I recently Googled “Do I need financial advice” and found 780,000,000 results. Wouldn’t I be delighted if found, among the top 20 results, content that focused on areas such as estate planning, cognitive biases, or even self-discipline through accountability?
Like the physicians and professors I’ve served over the years, I don’t have the time or inclination to surf through even a small fraction of these links. At a quick glance however, it appears they all, in one way or another, link back to investments.
When, and why, did the perception of financial advice get construed as investment management?
Investments are vehicles by which you can take a measured amount of risk to achieve a measured amount of return, often with some deviation from the mean. Should that process be managed? Yes, it should. Is that the reason to hire a financial advisor? No, it’s not.
There are plenty of low-cost solutions out there for portfolio management. Take Robo-Advisors for example. You can choose from many, but Betterment and Wealthfront are well known competitors in this space. Neither of these platforms have a minimum investment requirement, both charge a 0.25% management fee, and both are run by complex algorithms and produce results that you can view from anywhere, anytime, via your mobile device.
Dang it, I just realized I might be out of a job! There goes my Certified Financial Planner (CFP®) and Chartered Retirement Planning Counselor (CRPC®) designations. Yeah, Behavioral Financial Advisor (BFA) designation, I was going to get to you next, but I guess we’ll never have the chance to share coffee.
Truth be told, I haven’t the slightest fear of that happening. My confidence survives because I recognize the commodity that investment management has become. Identify the best allocation per your risk and goals, rebalance as needed while minding taxes, keep costs low, and avoid making emotional decisions during both good times and bad. Are there more technical aspects involved? Sure. But this is the essence of a good investment strategy.
Why shouldn’t you hire a financial advisor (just) to manage your investments?
Hiring a financial advisor for the sole (or primary) purpose of managing your investments is a rather silly idea. While you may not have the background to build out a strong investment strategy, you also don’t need to throw 1% of your investment value at someone who does.
Let’s recap the most important, and impactful, aspects of a good investment strategy:
- Identify the best investment allocation
- Rebalance as needed
- Keep costs low
- Manage tax implications
- Avoid emotional decision making
Each of these, except for emotional decision-making, can be done relatively easily and without taking too much time. Let’s break it down:
Identify the best investment allocation:
The old rule of thumb used to be that you should subtract your age from 100 to get your suggested stock allocation. Someone age 45 would have 55% in stock, someone age 75 would have 25%, and so on. Due to an increase in the average age of Americans, I suggest taking between 110 to 120 and subtracting your age. Alternatively, you can visit the Asset Allocation calculator on SmartAsset.com to incorporate more qualitative aspects of your allocation choice.
Rebalance as needed:
This is simple to do within your retirement account as you don’t need to worry about tax consequences. If your overarching investment strategy is 50% stock / 50% bonds, check your portfolio once or twice a year to see where it stands. If you find you have a 60/40 mix for example, simply sell some of your stock to reinvest the proceeds into your bonds. Whatever you do, make sure your stick to the plan! Rebalancing your taxable account is a bit trickier. There are tax considerations when investments are sold. Consult with your tax advisor or CPA to better understand the tax implications of rebalancing in a taxable brokerage account. Financial advisors can also be a good resource if you leverage them for holistic financial planning.
Keep costs low:
Index funds have gotten a lot of attention the past several years, and for many good reasons. One of those is the cost (internal expense ratio). There are hundreds of index funds available, many of which have expense ratios as low as 0.03% ($3 for every $10k invested).
Manage tax implications:
Don’t be concerned about this in your retirement account. Your retirement money won’t be taxed until it’s withdrawn, or never if it’s a Roth IRA. Money in your taxable accounts (joint brokerage accounts for example) is taxable based on dividends and capital gains. While investing may be relatively easy, taxes are not. It won’t make much of a difference on smaller accounts but be mindful that the larger your taxable account, the more complexity with your tax situation. Examples include higher income brackets relative to non-qualified dividends, taxable dividend income, or strategizing a lower adjusted gross income (AGI) to maximize everything from student loan qualification (FASFA) to minimizing Medicare premiums. This is where your accountant or a financial planner can provide tremendous value.
Avoid emotional decision making:
This is a tough one as it’s never as black-and-white as reducing expense ratios or systematic rebalancing. I wrote an article titled “4 Simple Strategies to Reduce Emotional Investing.” Give it a read to learn more.
Each of these, except for emotional decision-making, can be automated using a variety of solutions available to the average consumer. Target-date mutual funds, lifestyle mutual funds, or Robo-Advisors are a few examples.
For instance, a target-date fund may:
- allocate more of your money into stock (growth) investments during your younger years. The fund may shift to more bonds (conservative) as you near your goal, such as retirement,
- rebalance itself back to its intended allocation if the investments fall outside their intended parameters,
- be offered at a very low cost (think Vanguard), and
- provide tax sensitivity for use in a taxable investment account (such as index funds).
Does this mean you should put all your money in a lifecycle fund? How about a Robo-Advisor, or lifestyle fund? It depends of course, but you should at least know you don’t need a financial advisor to do this for you. It’s already been done and there are a lot of options to choose from that will save you unnecessary expenses.
If you're interested in learning more about your behavioral patterns related to changes in financial markets, take our Investor Composure assessment:
Why should you hire a financial advisor to manage your investments?
Although I will argue, until the end of days, that you don’t need a financial advisor just to manage your investments, there are situations where an advisor can truly make an impact on your investment strategy.
At Lucid Wealth Planning, a company I founded to serve a community of people that strive to make the world a better place, we had elected to not offer investment management for the sake of investment management. We do, however, manage our client’s investments because we recognize that it is part of the bigger picture.
Here are a few reasons you will want to hire a financial advisor to manage your investments:
- Your tax situation is more complex than you're comfortable with (or possibly even know): As mentioned above, taxes are anything but simple. Your income, the source of income, and your stage of life all contribute to the balancing act you must perform around tax mitigation.
- You and your child’s qualification for financial aid in college.
- Your ability to contribute to a Roth IRA.
- The Medicare premiums you pay.
- Your qualification for, and subsidy received, for healthcare through the MarketPlace.
- The tax rate applied to your long-term capital gains.
- The taxability of your Social Security Income.
For example, your adjusted gross income (AGI) has a direct impact on the following:
- It’s important to align your investments with your personal and ethical values: While a Robo-Advisor may offer an option for “Socially Responsible Investing,” this approach may be overly generic and may not hit all (or avoid in many cases) areas that are important to you. Same can be said for the allocation-based socially responsible funds. A financial advisor generally has more flexibility to create a personalized portfolio that aligns with your values. You want to limit the carbon footprint? Boom(!) it’s done. You want to focus on alternative sources of energy? Boom(!) it’s included. If you're interested in learning more about socially responsible investing, check out "Socially Responsible Investing 101."
- Managing your investments serves a greater purpose: Investments don’t always have to focus on growth. Sometimes the purpose of your investments is to yield income, such as subsidizing your Social Security payments. Other times you may find investments as the best source of charitable gifting, legacy planning, or to fund a new business venture. For example, while many physicians may use loans to establish their practice, others may use gifted stock or inherited investments. Here is where a financial advisor will stand out, building out a plan to support the investment strategy and aligning the overarching approach with your greater purpose.
- You understand that your investments are but a small piece of your financial picture: The value of a good financial advisor, as my argument supports, is not to just manage your investments. A good advisor aligns the investments with your overall objectives and goals, personal and family values, and coordinates the approach with all other facets of your financial life. If you understand this, you likely also understand how important it is to ensure you have proper insurance and insurance deductibles in place. You may recognize the importance of tax efficiency. You may even be so smart as to understand that cognitive biases cloud your every decision in life, and that the role of an advisor is to provide a strong foundation by which to continually make better financial decisions.
- You value human interaction: The psychological impact of human interaction is not something to overlook. Many investors feel better knowing they can call an advisor to get an update on progress, address questions, or talk them off the proverbial ledge. These interactions also make heavy contributions toward avoiding decisions based on emotions.
- You’re unable to control the emotions dictating your investment decisions: All humans, regardless of education or experience, are at risk of basing our investment decisions on emotional responses. Unfortunately, some of us are more susceptible than others. Do you have a history of buying high and selling low? Do you feel like you’re constantly making your decisions as a reaction to the most recent headlines? A financial advisor can help you to make better, more consistent investment decisions. When the market is down 20%, an advisor can remind you of your longer-term goals and prevent you from making detrimental mistakes.
Managing an effective investment process is an incredibly important part of your financial plan. It’s the centerpiece of Wall Street and conversations with your financial advisor, and the focal point of limitless online blogs and magazines.
While it’s important, it isn’t the only contributor to your financial success. The ability to accurately forecast market movements has zero empirical evidence. As quoted in the Harvard Business Review, “Quantitative models, historical models, even psychic models have all been tried — and have all failed.”
The best thing to do, then, is to make sure your allocation represents your risk tolerance and aligns with your short- and long-term goals. Give attention to the five areas listed above and you’ll have accomplished a majority of what you need to build a strong investment strategy.
Financial advice, on the other hand, is well worth the fee you’ll pay (opinion). This assumes it’s fair and represents the value you receive. The CFP Board1 defines the financial planning subject areas as:
- Financial statement preparation and analysis (including cash flow analysis/planning and budgeting)
- Insurance planning and risk management
- Employee benefits planning
- Investment planning
- Income tax planning
- Retirement planning
- Estate planning
Financial planning focuses on your values and objectives, and builds a foundation to increase your likelihood of success and achievement. Are you paying a % of your investments for only one of these bullet points? Is that fee worth it for “just” portfolio management? I think not.
Please contact us if you'd like more information on creating an effective financial plan, inclusive of your investment holdings.
Lucid Wealth Planning LLC (“LWP”) is a registered investment advisor offering advisory services in the State(s) of North Carolina and in other jurisdictions where exempted. Registration does not imply a certain level of skill or training. The presence of this article on the Internet shall not be directly or indirectly interpreted as a solicitation of investment advisory services to persons of another jurisdiction unless otherwise permitted by statute. Follow-up or individualized responses to consumers in a particular state by LWP in the rendering of personalized investment or financial advice for compensation shall not be made without our first complying with jurisdiction requirements or pursuant an applicable state exemption. All written content in this article is for information purposes only. Opinions expressed herein are solely those of "LWP", unless otherwise specifically cited. Material presented is believed to be from reliable sources and no representations are made by our firm as to other parties’ informational accuracy or completeness. All information or ideas provided should be discussed in detail with an advisor, accountant or legal counsel prior to implementation. The information contained in this article is not intended to provide any tax advice. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information and should not be considered a solicitation for the purchase or sale of any security.