The Money Meets Medicine Podcast

6 Ways a Financial Advisor is Worth It

By Jimmy Turner, MD
Host of Money Meets Medicine

I break doctors up into three groups. The first is the “DIY Financial Guru” group. These gurus likely won’t ever use a financial advisor. However, this is a small fraction of physicians in my experience. The second group is the Dot the i’s & Cross the t’s group. They know enough about personal finance that they could handle most of their financial decisions themselves, but they want the help of a financial advisor to make sure they are dotting the i’s and crossing the t’s (i.e. not doing anything stupid). The third group, which is the largest and the most at risk for bad financial advice, is what I call the “Outsource” group. These physicians outsource their financial help just like you would for your dry cleaning, daycare, or lawn care.

As you work through these groups, the financial literacy declines and the need for financial planning help increases. Each group could likely benefit from a financial advisor in different ways. The DIY group may utilize a financial advisor on an hourly basis to ask questions, just like you would with a lawyer, while the Outsource group would benefit from full financial planning and management services.

Regardless of which group you find yourself in, if you’ve ever considered hiring a financial advisor, you have certainly considered the cost. However, something else to consider is how much a financial advisor might save you. In that vein, you might be wondering, “How to quantify how much a financial advisor is really worth?” Well, I want to tell you that the value of a good financial advisor goes way beyond just the numbers on a spreadsheet.

In fact, this has actually been studied by Vanguard and quantified in concrete numbers, but let’s not get ahead of ourselves.

The Value of Financial Advisors

When you think about hiring a financial advisor, what comes to mind? Is it just about crunching numbers and picking investments? The true value of a financial advisor goes way beyond the spreadsheets and pie charts.

In fact, Vanguard spent some time specifically studying quantifiable ways that financial advisors add value. While the typical AUM fee for most financial advisors is around 1%, this Vanguard study showed that working with an advisor can result in a net return of as much as 3% per year. Some of this net return comes from concrete perks like investing strategies, which are important, but don’t underestimate the power of the intangible ones – they can be the key to unlocking a healthier financial future and a more relaxed state of mind.

Here are ways that a advisor can add value to your financial life, which we will discuss in turn (below). We are going to discuss the 6 that I think are most consequential.

Financial Advisor Savings

1. Behavioral Coaching: Navigating Market Volatility

Visualize the pandemonium of a stock market in turmoil, as your financial future hangs in the balance and your portfolio’s value evaporates before your eyes. What do you do? Panic and sell everything? Unfortuantely, many do sell when the market is down, which is a catastrophic financial mistake experienced by many when the market tanked during the March of 2020.

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That’s where a good financial advisor comes in.

They’re like your personal coach, helping you stay disciplined and focused on your long-term goals, even when things get rocky. In fact, the Vanguard study above shows that behavioral coaching can add up to 2% (or 200 basis points) in net returns annually by helping you make sound decisions during market downturns.

The sheer magnitude of this is staggering – it’s monumental. For example, if you had a $1 million portfolio, those 200 basis points would be saving you an estimated $20,000. Per year!

In the example above when the pandemic hit and the markets went wild, good advisors kept clients from making rash moves that I would’ve regretted later. Those that sold could have lost more than 20% of their portfolio, while those that held on to this day have reaped the benefit of good financial advice.

2. Cost-Effective Implementation

The Vanguard study goes on to demonstrate a finding that I don’t find to be as compelling, but is worth mentioning. In the study, the authors suggest that the cost-effective implementation of your investments is worth an additional 0.3% (or 300 basis points).

The argument here is that your advisor can save you money by making sure that you are investing in low-cost options, like a diversified index fund strategy. Now, if you are working with a financial planner from a big financial planning firm or mutual fund company, this likely holds true. Why? Because many of those advisors will place you into actively managed or loaded mutual funds.

Switching to an index fund strategy from an actively managed strategy would certainly save someone at least 0.3% annually. However, if you are financially literate, you can invest in low-cost, diversified index funds yourself. That is why this value add for a financial advisor must be taken with a grain of salt.

3. Suitable Asset Allocation and Location

Another area in the investing arena where a financial advisor can save you money is when it comes to your asset allocation. Vanguard attributes a value of 0 to 0.6% to asset allocation.

One of the easier ways to conceptualize the value of a strong asset allocation is with the concept of sequence of return risk (SORR). The idea behind SORR involves market movement immediately following your retirement. If the market experiences large losses while you are drawing from your nest egg, this can cause problems.

While there are multiple ways to deal with the sequence of returns risk, one way is to have an appropriate asset allocation heading into retirement. This may involve increasing the amount of fixed-securities, like bonds, in your portfolio. Or investing in Treasury Inflation-Protected Securities.

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One could argue, however, that asset location is more important than asset allocation in terms of financial advisor ROI. For example, an advisor can add significant value by ensuring your tax-inefficient investments are hidden within your retirement accounts while your tax-efficient investments are held within your taxable brokerage account.

4. Asset Management (e.g. Rebalancing)

Asset management is another area where financial help can be meaningful. For example, having someone make sure that your asset allocation is staying on track. This requires rebalancing your portfolio. Otherwise, your 80% stock / 20% bond portfolio might turn into a 95% stock / 5% bond portfolio with time.

In addition to this, making sure you are rebalancing toward your goal as you reach retirement adds value as well due to the aforementioned SORR conundrum.

In addition to this, a financial advisor may add value through other tax-saving techniques like tax-loss harvesting or donating appreciated shares into a Donor Advised Fund for charitable giving. Both of these techniques can save you a significant amount of money come tax time.

5. Spending strategy (withdrawal order)

Of all of the ways that the study demonstrated added value from a financial advisor, there are two that stand out the most. One was mentioned earlier, which is behavioral coaching. The value of avoiding mistakes (e.g. selling in a down market or buying a house that makes you house-poor) is massive.

The second most valuable contribution that a financial advisor can provide is in your spending strategy in retirement. In fact, despite being in the DIY Financial Guru group, this is one reason I might employ the use of a financial advisor in the future.

Why? Because taking out money in retirement in the wrong order or in the wrong amount can cost you an exorbitant amount of money come tax time. Maybe you should have pulled from your Roth money, but you decided to pull pre-tax funds instead. What about those required minimum distributions you must start paying when you hit age 72? Avoiding those, when possible, adds a very real benefit as well. And these are just a couple of ways that an advisor can help with your spending strategy.

This may be why Vanguard found that an advisor helping you with your spending strategy could save you as much as 1.2% annually, or $24,000 on a $2 million portfolio. I bet most would agree that is a significant amount of money.

6. The Intangible Value of Expert Advice

One thing that Vanguard did not mention, but that adds a tremendous amount of value for a busy physician is the amount of time they can save. When life’s financial puzzles leave you feeling lost, a trusted expert can be your guide. They’ll help you put the pieces together and discover the peace that comes with a clear financial path.

For many doctors that I coach, time is one of their most important concerns. Time is limited. With a financial advisor this means time that you don’t have to spend researching investments, rebalancing your portfolio, or worrying about your financial future. That’s time you can spend doing things you love, secure in the knowledge that your finances are in good hands.

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In my experience, those intangible benefits are often what clients appreciate most about working with an advisor. It’s not just about the returns – it’s about the relationship and the peace of mind that comes with it. And the time savings that they can provide.

Conclusion

Financial advisors can add very measurable value for many. On the tangible side, you can look at things like:

  • Investment performance – Is your portfolio on track to help you reach your goals?
  • Tax savings – Is your advisor helping you take advantage of tax-efficient strategies?
  • Progress toward goals – Are you on track to hit your targets for retirement, college savings, etc.?

All in, Vanguard estimates these strategies can add up to up to 3% in net returns per year. That is a significant ROI for a financial advisor. Not too shabby.

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