Do NOT Hire a Financial Advisor To Beat The Market
WRITTEN BY: Gideon Drucker, CFP® AIF® ECA
I’m going to let you in on a little secret.
A financial planner’s job is NOT to beat the stock market, to be an expert stock picker or to outperform an index. We are not handicappers nor are we portfolio managers.
If achieving slightly higher investment returns on your quarterly statement is the reason that you’re thinking about hiring a financial advisor, than honestly, you should continue going at it alone (and I have told prospects as much when I get the sense this is really the only “service” they are looking for.)
I have had thousands of conversations with high incoming earning professionals all around the country looking for guidance. I can immediately tell if the person I’m speaking with truly understands what a financial planner’s purpose is & if that person would benefit from professional guidance.
Ok, so what drives someone towards hiring a financial planner?
• You want a trusted partner to share in the decision-making process whenever you are contemplating a life decision, big or small. (Buying/renting a new home, refinancing a housing project vs. paying cash, private school vs. public school, changing careers, going from two household incomes to one, paying down debt vs. investing your bonus, taking a sabbatical from work, how to best help an elderly relative, moving from the city to the suburbs, or from state to another, renting out your old home vs. selling, paying off your mortgage faster/slower,
• You realize that time is your most precious commodity (the only one that is impossible to create more of), which means that hiring a proactive & competent financial planning doesn’t just improve your tactical decision making but will, by definition, be contributing to an overall improved quality of life (giving you back your time so you can do more of what you want to do)
• You no longer want to maintain the psychological burden of managing every aspect of your family’s financial affairs by yourself. You want to get rid of that tickle in the back of your head that wonders, “Am I missing anything? Will I have enough? Am I heading in the right direction?” You want a true partner who is being paid to shoulder that burden and who has the expertise & temperament to live with it every day so that you don’t have to…
• You want an objective outside voice telling you the things you don’t necessarily want to hear & hold you accountable to get the stuff done that you’ve been absent mindedly putting off for years. (Setting up a monthly investing strategy & actually sticking to it, buying more life insurance because your family is growing, setting up an estate plan with guardianships & trustees etc.) There is a reason that most people will do more pushups if a trainer is standing next to you & counting them out loud than if you were working out in your house by yourself.
• You don’t have the time, energy, or interest in managing your cash flow, investment strategy, insurance strategy, the ever-changing tax environment, or in ascertaining your overall financial health based on dozens of overlapping variables on a regular basis. Just reading this sentence made your head spin.
At the end of the day, you should hire a professional planner because the value (financial, mental, psychological, day-to-day, emotional) you receive from the RELATIONSHIP is greater by a multitude than the total price you are paying for it. For people that answer yes to any of those questions above, well, my counsel will simply prove to be invaluable.
If nothing on this list resonates with you (maybe because you’re saying some variation of “I do what I want to do, I wouldn’t value/use a partner when it’s decision making time” or “I love my spreadsheets so managing all of this on my own is not a burden at all” or “I’m not that busy…handling all of this is a good use of my time”) than again, speaking as a professional financial planner, you probably aren’t ready to work with a CFP®.
Now, to be clear, a fiduciary financial planner will, absolutely, ALSO increase your dollars & cents net worth…there will be, immediate, tangible & tactical improvements to your financial health as a result of your relationship with them. But even then, this can’t be seen through the prism of “investment performance” on a piece of paper. Here are some ways that a financial planner will provide tangible & immediate financial value that goes beyond any sort of “rate of return” on a statement:
• Tax Efficient investing. Placing tax-sensitive holdings in tax-deferred accounts & tax-affected holdings in taxable accounts.
• Retirement Tax Placing. Backdoor Roth IRA’s. Mega Backdoor Roth IRA’s. Devising a strategy to convert IRA money to Roth IRA money to lower your tax liability.
• Protection Planning. Ensuring that you have an adequate disability/life/long term care insurance to protect your financial foundation. Earning 8% in your portfolio doesn’t mean anything if you get injured and your $500k annual salary gets replaced by a measly $2,000 per month because you didn’t have enough coverage.
• Account Titling. Setting up portfolios either individually owned, jointly held, or TOD depending on the circumstance. Having primary beneficiaries and contingent beneficiaries on ALL of your accounts (& updating all of them.)
• Withdrawal/Distribution planning. Helping you to withdraw money from your accounts in a way that makes the most tax sense and asset allocation sense.
• Education Planning: Creating an education planning program that straddles the sometimes-contradictory goals of tax efficiency and flexibility.
• Cash Flow Investing: Helping to build a system that will prioritize where your money should be going each month (401k’s, 529 plans, Taxable Investments, Roth IRA’s, Insurance, Savings Accounts, Stocks, I-Bonds, Treasuries etc.)
All these decisions play a significant role in helping you get closer to hitting your net worth targets and achieving your financial goals. None of these decisions are reflected in a particular portfolios’ “rate of return.”
A Certified Financial Planner (CFP®) is not a “money manager”, “portfolio manager”, or “stock analyst” who spends his days building/structuring investment portfolios. That is literally a different job. That is why ALL the top advisory firms outsource their investment management services, using tried & true low-cost approaches to investment management. My team of CFPs®, for example, has access to over 100 different investment strategists and the ability to implement one of over 400 investment portfolios with our clients.
I’ll end here:
A financial planner cannot predict the stock market better than ANYONE ELSE. They cannot predict which type of stocks will perform better over the next 12 months. We are privy to the same information that you are…. which says that asset allocation is responsible for upwards of 93% of an investment’s performance. In other words, just picking the proper ratio between stocks and bonds is worth almost 10x more than the selection of the individual stocks and bonds themselves. The greatest investing minds in history (Warren Buffet, Peter Lynch, Franklin Templeton, Charlie Munger, Howard Marks) are all united in understanding that NOBODY can predict the stock market & that there is no “secret.”
All of this means, ironically perhaps, that investment management is the easy part…We don’t need to seek out over-performance because the market will reward us just for existing. When it comes to investing low-cost diversified portfolios of mainstream equities will grow your wealth greater than any other vehicle at your disposal. This fact has remained consistent for over 100 years.
With that as the preamble, it’s time to get to work.
As always you can schedule a 15 minute "Right Fit" call here so we can figure out together if there's more you can be doing now in your financial world.
