“Do I really need help? Or, can I handle wealth management on my own? What does an investment advisor do for their fee?”
These are common questions that investors often ask. These questions are critical since the decision of who you trust to manage your wealth will be one of the most important financial decisions you will ever make.
There are positives and negatives of doing it yourself, when it comes to investing and wealth management. Here, we will address the value you should be getting if you decide to use an outside advisor. We will focus on seven benefits that all have a quantifiable and qualitative impact on one’s long-term financial success.
Benefit 1: A portfolio that evolves with you
Does your advisor research funds to identify the best options in each asset category? Only with thorough data on a wide range of investment options can your advisor appropriately allocate funds for a custom-designed portfolio that evolves with you and your financial goals. Because asset values change, your advisor should regularly assess your portfolio to identify a drift from target allocations and take steps to rebalance as required.
Benefit 2: A portfolio designed to match your risk tolerance
Most investors have provided their advisors with an idea of their tolerance for risk in their portfolios. With age and a shortening retirement horizon, changes to career and family can dramatically affect an investor’s risk tolerance. Does your advisor periodically calculate the risk score of your current portfolio and compare it to your personal risk score? Nothing can remove all of the risk of investing, but a thorough advisor will stress-test your portfolio in a variety of market scenarios and optimize asset allocation to match your risk tolerance, even if it has changed over time.
Benefit 3: Portfolio management with an eye on taxes
Many investors focus primarily on portfolio performance, while overlooking the impact of taxes on their investment returns. The cost of federal and state income and capital gains taxes on a portfolio depends on many factors – the underlying investments, asset turnover, the structure in which the investments are held, the investor’s other income and state of residence.
The ten-year recovery of the U.S. stock market has exacerbated this impact for investors in the top tax bracket. A tax-savvy advisor understands the effects of current tax law on the assets in your portfolio and works to maximize your net after-tax return. Your advisor should implement tax harvesting strategies where applicable, coordinate the tax consequences of rebalancing and allocate investments to optimize the tax diversification of your portfolio.
Benefit 4: Private investment opportunities
To offset the risk associated with market volatility, most advisors will recommend a portfolio that is diversified across a variety of asset classes. Traditional bonds are often used as a risk mitigation strategy for many investors; however, high-net-worth investors may approach their advisors seeking investment alternatives with returns that do not correlate with stocks or bonds.
An advisor who is well-versed in alternative investments can offer investors a broad menu of options, including REITs, Commodities, Managed Futures and Private Equity, and review the risk and fees associated with each option. Some advisors can also provide access to vetted, private non-traded alternatives to help investors maximize returns while reducing overall portfolio risk.
Benefit 5: A comprehensive financial plan
In addition to providing investment recommendations, your advisor should work with you to develop a comprehensive financial plan that keeps your big picture in focus. A cash flow analysis, personal balance sheet, income projections and goals for education and retirement are data that your advisor should gather to generate a dynamic plan that becomes your roadmap to guide the financial decisions you make for you and your family. As part of their wealth management services, your advisor should periodically review your financial plan and update it to incorporate any changes to your income, family situation, goals and time horizon.
Benefit 6: A clear understanding of how you are doing
If reports from your investment advisor don’t paint a clear picture of your portfolio’s performance, this is a problem. Your reports should track net contributions and withdrawals, present a customized portfolio summary and transparently show the performance of your portfolio, net of all fees.
Benefit 7: Total wealth management – Not just investments
Does your advisor’s firm work only with investments, or is your advisor backed by a solid wealth management team?
A multidisciplinary wealth management firm includes specialists in areas of expertise affecting your overall financial well-being. For example, attorneys can analyze each asset and make recommendations to reduce the asset’s level of exposure to lawsuits and other risks. CPAs can review tax returns and suggest ways to reduce or defer tax liability and insurance experts can review existing policies and present options that could reduce premiums and/or improve coverage. An advisor who can offer these areas of expertise within his or her firm is well-equipped to become your financial quarterback – a resource to handle your questions concerning any financial matter.
The best advisors deliver significant benefits that can add both quantifiable and qualitative value to their clients’ portfolios. This advisor advantage can help you achieve your long-term financial goals by aligning your portfolio with your personal risk tolerance, focusing on your net after-tax return, and developing a strategic wealth management plan that evolves with you and your family.
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This article contains general information that is not suitable for everyone. The information contained herein should not be construed as personalized legal or tax advice. There is no guarantee that the views and opinions expressed in this article will be appropriate for your particular circumstances. Tax law changes frequently, accordingly information presented herein is subject to change without notice. You should seek professional tax and legal advice before implementing any strategy discussed herein.
About the Author:
David B. Mandell, JD, MBA
Mr. Mandell is an attorney and author of more than a dozen books for physicians, including For Doctors Only. He is a partner in the wealth management firm OJM Group (www.ojmgroup.com), where Bob Peelman, CFP, is director of Wealth Advisors. They can be reached at [email protected]