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Why Financial Advice Matters

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Studies have shown that households that seek financial advice are better prepared for retirement than those that do not

Acquiring wealth is not always achieved through choosing investments with the highest returns. Many investors are confused by the difference between the cost of investing and the value of advice. If you manage your own investments then you want to achieve the highest possible return within your personal risk tolerance and time horizon – that is, your ability to handle short- and long-term market volatility for the time frame your money will be invested. All things being equal, you should choose a mutual fund or managed portfolio that has the lowest management fee to ensure the highest net return after fees. A problem arises when investors choose investments that include a built in management fee or “trailer fee” which is charged for advice without taking advantage of that advice.

Mutual funds and managed portfolios come in a variety of fee and cost structures. For most people, these can be difficult to understand and compare, as a result, many investors choose the wrong investment for their needs. Choosing investments with the highest return and the lowest management fee can be a mistake because there are a number of factors that go into building a portfolio for long-term wealth accumulation. Unless you are a seasoned investor who understands all of your investments and their underlying risks, you are better off hiring an investment advisor or financial planner who can help you make the best investment choices for your unique circumstances. Their advice and value-added services are well worth the built-in management fee found in most mutual funds and managed portfolios.

One determining factor in growing your wealth is your tolerance for investment risk – by this I mean your ability to handle market volatility. The more uncomfortable you are with market volatility, the more likely you will be tempted to cash out of your investments in a down market and miss the resulting rebound. Your advisor’s role in this situation is to provide context for what is happening in the market and how it relates to your portfolio. Your advisor may suggest that you take this opportunity to add to your portfolio even though you feel panicky (assuming the reason for owning the investment has not changed). She may advise you to rebalance your portfolio, returning to your original target mix by selling a portion of the investments that made money in the down market (such as bonds) to purchase investments that have been dragged down by the market downturn. Over time, this automatic rebalancing will add to your portfolio’s overall net return and smooth out the volatility of your portfolio.

To create a portfolio, a full service investment advisor or financial planner will sit down with you to get a clear understanding of your investment priorities. He or she will ask you a series of questions about your:

  • Investment time horizon
  • Current level of investment experience
  • Tolerance for market volatility
  • Current tax situation
  • Liquidity requirements
  • Investment growth expectations
  • Anticipated lifestyle changes
  • Goals for you, your family, and your legacy
  • Economic variables such as inflation and market volatility
  • Other personal factors, which are important to you and the growth of your wealth

From this information, your advisor will create an investment blueprint known as an Investment Policy Statement (IPS) which he will use to manage his investment recommendations on your behalf. Depending on the complexity of your investment portfolios and circumstances, your advisor will meet with you quarterly or annually to review whether the portfolio mix is on track or needs adjusting. This is determined by discussing changes in your economic situation such as receiving an inheritance, a new job or loss of a job, new children, grandchildren, changes in market conditions that will affect your portfolio going forward, etc. Based on this additional relevant information your advisor modifies the IPS and subsequent advice.

The goal of achieving the highest return on your portfolio within your comfort zone is lost when the portfolio’s net return is eroded by taxes. A full service financial planner or investment advisor will take tax efficiencies of your portfolio into consideration and recommend strategies to minimize the tax effect on your portfolio. As the saying goes “it’s not how much you make that is important, it’s how much you get to keep.” When constructing a successful portfolio, effective tax planning is key in sustaining your wealth for you and successive generations.

Full service financial planners and investment advisors will also have access to a team of professionals such as accountants, lawyers, insurance specialists, and estate planners. These professionals will be in house or accessible through a network of local professionals who offer retirement planning, estate planning, comprehensive wealth planning, and business succession planning.

– By Adrian C. Spitters, FCSI®, CFP®, FMA


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About the Author:

Adrian Spitters is an avid writer and blogger who recognizes the need to publish on issues relating to the retiring business owner and farmer, by offering information and insight to help them transition into retirement and create sustainable multi-generational family wealth.

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