Financial Advice: What You're Really Gaining

There are many instances in which managing your personal finances can be confusing. But there are those times where the task can be downright intimidating. As your wealth grows, so does the need to seek professional help to ensure your financial affairs are properly organized. There are several variables involved in proper financial planning, including investment selections, risk management, tax planning, and possibly estate planning. However, there is a common misconception surrounding financial planners in that our primary goal is to seek out those investments for our clients that will outperform the market. Don’t get me wrong, seeking a strong investment return has its importance, but there are many other considerations on which we financial planners must focus if we aim to adequately serve the best interests our clients.

The duty of a financial planner goes far beyond investments alone and even goes beyond risk management, tax planning, or estate planning. We’ve outlined a pyramid, based on Bob Seawright's Heirarchy of Advisor Value, which defines the value provided by financial planners in order of importance. In the graphic below there are several underrated services provided by financial planners which go largely unnoticed as we too often get caught up with the dollar and cents of it all. In our experience, we often find that investment selection alone matters far less than the physical act of saving and managing investment behavior and expectations.

Encourage Consistent & Increased Savings

It goes without saying it is difficult to build wealth without first establishing consistent savings habits. No money saved = no money to invest.

Encourage Consistent Investment

Consistent investment means having a plan and sticking to it. Investing savings in accordance with a predetermined set of rules can help overcome the noise of the news and market pundits commenting on the daily fluctuations of the stock market.

Comprehensive Financial Planning

This is the commonly-known core of financial planning services. Retirement, tax, estate, and insurance planning. Comprehensive financial planning takes into account your personal financial goals and provides a customized plan to help you achieve them.

Manage Expectations and Behavior

It is easy to compare your investment returns to those of family, friends, or Yahoo Finance. However, the best use of a financial planner is not to pursue the market rate of return, but to manage the risks inherent to investing in the market. We cannot control the ups and downs of the market, but we can seek to limit the risks to which we are exposed through our investment strategies. Investments are carefully selected to provide a balance between risk and reward that is best for the client’s personal situation. The key is clearly outlining the risk tolerance of the client and adhering to their goals before reacting irrationally to daily market movement.

Asset Allocation

As financial planners, we assist our clients in achieving their financial goals by selecting a proper investment mix which adequately accounts for the many risks associated with investing. A well-diversified portfolio of investments aims to mitigate risk by investing in various industries/markets/companies so your returns may be a bit more stable than that of stock market as a whole.

Manage Cost and Fees

We’ve all heard there is no such thing as a free lunch. People and companies within the financial services industry, as with most other industries, are in it to make money. Although financial planners are not exempt from this notion, we do have an additional duty to serve the best interests of our clients. This can be easily translated to, “Save money for clients whenever possible.” We manage costs in various ways, including the offering of various fee structures to fit different clients and budgets. We also review the expenses unique to different mutual funds, ETFs, and other investment products, seeking lower-cost products with comparable returns. Saving on investment costs only adds to the return of your portfolio. I hate to use another cliché, but a penny saved is a penny earned.

Portfolio Rebalancing

When initial investment selection are made, they are diversified in a way unique to the client’s specific situation. A year later, the weighting of the investments in the portfolio may look entirely different, possibly exposing the client to more risk in a certain area which had once been properly accounted for. As these changes occur, it is the duty of a financial planner to recognize a portfolio in need of rebalancing to either the original or a newly modified financial plan.

Investment Selection

Last but not least is investment selection. Although investment selection is often the most scrutinized aspect of financial planning, it is actually one of the least importance. Of the tens of thousands of investment products out there, some will outperform the market while an overwhelming majority will not. Nobody can predict precisely what the market will do next so why waste time trying to outperform it?

We believe that by educating our clients to focus on things within their control (i.e. risk exposure, savings habits, investment behavior, careful planning), they may be better positioned to make sound financial decisions. The above pyramid serves to establish an expectation of what a financial planner is best suited to provide for their clients. In other words, the client cannot control when it rains but they can control what they wear and can also carry an umbrella.

The opinions and forecasts expressed are those of the author, and may not actually come to pass. This information is subject to change at any time, based on market and other conditions and should not be construed as a recommendation of any specific security or investment plan. Securities offered through Securities America, Inc., member FINRA/SIPC, Betsy Merritt & Tyler Aubrey Representatives. Advisory services offered through Securities America Advisors, Inc. New Break Financial and Securities America are separate companies. Securities America and its representatives do not provide tax or legal advice. It is important to coordinate with your tax or legal advisor regarding your specific situation. Diversification seeks to reduce the volatility of a portfolio by investing in a variety of asset classes. Neither asset allocation nor diversification guarantee against market loss or greater or more consistent returns.