5 Critical Things a Financial Advisor Will Do For You

Kolleen Schocke |

In the age of robo-advisors and Robinhood, it can be natural to question the need to pay a financial advisor to manage your money.  Unfortunately, many investors weighing such a decision get caught up with comparing annual fees to investment returns and miss the more important question: Will a financial advisor increase your chances of meeting your goals?

Clarify Your Goals and Estimate Your Chances of Success

The first thing a financial advisor will do is help you clarify your goals and determine what is needed to reach them.  You probably already have an idea of what you want and how much in retirement savings you will ultimately need. What you likely don't have is an estimate of the chances you will reach your goal.

First-generation planning analysis relied on simple investment average returns over time.  In the real world, investors don't get this average return every year for thirty years.   It is possible to have the same long-term average return while experiencing vastly different rides (sequential returns of 10%, 10%, 10% will leave the same result as returns of 10%, -20%, and 84%).

This timing and sequence of returns can dramatically affect investor outcomes when retirement withdrawals are considered.

A financial advisor will provide a "Monte Carlo" analysis that will run perhaps a thousand simulations and tell you how many times you reach your goal versus how many times you fall short.

Determine an Investment Philosophy and Allocation

Once you have clarified your goals and understand the savings required to meet that goal, a financial advisor will help you determine an investment allocation that’s right for you.

Investment allocation is simply the mix between major asset classes (types) such as stocks, bonds, and perhaps alternative investment classes.

This is another topic that may seem simple on its face.  The classic 60/40 balanced portfolio works in many situations, but your allocation should change over time.  Historically, a 100 minus your age rule of thumb could suggest the percentage of stock holdings in your portfolio.  Today, an excellent financial advisor will utilize software that determines an allocation based on modern portfolio and the efficient frontier.

This is just a fancy way of saying that the analysis will find an optimized allocation to provide the greatest expected return for a given level of risk.

Tax Efficiency

When it comes to investing, there is a saying, "it's not how much you make; it's how much you keep." Perhaps one of the most important things a financial advisor can provide is tax efficiency.  A recent article in Barron's magazine, investment-tax expert Ed Slott notes that "taxes are an advisor's ultimate high-value opportunity."

Tax-efficient investing can come in several ways.  Utilizing a philosophy of lower portfolio turnover (longer holding periods) will take advantage of the favorable tax treatment of long-term gains over short-term.

Tax-loss harvesting and timing of recognizing significant capital gains can impact exemptions and credit phase-out levels as well as the Alternative Minimum Tax (AMT).

Your financial advisor will also help you navigate the myriad of ever-changing IRA and retirement plan contributions and deductible limits as well as distribution options.

Tax law is constantly changing. Being on top of it one year is no guarantee that your knowledge is relevant a few years down the road.

Estate Planning and Insurance

A proper financial plan includes insurance.  Your advisor will be well equipped to determine an appropriate type and amount (and sometimes providing it) of insurance based on your age and family.

Types of insurance for consideration include life, disability, and long-term care.

Also, life insurance is often a vital part of an estate plan.  Proper estate planning is something that often goes ignored, even by ultra-high net worth celebrities.   You don't need to be a celebrity or ultra-high net worth to learn from the mistakes that many have made.

Like taxes, estate planning laws often change, and significant life events may trigger a need to update plan provisions.  Existing estate tax exemptions will likely lower significantly under the Biden administration and democratic control of the House and Senate.

Part Therapist, Part Mediator, Part Caretaker

Over time you will realize your financial advisor is much more than an investment, tax, and insurance expert.  They will keep you calm and on the right course during difficult times.  Ironically, they will also keep you out of trouble in the good times as many roaring bull markets come with can't miss-too good to be true (because they aren't) opportunities.  Your advisor will keep you level-headed and help you avoid (or at least minimize) potential trouble that is easier to find when times are good.

Often a husband and wife or life partners will have drastically different investment personalities and risk tolerance.  A good advisor will mediate and bridge these differences and focus on the long-term picture.

Of all the critical roles a financial advisor provides, perhaps nothing is more important than the role of caretaker if something unfortunate should happen.  In these situations, a surviving spouse or loved one can turn to a trusted professional with an existing relationship.

Pennywise But Pound Foolish

The money spent on a good financial advisor who is the right fit for you may be the best money you will ever spend.  If you simply look at annual fees compared to investment returns over a lifetime, it is easy to miss the big picture.  The real question is - after paying fees, will your financial advisor ultimately put you in a better position?

The cost and availability of life insurance depend on factors such as age, health, and the type and amount of insurance purchased. Before implementing a strategy involving life insurance, it would be prudent to make sure that you are insurable by having the policy approved. As with most financial decisions, there are expenses associated with the purchase of life insurance. Policies commonly have mortality and expense charges. In addition, if a policy is surrendered prematurely, there may be surrender charges and income tax implications.

Registered Representatives offer securities through First Allied Securities, Inc. a Registered Broker/Dealer Member FINRA/SIPC. Advisory services offered through First Allied Advisory Services. First Allied entities are under separate ownership from any other named entity. The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation.