The Value of an Advisor
Have you noticed that you hear less and less about “stockbrokers,” and more and more about “financial advisors” and “holistic wealth management”? That’s because investors are learning that outperforming on a particular investment is typically far less meaningful than making sure your investments are organized to have the highest probability of meeting your goals.
One can almost always outperform in the short run by taking on more risk. To evaluate whether you are on the path to the financial future you want, however, requires examining different scenarios for your investments, goals and risk tolerance in a holistically and statistically significant manner. To do that, almost everyone needs an experienced wealth advisor.
Russell Investments, a firm globally recognized for its excellence in investment data collection, publishes an annual study on this topic. It’s 2021 analysis, “Value of an Advisor 2021” finds that clients in the US who worked with a financial advisor earned 4.83% more than those who didn’t work with one—clearly offsetting average advisory fees charged. If you started with a million dollars, having an extra $48,300 every year to invest at 8% would result in almost $700,000 at the end of 10 years.
5 Key Value-Creation Areas on Which Your Financial Advisor Should Deliver
According to Russell, there are five areas in which the value-added of working with an advisor can be quantified.
ACTIVE REBALANCING OF INVESTMENT PORTFOLIOS
Active rebalancing means monitoring and correcting drift in your asset allocation. For example, if the stock market keeps advancing, your 60% equity allocation could grow into an 80% allocation exposing you to a much higher risk of loss if or when equities declined. Active rebalancers, such as Fischer Stralem, sell portions of overweighted asset classes and reinvest those dollars into underweighted asset classes to maintain your target asset allocation and lower the volatility of your returns. Active rebalancing can also result in higher returns because it positions you to participate when other asset classes do well. Consequently, active rebalancing potentially allows you to stay the course during choppy market conditions because you haven’t been over- extended in any one direction.
Behavioral coaching means working with an experienced human being who encourages you to stay the course through periods of intense market volatility. As you might guess, this was the single biggest component of a financial advisor’s value in 2020. The S&P500 Index fell 33.8% from February 19, 2020, to March 23rd, 2020. During March, investors pulled a remarkable $335.6 billion out of US equities. On the flip side, those who were guided by their advisors to stay the course experienced a 70% increase from the low and an overall return of 18% for the year. Helping you stick to your plan so that you avoid missing the market’s highest performing days has consistently added value over time.
CUSTOMIZED CLIENT EXPERIENCE & PLANNING
Customized client experience & planning means developing a comprehensive wealth management plan tailored to your unique circumstances and goals. You may have once heard that “your age is the percentage of municipal bonds you should have in your portfolio.” Nothing could be further from the right approach. There is no one-size- fits-all in wealth management. Each client starts with their own asset base held in different types of accounts and their own spending needs, tax situation, marital/family status, future goals, life expectancy, etc. A useful wealth management plan takes all of that—plus the risk, return and probability of achieving your goals under different market conditions—into account. Having a proper plan tailored to your circumstances adds meaningfully to your returns over time.
Product alignment means investing in rigorously researched products that stay true to the asset class they are meant to fill in your asset allocation. Fund managers can and do drift from their core asset class, across geography, sector, size, credit quality and across market capitalization (size) of the underlying companies. Your advisor’s investment team should be monitoring that drift as well as each financial product’s management team, tenure and expenses. In addition, understanding which asset classes you own in which accounts—and how they roll up to your overall target asset allocation– can add value over time. Unless you have the time and knowledge to research thousands of managers across the globe, you are not benefitting from the value obtained from the kind of product alignment strategy that an advisor can provide for your portfolio.
TAX-SMART PLANNING & INVESTING
Tax-smart planning & investing means seeking out tax-efficient investments, using tax loss harvesting where appropriate, and allocating investments in different asset classes to accounts based on their tax status—for example, holding higher volatility asset classes in tax-deferred rather than taxable accounts. Russell’s Value of an Advisor 2021 shows that investors lost an average of 1.74% of their return from U.S. equity products to taxes in each of the five years ending December 31, 2020. That tax drag is larger than the total fee most advisors charge. A $500,000 investment grown at 7.5% for 10 years would grow to $1,031,000 with no tax drag, compared to $875,000 with a tax drag of 1.74%. It’s almost impossible to eliminate all tax drag but taking prudent steps to minimize it can certainly add up.
THE RIGHT FINANCIAL ADVISOR CAN HELP
You may find advisors with expertise in one or more of these dimensions. To get the best value and results however, you need to make sure are working with an advisor who can deliver along all five. In addition, make sure that the advisor is a fiduciary. A fiduciary is required to act in your best interests—not everyone is held to that standard. Aligning with the right advisor can have a meaningful impact on your future. At Fischer Stralem Advisors, we are ready to help.