LEVATUS Perspective | Quantifying the Value of a Financial Advisor
Financial Planning.
Investment Strategy.
Private Wealth Services.
How to tell if you need any of it, and really answer the question, what am I paying for?
Money is personal and so is financial advice. Quantifying the value of a financial advisory relationship comes down to the individual, couple and family. For some the cost-benefit may not match up, while for others it is a clear cut decision. Either way, a framework for outlining the various elements of an advisory relationship in a way that lends itself to a value assessment is useful.
Below we outline a robust framework that includes both the straightforward math of returns and estate value, along side the harder to value elements of an advisory relationship such as your time, visibility, anxiety, and legacy. These last few items can have a significant impact on life and living, and their value varies quite a bit across families. Below we offer up a few ways to get more specific on the value of each in your life.
INVESTMENTS AND FINANCIAL PLANNING
Image by Casey Jarvis
Investments and planning are a foundational element of most financial advisory relationships. If you, your partner, and your family enjoy doing both, you may not need an advisor.
If you prefer to spend your time on other things, the experience of an advisor can bring with it valuable perspective and insights. This experience helps in developing a strategy that is geared toward long term outcomes, including wealth, peace of mind and legacy. It can also help in avoiding costly mistakes.
The compounded impact of small decisions can be significant.
Since 1995, missing the best 5 days in the market each year takes annualized returns from 7.7% to 5.9%; missing the 10 best days takes annualized returns from 7.7% to 4.7%
Tax smart financial planning also impacts the bottom line. A study from Morningstar suggests that “intelligent financial planning decisions” can add the equivalent of 1.5% to a retiree’s annual arithmetic investment returns
To give you an idea of the scale of the impact of small changes in annualized rates of return over the long term: on a starting value of $100,000, the difference between earning an annual return of 10% or 7% over 30 years is close to $1,000,000.
VISIBILITY
For some the landscape of financial decision making is straightforward, and in these cases the cost of an advisory relationship may outweigh the benefits in terms of added visibility. For more complex situations, visibility to support decision making can be a valuable asset as it adds, control, clarity and conviction when decisions need to be made. Should I take that job? Should I invest in that Real Estate deal? Should we buy a family vacation house on the beach?
Visibility on retirement
Tax risks and lifetime cash flow implications
Planning for optimal mortgage structure
Assessing the cash flow reality of education costs
Investment in illiquid assets
Planning for philanthropy
TIME
If you enjoy and are good at overseeing your investments, estate planning and financial organization, then paying a financial advisor may not make sense. This time spent is accruing to your ‘enjoying life’ category, and this is an extremely valuable category indeed. If managing your finances is not something you enjoy or if your partner is not comfortable with the prospect of someday taking this on, then the time spent can be a cost, not only in the hours spent but in the hours missed doing something else. Many people hire professionals to do tasks that they prefer not to do like, managing a renovation project, mowing the lawn, preparing taxes, interior design, or reviewing legal documents. How would you value the below items?
Organizing financial documents - hours per year x rate per hour
Monitoring and Organizing estate documents - hours per year x rate per hour
Monitoring Accounts for Fraud - hours per year x rate per hour
Reviewing employer sponsored retirement plans - hours per year x rate per hour
Transacting in investment accounts - hours per year x rate per hour
Budget and cash flow analysis - hours per year x rate per hour
Financial Literacy for children - hours per year x rate per hour
Philanthropic Planning - hours per year x rate per hour
“Your financial security can affect you as strongly as job satisfaction, relationship stability, and physical health combined.”
Control and Legacy
Image by Giulia May
Scholarly research shows quite clearly that a sense of control helps to reduce anxiety. This frees up space to more fully enjoy life, relationships and the moments that define our legacy.
These elements are in many ways the most important. The value placed on this part of an advisory relationship varies considerably. If all parties already feel a great deal of control and visibility then the impact of this category on the value calculation of an advisory relationship may not be large. For others, it the most important piece of the relationship.
If your current financial situation is causing you some amount of anxiety, how do you quantify the value of not feeling that? Questions like, ‘How much would I be willing to pay for a vacation where I could totally escape, and not worry?’ help to give some insight. A sense of control with less anxiety is an important category in the evaluation of value.
Partner when things get tough
Often an advisor that understands you well is most important when things get tough. Nobody ever knows when these life moments will come, but having somebody who has proven themselves to be truly on your side, understanding both your values and your priorities lends a great deal of comfort in stressful times. Times like:
Loss of a partner or spouse
Loss of a job
Recessions and periods of economic stress
Selling a family business
Divorce
Life transition
Managing difficult family dynamics
The true value of years together as partners is never more visible than in these times of stress.
Not all advisors are cut from the same cloth. Some are all about investments, while others are all about planning. And then there are those who offer a full-service, partnership-style approach like the one described above.
By asking the right questions and crunching the numbers, we hope this article has given you some practical tools to decide whether an advisory relationship is right for you and, if it is, how much value it might bring to your financial journey.
Simplicity, purpose, control
The value of an advisory relationship depends on great relationships.
ABOUT THE AUTHOR
Susan Dahl is a well regarded executive, female industry leader and dedicated client advisor with over twenty-five years of experience. Susan writes on topics such as investing, strategy and financial planning, and is the author of the blog series Female Advisor Perspective, a look into the unique strategy, process and planning insights that emerge when problem solving is viewed through the unique lens of experienced female financial advisors. Susan’s deep and diverse background extends from global investing to risk management to change leadership. This background has laid the groundwork for an approach that asks more of wealth. She shares some her most recent work in a talk for TEDx, Can Happy Make You Money?
