Which Financial Services are Worth Paying For?

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Forbes.com, Summer, 2015. This article was written with Jim Cahn, the Chief Investment Officer at Wealth Enhancement Group. It was part of a series of articles developed under an agreement with Forbes to work with a variety of contributors and assist them in delivering actionable investment ideas each week. The site forbes.com is one of the top 500 sites in the world with nearly 10 million subscribers and nearly 100 million page views a month.

Selecting financial services that will help you reach your financial goals is important, but it’s not always easy figuring out which ones are worth paying for and which aren’t. Successful investors know the difference.

In my opinion, here’s what you should pay for:

  • Integrated tax and planning advice. This is a definite value. Being tax-smart can actually add as much, if not more, return than being investment-smart. Research shows that tax strategies can add 30 to 40 basis points to after-tax investment performance. You need a team of specialists to maximize the best tax strategies, which leads me to the next item on my list of financial services fees worth paying for.
  • Specialists. There are many financial advisors trying to do it all, but they really can’t. It is worth paying a little bit more to have a full team of financial professionals in your corner – specialists, for example, who enhance your investments with tax efficiency strategies.
  • Estate planning advice. People pay thousands of dollars to set up complicated estate trusts that don’t get follow-through, like funding those trusts. Paying for estate planning advice means you get that follow-through and your plan and investments are aligned to your wishes and your specific assets go to the people you designate. You’ll also get intergenerational strategies to mitigate estate taxes.
  • Life planning. Financial advisors don’t just give advice on your investments. They are often life coaches, too. What I mean by that is they can help you figure out what you can do financially as well as what you can’t, such as whether or not you can buy a vacation home or fund a child’s college education.
  • Quantitatively Enhanced Indexing. I am not going to get too much into the weeds here with a dive into QEI (see my article “Active vs. Passive Investing: Are Those Really the Only Two Options?” for more), but we have seen portfolios using the QEI approach outperform passively indexed portfolios, and they have some of the same tax and cost benefits as passive indexing. I believe paying a financial professional who understands this approach to manage your portfolio using it is worth it.
  • Asset allocation. Research has shown that the majority of the fluctuation in portfolios is based on asset allocation, so making sure your asset allocation is aligned to your risk level is something worth paying for. What you’re paying for here is not someone to simply plunk X dollars into stocks and Y into bonds. You’re paying for a relationship with someone who understands your goals and, importantly, your risk tolerance. Having a financial advisor with whom you have a personal relationship means your assets and your risk tolerance, which changes over time, can be better aligned.

What you shouldn’t pay for:

  • Asset allocation. There isn’t a duplication error. I have asset allocation in the both the ‘pay for’ and ‘don’t pay for’ lists. That’s because I would pay for asset allocation with the caveat of having a personal relationship with my advisor. I wouldn’t pay for asset allocation without having the benefit of someone who knows me and understands my values, goals and risk tolerance level.
  • Someone to pick stocks. Research shows that over time most financial managers can’t beat the market, and the ones that do aren’t prescient. If a financial professional tells you he or she knows when the market will go up or down, they’re probably lying to you.
  • Suitability standard. Depending on their designation, financial professionals are held to different standards regarding advice they provide clients. Those adhering to the fiduciary standard must put a client’s interests above their own. Those adhering to the suitability standard can make recommendations that are suitable for a client but they don’t necessarily have to be in the client’s best interests. I wouldn’t pay for financial advice that wasn’t in my best interests.

There’s a lot of talk about low-cost investing and generating high levels of return, but what’s important to remember when paying for financial services is value. Value is meeting your goals for the lowest cost possible. Going the absolutely lowest-cost investment route or finding the highest-cost investment management is not going to accomplish your goals. You may have to pay a little more to get all the services you need (but probably not as much as you fear you will), but in the end you should be closer to your goals.

No strategy assures success or protects against loss.  Asset allocation does not ensure a profit or protect against a loss.

Click here to see the article on Forbes.