According to Wikipedia, financial planning is a comprehensive evaluation of an individual's current pay and future financial state by using current known variables to predict future income, asset values and withdrawal plan. The CFP® Board of Standards (Certified Financial Planner) explains financial planning as a six step planning process:
- Establish and defining the relationship with the client
- Gathering client data
- Analyzing and evaluating the client's financial status
- Developing and presenting financial planning recommendations
- Implementing the financial planning recommendations
- Monitoring
As a Certified Financial Planner®, I walk my clients through the 6-step planning process. Since I work with my clients in a fiduciary capacity, doing what is right for the client is the cornerstone of our financial planning practice. With that said....
How Much is a Financial Planner Worth?
If you work with a financial planner you will incur fees/expenses. Keep in mind, if you do not work with a planner you still incur fees. But is working with a planner worthwhile?
Vanguard, which is the world's largest mutual fund company, is known for catering to "do it yourself" investors admits that working with a financial adviser pays off. The conclusion of Vanguard's study, "Quantifying Vanguard Advisor's Alpha" working with an adviser increases client's investment returns by 3%.
This study mentions there are 5 ways financial advisers produce extra returns for their clients. The most significant value-added component is behavioral coaching. Said another way, the discipline and guidance of an adviser produces an extra 1% to 2% in net return. You may be saying 2% is not much. To put it in perspective, 2% of $250,000 is $5,000 and compounded over 5 years is $276,020.20. If you were working with an adviser providing 5% in net return your total value would be $319,070.39 over 5 years.
A good adviser emphasizes the importance of behavioral coaching because investors are emotional. In my previous article, "There is a Better Way! - Why No One Talks About the Stock Market the Right Way", explains how our tactical portfolio management process is based on time-tested evidence and analysis and not emotions. Too many investors chase returns and make irrational decisions which bring down investment returns.
The importance of sticking to a regular investment plan is critical for our clients to achieve their financial goals. If clients focus on the long-term and are consistent to a steady investment plan, their return is increased up to 1.5%. Our planning process is built upon the client understanding that they have a plan in place to protect their investment portfolio and grow it at the same time.
Vanguard's study also mentions that another 0.45% can be generated in returns when fees are reduced. Vanguard is known for its low fees and of the 5 major components on how an adviser can improve a client's financial life fees/expenses rank 4th on the list. In other words, low fees are not that important in order to achieve an investor's financial goals. Fees are only an issue in the absence of value. Therefore, investors do not need to make their investment decisions based on fees. Expenses need to be fair and just for the client and there needs to be investment value to the assessed fee. However, the driving force in order for clients to achieve their goals is a disciplined and time tested approach to investment management.
Vanguard's study does not address the additional services we offer. For example, I refer clients to a competent CPA/accountant for tax planning advice and/or an estate planning attorney for proper legacy planning. How much more value does this bring to a client's financial situation? Well above 3% stated within Vanguard's article. The Proverb which states: "Without counsel plans fail, but with many advisers they succeed" is true to this day.
So does it pay to work with a Certified Financial Planner®? Yes, our advice pays for itself and Vanguard quantified it for us.
To learn more about Blake Fambrough and his approach to Financial Planning, view his Paladin Registry profile.
Originally posted on PaladinRegistry.com.
About the Author: Blake Fambrough, Financial Advisor with Dubots Capital Management attended Texas Tech University and received a B.B.A. in Finance and a M.S. in Personal Financial Planning. In addition, Blake holds the Certified Financial Planner® designation. He has been working in the financial services industry since 2004. He is a member of the Lake Elsinore Rotary Club. Blake with his wife Christina and their daughter live in the Lake Elsinore area and enjoy volunteering their time to their local church. Follow Blake on Twitter @Fambro1