Because that can be your best investment.
Wealth planning is one of the most important services an advisor can provide to you, and it requires an indepth understanding of your entire personal and financial situation. Professional guidance to uncover and comprehend what’s most important to you takes time and knowledge.
With the wealth of information available to us now, you may think you understand the markets enough to invest for yourself or that getting a financial professional to manage your assets is expensive. However, investing is challenging, and emotional responses in period of volatility can undo years of past or future success.
The worth in having an advisor to filter capital market news or your own emotions can create significant value when it is needed most. The services an advisor provides exceed simply selecting investment products for you. Investment advisors can conduct a full 360-degree spectrum of wealth planning, from investments to retirement and estate planning, for you and your family. They can also provide guidance on taxation to increase the amount of your savings that stay in your pocket and not in Uncle Sam’s.
THE VALUE OF AN ADVISOR STUDY:
What’s next? That is the eternal question we can ask ourselves about life – and about the financial markets.
Without a crystal ball there is no way of knowing what may come next in either our lives or in the markets. That’s why we should always be prepared for any potential situation. But we can generally assume that our lives will follow a certain pattern – we’re most likely going to navigate careers, relationships, and major financial events (like having children or buying a home) until we get to an age where we then enjoy the fruits of our labors.
We can’t make such assumptions about the markets, however. There are any number of unforeseen events that could jostle them. Just consider the past few years in which the markets have been buffeted by wars, a global pandemic, corporate bankruptcies, surging inflation, or the emergence of accessible artificial intelligence. We just can’t predict what may be on the horizon. And in a year where more than half of the global population1 is going to elect new leaders, the potential for volatility is significant.
We believe that advisors play a critical role in steering investors through the various market environments they may encounter over their lives – and through the various major life events they undergo. Indeed, for more than a decade we have conducted an annual study into the variety of services that an advisor typically provides to their clients. We’ve also estimated the value that represents. And year over year, our Value of an Advisor study has indisputably shown that an advisor who delivers holistic wealth management services provides value that far exceeds the typical fee charged.
Our study* is based on a simple formula that shows the value that advisors add by helping ordinary people gain financial security.
*Source: THE VALUE OF AN ADVISOR STUDY
Rebalancing is a critical component of wealth management, but your advisor may never have discussed it with you.
Why? Well because many advisors take rebalancing for granted. It’s often automated once your asset allocation is determined. Let’s remember that your asset allocation was selected to fit your goals, circumstances and preferences. Rebalancing ensures that your asset allocation – or the mix of equities, fixed income, alternatives and other assets in your portfolio – remains in line with the level of risk that you feel comfortable with.
It’s unlikely you would rebalance your portfolio on your own. Rebalancing is buying more of the securities in your portfolio that have fallen and selling those that have risen. In other words: selling winners and buying losers. Would you do that willingly? Probably not.
That’s why we consider rebalancing a vital activity for an advisor to do. By ensuring your portfolio is regularly rebalanced, your advisor is making sure that it remains in line to the original mix of stocks, bonds, cash, and alternatives. Remember, that asset allocation was chosen to fit your risk comfort zone.
What could happen if your portfolio wasn’t regularly rebalanced? Let’s say you purchased a hypothetical balanced portfolio of 60% equities and 40% fixed income in January 2004 and never rebalanced. By the end of 2023 the portfolio would look very different. That original balanced portfolio would have become a growth portfolio, with approximately 81% invested in equities and only 19% in fixed income. Any downturn in equity markets would hit that lopsided portfolio particularly hard. More importantly, the allocation to U.S. large-cap growth would have more than doubled in the period. While that kind of heavy weighting in U.S. large-cap growth may have given you stellar returns over the past decade, any sudden reversal would have an outsized impact. That would not be a pleasant experience.
What happens when markets get jittery. Do you get jittery too? If so, you’re a normal investor. When it comes to our retirement savings, most of us prefer a smooth climb over the years. You may be okay with a little volatility, but wild swings in the markets could prompt you to pull out your investments and lie low for a while.
That would be a mistake: after all, markets have traditionally bounced back from major declines. Indeed, the S&P 500 Index has ended the year positively 74% of the time from 1926-2023. That’s why advisors who keep their clients calm – and invested – during volatile periods have value.
Investors who are left to their own devices are prone to chase performance. Similarly, investors are prone to vote with their feet when markets get difficult. The chart below shows the flow of money into and out of U.S. open-ended mutual funds and passive ETFs over the 16-year period ending December 2023.
The orange bars represent the net flow of cash, while the blue line represents the returns for the 12- month trailing period from the purchase date. As you can see, the flows into mutual funds and ETFs lagged the blue line both up and down. That means investors bought into the market after it had already begun to climb and sold after it had begun to fall. In other words, they bought high and sold low.
We can all agree that our society has become more complicated and so have our lives.
Your advisor can help you through the many events you are likely to go through over your investment journey. Indeed, many advisors now offer a multitude of services, that can cover everything from your insurance needs, your wish to leave a legacy, your charitable planning and other goals – even helping you structure your investments to reflect your value.
Often, advisors build a network of experts—estate lawyers, insurance planners, accountants, lifestyle consultants – to help you create a holistic retirement plan that considers more than just how much money you will have to spend. It can help you ensure there is an orderly transfer of wealth, and consider your family’s overall financial situation.
This is more than just a basic financial plan and selecting assets for your portfolio. It’s likely that you and members of your family – your spouse and perhaps your children – meet with your advisor regularly to discuss recent life changes and evolving financial goals. All of you together are helping build an investment plan that considers your family’s unique goals, needs and circumstances.
The extra services and deeper discovery conversations, the expanded planning and coordinating are time-consuming. Personalized services are quite different from basic financial plans. This can represent significant value to you as it can ensure a customized financial journey.
Taxes can be complicated and confusing.
You can review your tax forms and identify how much tax you have paid on capital gain distributions, dividends, and interest payments received from your investments. But those aren’t the only taxes that may impact your net returns – the money that goes into your pocket. There are also investment and implementation decisions that result in more money going into Uncle Sam’s pocket. Those are difficult to see and even more difficult to understand.
Working with a tax-smart advisor, who incorporates tax management into the investment process, can help you reduce the taxes on your portfolio and add substantial value.
We call the tax costs that impact a portfolio’s returns tax “drag.” When your advisor considers the impact of taxes throughout the entire investing process – from initial asset allocation to management of taxable and tax-deferred portfolios, to the most tax-efficient ways to withdraw funds – they can take action to reduce that tax drag. One of the simplest actions an advisor can take is to incorporate tax-managed funds into the investment portfolio. Tax-managed funds pay little to no distributions. That means you won’t pay taxes on those distributions. Instead, that money is left in your portfolio where it has the potential to continue growing.
THE ADVISOR ALPHA STUDY:
Vanguard recently released an update to their “Advisor’s Alpha®” research study. First published over twenty years ago, this study attempts to quantify the benefits or “alpha” that wealth advisors can add to their client’s net investment outcomes through relationship-oriented services such as planning and discipline rather than simply picking investments to try to outperform the market.
Particularly in focus are fiduciary-driven (clients first) advisors like BWFA who follow certain best-practices when implementing their investment management process. The best practices that were identified in the study align closely with BWFA’s approach. It serves as an important reminder of how working with an advisor can improve the investor experience.
The Vanguard research determined that advisors can add up to an average of 3% or more annually in net returns as compared to the average investor.
This is not to be expected every year and varies due to client situations and market circumstances. It can be very irregular, from non-existent one year to double digits the next – particularly during periods of market decline or euphoria.
This is certainly applicable today as investors and wealth advisors navigate through one of the most unsettling environments since the 2008-2009 financial crisis. When markets are this volatile and uncertainly reigns, investors are most tempted to let emotions guide investment decisions. This often leads to poor outcomes and permanent long-term damage to portfolios.
Vanguard considered the value-add across seven different modules and attempted to quantify the benefit of each module. A summary of each module is below.
It comes as no surprise that behavioral coaching provides the single biggest impact, offering up to an annualized 2% of additional returns. Keeping client fears and emotions in check prevents impulsive actions to abandon their investment strategy or worse yet, go to cash altogether when markets get volatile. It goes the other way too, chasing the latest hot investment or wanting to get more aggressive at all-time highs. Vanguard finds that the biggest detriment to an investor’s return is often not the investment or portfolio itself; it’s the investor’s behavior related to that investment when big swings (in either direction) cause anxiety or an impulse to act. We concur with Vanguard.
Any time spent on the sidelines or even temporarily moving into an overly conservative portfolio may curb anxiety in the short run but opens up the risk of permanently missing out on meaningful recoveries.
Case in point, $1,000,000 invested in the S&P 500 for 10 years ending 12/31/2020 is worth $3,669,960. Missing just the 10 best days over that time ends up with $2,015,760, a reduction of 45%!
Not directly considered in the Vanguard study is the value of all the other areas of wealth planning. It does not include capital sufficiency planning that creates a path into the future and the steps to take along the way, or the development and implementation of a well thought out estate plan to provide a legacy for the next generation. The study does not address the value of insurance or education planning…the list goes on and on.
Your BWFA Wealth Advisor will leverage their skills and that of the firm for your continued benefit in all these areas.
Source: https://corporate.vanguard.com/content/corporatesite/us/en/corp/articles/quantifying-evolution-advice-and-value-investors.html/
