There are many different aspects of financial planning, from retirement planning, to employee benefits, to ensuring your estate and assets are properly protected. It’s a lot to manage all on your own. In this post, we’ll talk about the value of having a financial advisor to consult, and the criteria you can use to ensure you are choosing the best person (or people) for the job.
More and more, we are seeing financial planning companies offering a service known as “robo-advising”.
Robo-advising uses a software program to collect data about clients’ current financial situations and future goals. From there, using mathematics and algorithms, the robo-advisor can offer advice, invest money, and manage portfolios with little to no human involvement. And this can be done at a very low cost.
If robo-advisors are low-cost and easy to work with, why bother seeking financial planning advice from a professional?
While robo-advising services may look good on paper, it’s important to also consider the benefits of working with a real person. For starters, it is good for clients to have a place where they can feel safe talking about money and retirement. Too often, family members, friends, and even spouses treat their salary, savings, and retirement goals as taboo topics. Without the sounding board of a financial advisor, people could wind up making poor financial planning decisions.
Vanguard, the largest mutual fund company in the U.S., researched this area in their Advisor Alpha Study. Their research found that behavioral coaching is the single most impactful skill a financial advisor provides their clients. By spending time talking to a client, the advisor gets to know that client’s weaknesses and habits when it comes to handling money. Using this information along with behavioral coaching techniques, the advisor can teach the client how to make better financial decisions.
A great example of a habit that behavioral coaching can help to break is the all-too-human fight-or-flight survival instinct. During a severe market downturn, the brain automatically kicks into survival mode and forces investors to flee the market. This is actually the opposite of what they should do. With behavioral coaching, financial advisors can help their clients to avoid mistakes like this by encouraging them not to focus too much on the news or check their portfolio values every day. In fact, Vanguard’s research study estimated behavioral coaching can add an additional 1.5% per year over a long-term investment horizon.
Morningstar, an independent mutual fund research firm, discovered that investors think they value their advisor mostly for their technical knowledge and expertise. However, it is behavioral coaching that is actually the most beneficial for investors.
In a recent post, we talked about the benefits of having a fiduciary handle your financial planning needs.
As a reminder, a fiduciary is legally required to always act in your best interest. When you have your potential financial advisors narrowed down to those that are fiduciaries and have the right experience and credentials, then it’s time to focus on the human aspect of working with them. This is where the true value of your relationship exists.
Try asking your prospective financial advisor questions like these to see if they can provide valuable behavioral coaching:
• How do you help clients manage emotions and stress during market corrections?
• Will you educate me on personal finance issues?
• What are some examples of how you can provide peace of mind about retirement and achieving my goals?
• What are some ways you can save me time and make my life easier?
• How will you help me avoid running out of money?
There isn’t a right or wrong answer to these questions. Allow your instincts to guide you as you listen to the responses. Trust your judgment! This person will have a significant role in your financial planning process, so it’s important to make sure they are a good fit for you.
If you would like to take things to a deeper level, you can get into specific areas of how your financial advisor will help you.
As we mentioned at the beginning of this article, there are many different aspects of the financial planning process. Ask some questions like these to see which specific services your advisor can offer help with:
• Will you help me understand employee benefits?
• Will you provide a detailed savings strategy?
• Will you coordinate with my CPA and estate planning attorney? If so, how?
• Do you perform year-end tax planning to implement strategies like Roth conversions or charitable giving?
• Do you harvest tax losses if the opportunity arises?
• Will you help with Social Security benefits and when to start taking them?
• Will you help work through different long-term care insurance options?
• How do I withdraw money from my accounts?
These are just a few areas that provide value beyond just managing your investments. Understand what a prospective advisor can do for you. Feel free to compare services among different advisors to discover the full scope of what is available.
Now, it’s time to sum it all up.
We’ve gone through a lot in the past few posts. All of this information is a great resource to use when it’s time to begin the search for a financial advisor, but there are a few key points you should definitely keep in mind. First, the absolute must-have criteria for anyone who will be a part of your financial planning process is that they are a fiduciary. Confirm that in addition to this designation, they have the necessary experience and expertise to meet your needs.
After these steps, get a sense of their behavioral coaching skills and how they align with your personality. Remember, this person will get you through tough times and help you stay on track to meet your goals. Finally, look at the additional financial planning services they offer beyond investment advice and behavioral coaching. It can be a long process to find a financial advisor, but when you find the right person for you, you will see it was time well spent.