Financial Planning | February 7, 2017

Wealth Management | February 7, 2017

DIY Financial Planning vs. Working with an Advisor

by  Laurie Wexler Gerber, MBA

Are you considering hiring a financial advisor to help put your financial affairs in order? Or, are you managing everything yourself? According to one study, most individuals surveyed saw tremendous value in receiving professional financial advice. However, they didn’t believe that what they were being told would actually come to pass. What’s more, follow-ups after the survey concluded that the number one reason most individuals don’t hire a financial advisor is because they’re afraid of the fee an advisor will charge them1.

What’s most interesting about these findings is that DIY investors continue to underperform the broader financial marketplace:

According to Dalbar, the financial community’s leading independent expert for evaluating, auditing and rating customer performance, the average equity mutual fund investor underperformed the S&P 500 by a margin of 3.66%. While the broader market made incremental gains of 1.38%, the average equity investor (a.k.a. DIYers) suffered a more-than-incremental loss of -2.28%2. Read the full Dalbar’s 22nd Annual Quantitative Analysis of Investor Behavior Study.

Net Impact of Good Financial Advice 

In a recent article, Professor Wade Pfau of The American College talks about the net impact of good financial advice. Specifically, he describes Vanguard’s Advisor Alpha concept – the notion that a client receives an added return when working with a financial advisor. In his discussion, the Advisor Alpha is 3% (4% added return less an assumed 1% advisor fee)What Pfau essentially proposes, then, is that an advisor’s value is derived from not just from making good investment decisions, but by providing other sources of value, including financial planning and related risk management services. 

Based on this, it appears that most financial advisors pay for themselves. 

So what’s a DIY investor to do, particularly if you have reservations about hiring a financial advisor? At GW & Wade, we believe arming yourself with information is the best approach.

Therefore, to round out this discussion, I sat down with GW & Wade Principal Gene Sinclair [GS], and Vice President of Client Development Jim Da Silva [JD]. Our goal: To examine DIY investing versus hiring a financial advisor. Here’s what I learned:

LWG: What do you think about individual investors who continue to manage their own money?

JD: We welcome consulting with DIYers because they come in having educated themselves and we tend to have a deeper conversation earlier in the process, which is a good thing. It's their hard-earned savings after all, so why shouldn't they learn as much as they can. Our intent with DIYers is to not be in competition with them; rather, work with them and show how we can help expand their long-term wealth. 

LWG: What are the benefits of using a financial advisor vs. a DIY approach?

GS: An important distinction is to use a financial advisor that is part of a comprehensive financial advisory firm. By doing so, you’ll escape the emotional investment patterns that plague individual investors. A financial advisor can provide an antidote to emotional investing; a thoughtfully structured, efficient portfolio appropriate for the client; access to a richer, more thoroughly researched investment pool; continuous monitoring of the portfolio; disciplined rebalancing and tax efficiency.

Benefits Continued

JD: The real benefits begin when you can identify a true advisor as opposed to an intermediary.  Key questions to ask: What are the advisor’s credentials? How long has the advisor been working within a fiduciary capacity? How are they compensated? How long has the advisor worked at the firm that you’re interviewing? 

Entrusting your finances and personal circumstances to another person is a significant decision. The benefit of using an advisor comes in the form of having a professional doing the work for you since time is a precious commodity. At the end of the day, clients pay an advisor to do a better job than they could have done on their own. Period.

Case-in-Point:

After buying our first home, I did most of my own handiwork around the house. I enjoyed the work, was good at it and had the time to be meticulous. Now, most work is contracted out. The finish work is of higher quality than I could possibly produce given my current time constraints and the projects are completed in a timely manner.

LWG: How do you help them determine if someone needs an advisor?

GS: First, it’s important to point out that wealth management is a full-time job. I then pose several questions to them, including: Is managing their assets the best use of their time? Do they enjoy it? How do they choose their investments? How many professionals are on their investment committee? How many asset classes do they use in their allocation? Are their results net of costs? Net of contributions and distributions? Time-weighted? Annualized?

At GW & Wade, we would argue that if you’re not asking yourself these questions and using productive financial tools to answer them, that you do not have a sound and well-diversified financial plan.

LWG: What are the “non-traditional” benefits of working with a financial advisor, such as receiving tax or estate planning advice?

JD: When people think advisor, they tend to focus on money management. The non-traditional benefits you mention are in fact traditional benefits of GW & Wade’s clients. However, when we think of the advice we provide, we think of money management in terms of a much broader engagement.

For Example:

  • What if you were informed that your estate documents, which you had drafted on your own, did not contain the mechanism to properly avoid probate?
  • What if you sold your company two years ago and never learned that the proceeds from the sale could have been taxed at a much lower level or even excluded. Good thing you met us now because individuals have three years to make an amendment to a previously filed tax return.
  • What if you were moving to another state for a new role within your company and your GW & Wade advisor had you exercise vested options as a Massachusetts resident so that you were taxed at a lower rate in comparison to a New Jersey resident?
  • It’s a Sunday morning. You email your advisor mentioning that you want to make an investment in your business and 20 minutes later you are reminded that the short-term account she created for you eight months ago has more than adequate funds for you to arbitrage this opportunity.

LWG: Name a few typical mistakes people make when taking a DIY investing approach?  

GS: DIY investors often act based upon emotion rather than value. They tend to focus too much on the return and not enough on risk. As a result, a DIYer often takes too much risk for the return they earn, and ultimately gives back the return. They frequently chase returns instead of developing and sticking to a thoughtful investment plan. They tend to be drawn to people who claim the ability to predict events and markets, which no one has demonstrated the ability to do. They fault themselves for failure to predict good or bad markets. They engage in excessive turnover, generating too many commissions and taxes. Finally, they often follow the latest investment fads, which can work for a while, but eventually give back all the benefits and then some.     

LWG: What’s the single most important takeaway for your clients and prospects about the value of a wealth manager?

JD: Clients who chose to work with an advisor tend to be better planners, have real goals, possess a clear understanding of how their money works, tend to achieve greater financial success and, most importantly, live less on hope and more on facts. That said, our most enduring relationships derive from clients who make just as much of an effort working on the relationship as we do.

GS: Most individuals, including many small advisory firms, are not emotionally suited to manage assets. However, a disciplined investment committee with good tools and a deliberate research process can eliminate the destructive emotional factor from investing.

Is GW & Wade a Good Fit for You?

Our clients are young and old, families and individuals, hard-charging executives and comfortable retirees, aggressive and risk-averse. What they all share in common is the desire to be smart about their financial matters, working with someone they trust in order to reach their goals. Learn how GW & Wade can help you take control over your financial life.

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The information provided above is general in nature and is not intended to represent specific investment or professional advice.  Any results cited do not necessarily represent the experience of other GW & Wade clients.  No client or prospective client should assume that the above information serves as the receipt of, or a substitute for, personalized individual advice from GW & Wade, LLC, which can only be provided through a formal advisory relationship.  

Clients of the firm who have specific questions should contact their GW & Wade Counselor. All other inquiries, including a potential advisory relationship with GW & Wade, should be directed to:

Laurie W. Gerber, Client Development

GW & Wade, LLC

781-239-1188

lgerber@gwwade.com 

1 http://www.edelmanfinancial.com/Education-Center/Articles/W/Why-Some-People-Never-Seek-Financial-Advice 

2 http://www.northstarfinancial.com/files/6314/6523/9571/2016_DALBAR_Advisor_Edition.pdf 

Recent Article: http://www.forbes.com/sites/wadepfau/2015/07/21/the-value-of-financial-advice/#423ff5783e8c 

Fiduciary Capacity: https://en.wikipedia.org/wiki/Fiduciary

Financial Planning Wealth Management

Laurie Wexler Gerber, MBA

GW & WADE CLIENT DEVELOPMENT MANAGER

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