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How Much Value do Advisors Add for the Typical Client?

It is difficult to determine the exact value that a financial advisor adds for an average investor, as it can vary greatly depending on the specific needs and circumstances of the individual. However, it is safe to assume that getting a financial advisor on board can be beneficial for most people. Traditionally, financial advisors were seen as experts offering recommendations for stock trading. However, today financial advisors assist with a wide range of financial issues and goals like tax planning, budgeting, retirement planning, estate planning, debt management, asset allocation, portfolio diversification and rebalancing, as well as business succession planning, among several others.

A lot of people look for data and figures to understand the value of a financial advisor in their lives. Several assumptions have also been made in this regard. Some of these suggest professional financial advice can add between 1.5% and 4% to portfolio returns over time. However, these figures may not be relevant and applicable to all investors. Monetary and investment success can mean different things to different people, depending on what an individual seeks. For someone who is overburdened with debt and struggling to save, getting rid of debt and attaining a savings rate of as low as 5% may also be a success. For someone else, being able to steer clear of bad investment decisions that can result in a potential loss can be termed a success.

The value a financial advisor adds to your life may be hard to sum up as a mathematical figure. But they can be expressed through the myriad of ways in which these professionals can help. Therefore, you may consider hiring a financial advisor.

How much value does an advisor add?

Here are some ways in which a financial advisor can add value to your life and financial planning routine:

1. Providing professional and expert guidance on financial matters

Financial advisors have a wealth of knowledge and experience in the financial industry and can provide valuable guidance and recommendations to clients to help them achieve their financial goals. They can start by reviewing your income, expenses, financial responsibilities and liabilities, assets, goals, etc., and assess your current financial situation. A basic review and assessment of your finances can help them understand your objectives for investing or saving, your outlook and attitude towards money, and problem areas that need to be worked on. Based on these findings, the financial advisor can create a suitable financial plan for you, outlining specific steps you can take to achieve your financial goals. This may include setting up a budget, paying off debt and minimizing some non-essential expenses, investing in specific financial products, saving for retirement, adopting tax saving strategies, and more.

A financial advisor can also offer expert guidance on where to invest your money, how much to invest, and how long to invest it. For instance, stocks are suitable for wealth creation over the long term. In contrast, commercial papers, certificates of deposit (CDs), etc., can be ideal for short-term goals. The professional can help you pick suitable investment options based on your objectives and risk appetite across life stages. This can help minimize risk and maximize potential returns. Moreover, it ensures you pick the right products for your goals and avoid unnecessary diversions in your wealth creation journey.

2. Reducing costs

A lot of people only look for financial advisors for investment advice. However, they forget that apart from helping your money grow, these professionals can also help you save it. There are a number of costs associated with investment products, like expense ratios, taxes, fees, etc. Financial advisors can review these costs and help you pick out cost-effective options that can be accommodated into your budget. They can recommend strategies like long-term investing to minimize investment costs. This also helps in maximizing your returns.

Additionally, taxes are a significant component of investment planning. Your investment returns are taxed as short- and long-term capital gains. The taxability for each can differ depending on how long you hold them. Some investments, such as Roth retirement plans, may also be tax-free in retirement, while a traditional retirement plan would be taxed in retirement. Your financial advisor can help you know and understand these rules and devise an investment strategy that triggers the least taxes while fulfilling your goals.

Other than this, financial advisors can also help you with basic budgeting. They can review your expenses and help you save more money. Financial advisors can be helpful in debt management, too. All your debts carry an interest. They can help you prioritize settling high-interest debt first. They can also recommend ways to save and invest more, so you depend less and less on debt.

Estate planning can also be costly, not only for you but also for your children. Your financial advisor can create a plan to distribute your assets after you pass away, which can help reduce the costs of probate and other legal fees for your inheritors. This also ensures that your hard-earned money is protected and passed on as intended.

3. Helping overcome behavioral and emotional errors

Emotions have little to no space in finance. It always helps to make investment decisions based on accurate data, research, market trends, etc. Making emotional decisions may pose a risk to your money and is strongly discouraged. However, in most cases, investors tend to panic sell when the market takes an unfavorable turn. This panic caused by overreaction, gossip, and irrational decisions further affects the market and can lead to greater financial turmoil for investors. However, a financial advisor can help emotional investors by providing objective, unbiased advice and guidance based on years and years of experience and expertise. These professionals can help investors make decisions based on their long-term financial goals rather than their emotions. This can involve developing a financial plan that takes into account the investor's risk appetite, time horizon, income, expenses, etc. Financial advisors can also help investors understand the market better to eliminate panic altogether.

Additionally, financial advisors can provide support and guidance during market volatility or when investors may feel anxious or uncertain. This can be done through regular updates and by monitoring their investments. This can help investors make sense of what is happening so they stay focused on their long-term goals and do not get caught up in short-term market movements. Investors who are in control of their emotions are less likely to commit errors, and the chances of earning a higher yield are greatly enhanced with reduced errors.


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4. Planning withdrawals in retirement

The money you spent all your life saving and investing must be carefully and rationally withdrawn in retirement to ensure it serves your needs and is not wasted on taxes. As mentioned above, your retirement accounts are taxed differently on your withdrawals in retirement. For example, your withdrawals from a traditional Individual Retirement Account (IRA) are taxed, whereas your withdrawals from a Roth IRA are not taxed in retirement since you would have already paid tax pre-retirement while contributing to the account. A financial advisor can help you devise a suitable withdrawal plan for your retirement accounts, depending on their taxability. Further, accounts like the 401k and the IRA also have penalties associated with early withdrawals. For instance, if you withdraw your money before age 59.5, you pay a 10% penalty over and above any applicable federal taxes. A financial advisor can help you plan your withdrawals based on all of these rules.

Further, retirement accounts also have Required Mandatory Distributions (RMDs) that mandate you to withdraw from your retirement account after you reach 72. The RMD amount is decided on the basis of the fair market value of your account and your age and life expectancy. The value of a financial advisor lies in helping you take cognizance of these rules while planning how you draw and use your money. A financial advisor can also help you decide between lump sum and periodic withdrawals from various investment and savings products. This can be planned per your needs, tax liabilities, age, life expectancy, and other factors.

5. Reviewing your investment portfolio

Portfolio review and rebalancing are essential for a number of reasons. They ensure that the portfolio is aligned with your financial goals and risk tolerance. Your financial situation and goals change over time. Therefore, your portfolio may become misaligned with your current circumstances. Regularly reviewing and rebalancing the portfolio can ensure that your investments are still appropriate for your current financial situation and long-term goals. Rebalancing also maintains a desired level of diversification. This spreads risk and reduces the dominance of any one investment on the rest of the portfolio. Regular rebalancing ensures that your investments are appropriately diversified and not too heavily concentrated in any area.

However, rebalancing can be tricky and also time-intensive. That said, financial advisors can help review your investment portfolio by analyzing your current holdings and making recommendations for any changes that may be necessary. Financial advisors evaluate the market, your age, recent personal, professional, or financial changes in your life, as well as your liabilities to determine your risk appetite and the recommended level of diversification for the same. A financial advisor can advise adding or removing certain investments to take advantage of market movements. Buying and selling some investments may also be necessary to maintain the desired asset allocation. For instance, if your original asset allocation was 40:60 in stocks and bonds, respectively but has changed to 70:30 because of gains in stocks, your portfolio will be unbalanced with regard to your risk appetite. A higher stock concentration may or may not be suitable for you and your goals. A financial advisor can identify these changes in your portfolio and recommend the required course of action during a review.

6. Protecting from scams and educating clients to make better investment decisions

The value of financial advice from a professional cannot be undermined, especially for young inexperienced investors. It is common for people to fall for scams and Ponzi schemes. Financial advisors can help educate clients about financial scams and provide guidance on how to avoid them. They can also help clients verify the legitimacy of investment opportunities and protect their assets from fraudulent individuals. One way to prevent falling victim to these scams can be by educating yourself. Financial advisors can help inform clients about a variety of financial topics, such as budgeting, saving, and investing. By providing clients with the knowledge and tools they need to make informed financial decisions, advisors can help clients build a strong foundation and not fall for products or investments that do not serve their purpose.

A general awareness of the market, comprehension of the calculation of taxes, understanding of compound interest, as well as knowing how to use essential investment and savings formulas are some excellent ways in which a financial advisor can help investors.

To summarize

The answer to how much value an advisor adds to your financial plan is long and elaborate. The reality is that financial advisors can help you navigate a number of financial decisions. They provide expert guidance on financial matters. They also help you understand the potential risks and benefits of different financial decisions so you can effectively plan for the future. A financial advisor can help you understand the pros and cons of various financial strategies and products and provide you with the information you need to make informed decisions about your money. They also identify potential risks and recommend strategies to mitigate or eliminate those risks. Lastly, these professionals provide ongoing support and guidance to help you stay on track and make progress towards your financial goals.

Overall, the value of a financial advisor can be significant. Use the free advisor match service to find a suitable financial advisor for your financial concerns and future goals. The tool matches you with 1-3 advisors in your area based on your answers to a few simple questions. 

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The blog articles on this website are provided for general educational and informational purposes only, and no content included is intended to be used as financial or legal advice.
A professional financial advisor should be consulted prior to making any investment decisions. Each person's financial situation is unique, and your advisor would be able to provide you with the financial information and advice related to your financial situation.