic. Similarly, if you haven’t done a comprehensive review of your investment and tax planning strategies within the last year, it might be time for a second opinion.
Tax Minimization
Minimizing your tax obligations is a significant piece of the overall wealth planning process that your financial advisor can provide. We often help people explore strategies that could help minimize their tax bill today and in the future. A few strategies we regularly explore include:
- Tax-loss harvesting
- Using asset allocation strategies
- Roth IRA conversions
- Gifting appreciated securities instead of giving cash
- Strategies to reduce taxes on Required Minimum Distributions
- The IRS requires you to take money out of retirement accounts at age 72
- Using donor-advised funds
- Tax-managed investment strategies
- Minimizing taxes on Social Security benefits
- Asset location (i.e., where you save and how much you save)
While each of these opportunities is worthy of a separate blog post, let’s talk for a moment about minimizing taxes on social security benefits. Did you know that 50-85% of your Social Security benefit can be taxed? Putting money in a Roth IRA is one way you might be able to eliminate some or all that tax without being in a higher (taxable) bracket.
An experienced financial advisor can help you explore and uncover strategies for minimizing taxes that can benefit your specific situation.
Company Retirement Plan Management (401(k), 403(b), 457, etc.)
One of the most significant issues we see regularly is investors not actively managing their 401(k). In many cases, a 401(k)is a big part of someone’s retirement savings, but unfortunately, they don’t know the last time they logged in to their account!
The financial markets and the company retirement plan landscape are constantly evolving, which can make it difficult for you to manage your 401(k). In recent years, new legislation with more complex rules has been passed, provider platforms have been enhanced with more features, and investment options have been expanded. Any time your company retirement plan changes (i.e., new investment options, change to the plan fees, or an adjustment to the plan rules), it is important to review your benefits and investment strategy.
Rebalancing your 401(k) portfolio is not something you only need to do once. In our opinion, for maximum impact, your account should be monitored regularly and rebalanced anytime there is a change to your financial plan, goals, investments in your plan, or a change in your risk tolerance.
And as your 401(k) grows, you may benefit from a personalized investment mix rather than the age-based allocation in a target-date fund, which is often the default option from 401(k) providers. While these “one size fits all” solutions might be easy to use, there may be some major potential setbacks with these canned strategies. The biggest issue I have with age-based or “target date” retirement funds is that all your money is invested in the same strategy.
For example, I recently met with Bob, who plans on retiring next year. He’s planning on using his 401k for a $100,000 down payment on a cabin. He was in a target-date fund that had his portfolio invested in 60% stocks and 40% bonds. That type of portfolio could lose over 20% in one year. That means the $100k in Bob’s account might only be worth $60k when he’s ready to use it. If that happens, Bob will be faced with a difficult decision: sell his portfolio at a loss or wait until the market rebounds to purchase his cabin.
We suggested using the guaranteed fund in his plan to hold his cabin down payment funds. That way, the funds would be there if there was an unexpected market crash. We then invested the remainder of his funds into a customized strategy designed to achieve the goals in his financial plan.
A cohesive, unified financial strategy that is tax and cost-efficient and doesn’t sacrifice your target investment mix is the goal of most investors. A financial advisor can review the options to help ensure you utilize the plan’s features, considering your other investments and tax-saving strategies.
Insurance Savings
Full disclosure: I hate insurance. I love my family and want them to be okay if I become disabled or die unexpectedly. But I hate the idea of throwing away even $20/month for insurance that I don’t need. I used to be an insurance agent years ago and understand how insurance works (and how insurance companies make a profit). I’ve seen many clients rescued from insurance when they lose a spouse because they had the right amount of life insurance. But I’ve also seen way too many situations when people pay for insurance they don’t need. Why is that?
Sometimes the insurance agent sold something that the client didn’t need. Other times the client purchased something, and their situation changed. Their assets grew, they aged and had less of a need, and their debt decreased. Some insurance agents do a comprehensive analysis for life, disability, and long-term care insurance. But many of those same agents don’t rerun their insurance analysis for their clients over time. Why is that? It might be because they make more money when they sell a new policy. It also might be because they will lose money if their policyholders reduce their coverage.
What’s the hypothetical value of a financial advisor who can help you with insurance analysis? It’s difficult to say, but last week I discovered a client could save 8% per year on their premiums for disability by changing their premium mode from monthly to annual, and they could save an extra $130 per year if they dropped a rider they didn’t need. That savings hypothetically could have been $210/year for 26 years or $5,460 over the life of the policy. That type of savings could pay for a nice vacation!
DISCLAIMER – We don’t sell insurance, and we don’t accept referral fees or compensation from insurance agents that we refer you to! But we can help you make sure you get the coverage you need, based on your personal situation, and not overpay.
Goal Setting and Staying on Track
Pretty much all of us have goals and ideal lifestyles that we aspire to attain, but unfortunately, most people don’t have a documented strategy to help them achieve their aspirations. At One Life Financial Group, we focus on listening to your goals and dreams, then help you document a plan to work towards your goals and build the life you want. Along the way, we help you make informed and educated decisions to stay on track.
Speaking of staying on track, let’s be honest. How many times have you made a plan with the intention of sticking to it but then failed to follow through? I’ll admit I’ve done it many times! It’s much easier for me to get started and then either get off course or lose motivation than follow through when things get difficult or complex.
Your finances are no exception. A trusted financial advisor can be the person you need to help you stay on track and bring order to your financial life.
At One Life Financial Group, we do your financial planning so that you have the freedom to focus on what matters to you. We work with small business owners, physicians, dentists, and business executives every day, and we can help you develop a plan that helps maximize your wealth and protect your cash flow. Click here to learn more, or click here to schedule a consultation.