Ep. 8 - Financial Advisor or DIY?

John Bever |

In this episode, Jim Uren and John Bever discuss the decision of using a financial advisor versus managing retirement planning on your own. They cover the advantages and disadvantages of both approaches, highlighting the cost-saving potential and personal enjoyment of the DIY method, but also cautioning about the time and potential for costly mistakes. On the other hand, they emphasize the expertise and knowledge that financial advisors bring to the table, along with the potential for costly mistakes. However, they also address the drawbacks, including the cost and the possibility of working with the wrong advisor. Jim and John present a balanced view, emphasizing the importance of considering one's preferences, skills, and resources when making the decision. If you're nearing retirement age, this episode can help you make more informed decisions about your retirement planning, whether you're considering going it alone or seeking professional financial advice.

In this episode, you will:

  • Learn the pros and cons of a DIY approach to financial planning and investment management
  • Uncover the drawbacks and potential benefits of working with a financial advisor as you work toward your financial goals
  • Discover what research reveals about the potential financial and non-financial benefits of working with a financial advisor
  • Understand how an advisor can use both asset allocation and asset location to help you manage your investment portfolio. 
  • Learn what to look for in a potential financial advisor and why the fiduciary standard is helpful, but not enough

The key moments in this episode are

00:00:41 – Episode Introduction

00:02:47 - Advantages and Disadvantages of DIY Approach

00:06:46 - Advantages and Disadvantages of Working with an Advisor

00:11:27 – Research on Confidence Levels When Working with an Advisor

00:13:22 - Holistic Benefits of Working with a Financial Advisor

00:16:54 - Portfolio Specific Benefits of Working with an Advisor

00:18:25 – The Value of Asset Selection and Allocation Services

00:20:26 – The Value of Advisor Guided Withdrawal Strategies in Retirement

00:24:12 – The Value of Behavioral Coaching

00:28:39 – The Value of Advisor Guided Asset Location

00:32:53 - The Potential Total Value of a Financial Advisor

00:36:55 – Advice on Finding a Good Fit Financial Advisor

00:42:08 - Next Episode Preview

00:42:57 – John and Jim Share Their Thankfulness  

Discussed on the episode

Financial Advisor Industry Statistics to Know – https://smartasset.com/advisor-resources/how-many-financial-advisors-in-the-us

Banerjee, P. (2023). A multi-demensional analysis of the value of financial advice to households in Canada [Doctoral dissertation, Henley Business School, University of Reading]

Northwestern Mutual Planning and Progress Study 2023 – https://news.northwesternmutual.com/planning-and-progress-study-2023

New LIMRA Research Reveals Women Working with a Financial Professional Are More Confident and Prepared for Retirement – https://www.limra.com/en/newsroom/industry-trends/2023/new-limra-research-reveals-women-working-with-a-financial-professional-are-more-confident-and-prepared-for-retirement/#:~:text=According%20to%20LIMRA's%20new%20study,don't%20work%20with%20one

Book:How Much Can I Spending in Retirement? by Wade Pfau, 2017

The Value of Personalized Adviceby Vanguard – https://corporate.vanguard.com/content/dam/corp/research/pdf/the_value_of_personalized_advice_final.pdf

Capital Sigma: The Advisor Advantageby Envestnet – https://www.investpmc.com/sites/default/files/documents/PMC-CAP-SIGMA.pdf

Alpha, Beta, and Now …Gammaby Blanchett, David and Kaplan, Paul [Morningstar] – https://www.morningstar.com/content/dam/marketing/shared/research/foundational/677796-AlphaBetaGamma.pdf

FINRA Broker Check – https://brokercheck.finra.org/

SEC Check Your Investment Professional – https://www.sec.gov/check-your-investment-professional

Show Transcript

Jim Uren: This is The Year You Retire podcast for people who want their first year of retirement to be right on the money. Your hosts are me, Jim Uren and John Bever, CERTIFIED FINANCIAL PLANNER™ professionals with Phase 3 Advisory Services. Retirement is one of the happiest times of life, but getting the most out of it requires you to be properly prepared.

Listen along as we explore the financial topics, tips, and strategies that will help you make your first year of retirement your best year yet. Now let's get planning.

Welcome everyone to this week's episode. Today we're diving headfirst into one of the most important decisions you'll make as you approach the year you retire, should you work with a financial advisor or do it yourself. In this episode, we'll discuss the pros and the cons of each approach and share some of the research that has been done on this very question.

We'll also discuss the different types of advisors and what you should look for in an advisor if you do decide to work with a professional.  But first, we like to often start with some trivia questions. Hi John. How are you today?

John Bever: I'm doing great. How about you Jim?

Jim Uren: Doing well, doing well. 

So our first question is how many financial advisors are there in the United States?  (This is one of those, choose the best possible answers, because it's not exact.) But, are there…

  1. About 100,000?
  2. About 300,000?
  3. About 800,000?

John Bever: Well, Jim, I know there's at least two cause there's you and I.

Jim Uren: That's right. So the answer is, it's hard to know, but the estimates range, depending on your source, from about 240,000 to 370,000.

So the answer is about 300,000 give or take. And one of the challenges of course, is the definition of a financial advisor is not that easy to agree upon.  And in the U.S., at least so far, that terminology is not regulated as it is in some other countries.

But related to that, one more trivia question: How many CERTIFIED FINANCIAL PLANNER™ professionals are there in the United States?

  1. About 100,000?
  2. About 150,000?
  3. About 200,000?

Well, the answer, according to the CERTIFIED FINANCIAL PLANNER™ board of standards is right now they've just crossed over 95,000. So the answer is about a 100,000.

There's about 100,000 CERTIFIED FINANCIAL PLANNER™ professionals in the U.S. and we'll talk a little bit later about what that means.

So let's dive into our topic, John.

John Bever: All right. So advantages of the do it yourself approach. What are they, Jim?

Jim Uren: Yeah. So there are a couple of advantages of the do it yourself approach. And research shows that about a third of the adult population in the U.S. is working with an advisor. And so that doesn't mean the rest are do it yourself. Probably the biggest chunk is the do nothing group, but there are some who are actually working hard to do it yourself.

And there are some advantages. The first advantage, of course, is cost, right? Advisors, we do get paid for the work that we do. And so, like with anything in life, if you change your own oil, you can save money. So you've just got to determine what makes the most sense for you. But that, of course, is a potential advantage, is that you could potentially save some cost if you do it yourself.

And the other possible advantage for some people is really personal enjoyment. People like you and I, John, who just love this stuff, love reading journal articles, love staying up to date on the latest news.  And so we totally get this. There is certainly a personal enjoyment for some that can come with this.

So there are some advantages, no doubt about it, in the do it yourself approach. And for some people, that really works. And some of the research suggests that some of those folks can actually do fairly well. So it's certainly a legitimate option.

John Bever: Yeah, I remember one of my clients from years ago, we worked together for many years.  I was the second opinion for her. She was a do it yourselfer and she would come in every couple of years and go, “Am I on track here? You think I'm doing the right thing?” And she absolutely loved it. She ran the family's finances all of time. I started working with her just right after her husband passed on and I tell you, she loved it.

In fact, she really dreaded the day when she knew she had to give it up because she just got to that point where she couldn't handle it anymore in the last couple of years of life, but it gave her life. No question.

Jim Uren: Absolutely. And some of us are just built that way.

John Bever: That is so true, but there are also disadvantages to the DYI approach.  What are those Jim?

Jim Uren: So probably the two biggest drawbacks initially, and I guess I'll call the first one, time and energy. That's the first big drawback. And, I tell a lot of people, the clients we work with as a group are really highly intelligent.  I mean, people don't not DIY because they can't do it. Virtually every one of our clients is very intelligent.  Very capable of doing it. But I say they lack one or two things – either time or the interest in staying informed.

So a lot of our clients are very busy.  And so they just don't have time to stay up on stuff. But the other was kind of the inverse of what we talked about already. There are people who could not find anything more boring to do than to stay up and read a journal article on the latest investment or insurance strategies. And so for some people, they would rather go to the dentist than do this themselves. And I've, I've heard many say that.

Of course, the other real potential drawback, is costly mistakes. And now that could be something major and we've seen that, right? We've seen people come in or talk to others who have made a major mistake. And it was very clear that it was a major mistake.

But for a lot of other people, it's not necessarily a catastrophic mistake. It might just be missing out on something. It might be missing out on tax savings every year, and that can really add up over time. And so the mistakes might be major or they might be minor that just happen every year. And so that's the other potential disadvantage of a DIY approach is it could be costing you money and you may or may not be aware of it.

And this will become a little clearer later as we transition to some of the advantages of working with an advisor.

John Bever: So what are some of those advantages of working with an advisor?

Jim Uren: Well, let's actually first, if it's okay, John, let's talk about the disadvantages of working with an advisor. Let's go there.

And so, of course, as I mentioned before, the disadvantage is cost, right? Like any professional, we do get paid for the work we do and for the knowledge that we've accumulated over the years. And, you know, sometimes this might be an hourly fee, it could be a percentage of assets managed, it could be a commission.  You know, advisors get paid in all sorts of ways, often in a combination of those ways.  And so that is a potential disadvantage, as it does sometimes cost money.

Now the other potential disadvantage is that you could end up working with the wrong advisor. What could that mean? That might mean getting some bad advice.  That advice might be very conflicted in terms of, you know, what their incentives are, to advise you on.  Or they may just provide very few services or actual value compared to the fee that you pay them. 

So it could be a variety of things. You could just end up with the wrong advisor and end up either getting bad advice or simply not getting very much for the cost that you pay to work with the advisor. So those are kind of the potential disadvantages of working with a financial advisor.

John Bever: So Jim, as you can tell, I I'm really eager to get to the advantages of working with an advisor. So what are those?

Jim Uren: Sure. So now this is, this is interesting because you would think John with as much, of the economy that financial services represents, that there'd be a ton of research on this topic.  And believe it or not, there's not a lot of research on this topic.

Now I will acknowledge obviously some biases, right? Certainly you and I are biased because we are financial advisors and we really see the value in the work that we do. And some of the research out there can also be biased depending on who is paying for it.

But the other disclaimer I'll make is that the benefits are going to vary greatly from person to person.  So for example, John, if you went and hired a financial advisor, you probably wouldn't get much value out of it right, because this is what you do. It might save you a little bit of time if you could offload a little bit of the work that you do.  Maybe they could rebalance your portfolio for you, but generally you wouldn't get much out of it. So that's just an extreme example of how it's going to vary greatly based on how much financial knowledge and time someone has that they can bring to the table. So those are kind of the disclaimers.

Now there are four main advantages that will highlight, and then we'll get into a little bit more detail on each of those. The first advantage is confidence that you can have. So people working with an advisor display, greater confidence.  There are what we'll call holistic wealth benefits. There are financial benefits and actual dollars that can be improved upon by working with a financial advisor. And the fourth main advantage I'm just calling the benefit of saving time and effort. So we've talked about this, just literally having someone else do the work so you don't have to take the time and the effort to do it.

Now that fourth one is really more of my edition. I want to highlight those first three. I've really taken those from a doctoral thesis written by a gentleman named Preet Banerjee. I've seen him many places. I had the privilege of attending an educational session with him at a recent conference.  And he did his doctoral thesis looking at this, and one of the things he did identify is the fact that there's very little research in these areas.  Partly because it's hard to do.

But he identified three areas. One is confidence. Looking at is there an increase in confidence levels of people who work with advisors?  Second, he looked at what he calls the holistic wealth benefit. He actually came up with a score, a holistic wealth score that he tabulated.  And these first two are what we call non-financial benefits. And these are the ones where a lot of the research is lacking.

Where virtually all the research rest is on, is on the financial benefit side.  In other words, where they can actually look at portfolios and compare two groups and say, has this group actually, do they actually have more money in their portfolio than the other group? Therefore, that may be an indication that working with an advisor is helpful, etc. And so, those are kind of the four main advantages of working with an advisor.

John Bever: All right. So confidence, let's cover that one first. What does the research say about the confidence level of people who work with a financial advisor?

Jim Uren: So the research shows that people are generally more confident when they work with an advisor.  So, a recent Northwestern mutual study, actually from 2023, found that people who work with an advisor have significantly higher levels of confidence across the range of areas, including being prepared for unplanned expenses. They were 30% percentage points higher in that category.

Being able to retire, they were more confident being able to retire when the times comes.  They were 29 percent points higher if they worked with an advisor in terms of their confidence level.

And achieving long term financial security, they were 28 percentage points higher in confidence level if they worked with an advisor. 

And that's not the only study.  I mean, there's lots of research that also finds that confidence is higher when working with an advisor. This is true across genders.  There is a group called LIMRA, which is part of the insurance group. They did a study recently looking at just women.  Same thing.  Confidence levels much higher.

And that's hard to measure in terms of dollars, but confidence is valuable.  I mean, what's the opposite of confidence? Fear and worry, right? And I don't know about you, John, but I generally, in any area of my life, do prefer to have less fear and worry.

John Bever: Yeah, I would agree with that. That's an easy answer.

Jim Uren: There's lots of other areas of my life I wish I could offload fear and worry.

I'd pay a lot of money to do that in certain areas. So anyway, there's certainly a value, even though we can't necessarily put an economic price on it.  But the research is clear, people who work with advisors tend to have much higher confidence in achieving a lot of their financial goals.

John Bever: Okay. So got that one down. What about these holistic benefits? What are they? What are the benefits of working with a financial advisor on a holistic side?

Jim Uren: Certainly. So in this doctoral thesis that Dr Banerjee did, he looked at kind of breadth of advice received in areas such as insurance, investing, emergency funds, debt management, retirement planning, tax management, estate planning, and education savings. And these areas don't necessarily show up in someone's net worth. In fact, it's the opposite.

So an example, life insurance. So John, let's say you've got a young couple coming in, maybe they're making $200,000 as a household. They've got three kids in preschool and they don't have a lot saved because they're young.  They're just starting out and they have zero life insurance. Would you likely recommend they need some life insurance? 

John Bever: Oh definitely. And believe it or not, just had one of those cases come in the door this last year.

Jim Uren: Yeah, it happens. And so we recommend they get life insurance. Let's say we recommend a nice 20-year term life insurance policy to get those kids grown up.

John, if we look at that client's bank account after they purchase an insurance policy, is that bank account going to be higher or lower than it was before they bought the policy?

John Bever: Well, maybe a little bit lower.

Jim Uren: Yeah. It's going to be a little bit lower, right? In other words, if we look at their portfolio, we're not going to see the advantage, dollar wise, of life insurance. And yet I think everyone would agree that that family is much better off having that life insurance in place, even though it's still statistically likely in 20 years, they'll both still be alive. They won't have needed that insurance policy and they've spent that money. And yet we all intuitively recognize it's still a very wise decision because something could have happened that would have devastated the family financially.

And so having that would be helpful, similar to estate planning, right? We pay sometimes for estate planning and it doesn't actually increase our bank account right now.  But it gives us peace of mind. It makes sure that our next generation, things are much simpler for them. Assets are protected, et cetera, et cetera.

There's value in a lot of this holistic approach. And there are some benefits that can be real dollars, like tax savings. So, you know, when we do a financial plan for people, we recommend a lot of things to help improve and increase their tax savings. And that does add some real dollars to their pocket.

However, that can be hard to show up in a research study. They're just hard to do. And if you save someone $500 in taxes for a particular recommendation, and maybe that's going to save them $500 every year, that money doesn't necessarily go on the portfolio, right? That may go to fund eating out more. You know, et cetera, et cetera.

So it's hard to measure, but there are real values to that. And I think a real additional benefit too, of course, is just avoiding and trying to conquer procrastination, which can be a real, a real challenge for all of us in every area of life.

John Bever: It is.  That's actually one of the biggest impediments in the financial planning world, why people don't proceed.  It's this procrastination. They know they need to do it and it's, they're bugging them, but life gets in the way.

So oftentimes we're acting as that little nudge, right? We give people nudges to take action on things that they need to take action on.

Jim Uren: Exactly.

John Bever: So what are some of the potential portfolio specific benefits of working with an advisor?

Jim Uren: So this is where a lot more research is done. So we're on a little bit more solid ground here. And again, it's very hard to do, and it varies greatly person to person. So you need to keep that in mind. Now, what a lot of the research has done, because it, again, it's hard to quantify, but what they've done is they've tried to attempt to convert the benefit into what would be an equivalent extra rate of return on a portfolio.

So with all of these, we'll say, “Okay, if you have this particular service or advantage of working with an advisor, it has the potential to increase your rate of return by X%.” And of course, even a 1% increase in your rate of return over your lifetime means huge, huge dollar difference for people.  So kind of keep that in mind.

But the first benefit, so to speak, is what I'm calling asset selection and allocation. Now, each of these studies approach things a little differently. So I'm kind of summarizing, pushing some things together where they best fit, but they all approach a little differently, but asset selection and allocation.

And this is really recommending an appropriate investment mix. You know, how much should you have in stocks? How much in bonds?  How much in large cap growth or small cap value, et cetera. But it also includes identifying, you know, the most cost effective investment options and identifying a risk level that fits with your personal risk tolerance and need for growth.

Now, research shows, in these particular studies, this can add up to an extra 0.5% of extra rate of return.  And again, that's each year. And so that's compounded. That is not insignificant. That's, that's very good. So the first benefit is really helping you with the asset selection and allocation.

The next benefit that was identified in virtually all the studies was rebalancing. And John, can you explain a little bit about why we rebalance a portfolio?

John Bever: So when we rebalance, we're going back to the original target allocation of the percent that we would want to have and say large company stocks and those that might be more value oriented or into midsize companies or into the real estate sector or into bonds, whether they be short term or long term.

This rebalancing is important because some areas may drop and other areas may gain. And what happens is you capture some of those gains and put it into those that are down that then have the potential of growing or buying at a cheaper level. So the rebalancing is important, can sometimes be done annually or quarterly.  That's not as important. What's important is to make sure that rebalancing is done. And that can add somewhere between 15, what we call basis points, 0.15%, to as much as 0.30%.  Almost a third of a percent additional value through this rebalancing, additional return.

Jim Uren: Absolutely. And the other benefit that is not quantified, but it also helps make sure you keep within that risk tolerance.  Because if you start off with 20% in stocks and never rebalanced, 20 years later you might have 60% in stocks and you've got a whole lot more risk in your portfolio than you are comfortable with. So yes, that rebalancing is really important because it can add some excess returns.

The next benefit, the third benefit, which is really, really critical is withdrawal strategies. Now, this is a little bit more applicable in retirement. It can be a little bit during your pre-retirement years as well, because there are still occasions where we draw from the portfolio but particularly when you enter the retirement years. 

Most people, they've got some in their money in their 401k, some of their IRA, some of their Roth IRA, some in just a regular account.  Maybe they've got some in a trust account. How do you know which account that you should start taking your money from first? And how do you know how much money to take each year? Now that's where a withdrawal strategy comes into play. And there are many of them.

Probably the best book written on this is a book by a guy named Wade Pfau. He's a professor at the American college, and he wrote a book within the last few years called, How Much Can I Spend in Retirement? And he details a variety of withdrawal strategies. Some are dynamic, meaning you're making changes all the time. Some are a little bit more static, it's just the same formula every year.  But there are a variety of approaches to this.

It's a technical book, but very, very important in retirement. You don't just take proportionally from every account, right? There are much more effective ways to help your money last longer in retirement. If you can have a proper withdrawal strategy, the research shows that this can add up to 1.2% of excess return in your portfolio.  And so that can make a big difference.

John, what are some of the mistakes you've seen people make with withdrawal strategies?

John Bever: Yeah, I've seen some of those mistakes being, “Oh, you know what? We're not going to need to take anything for five years.”  Three months later, “Yeah, we decided to put a deck on the house.”

So when it comes to the withdrawal strategies, we always want to put in place a buffer zone. That's what we use in the withdrawal strategy. So that's actually one of the first things. It's gets the basic of even just how much they're going to withdraw.

The 2nd mistake that I've seen is where people say, “Well, I don't want to pay any taxes this year.  I'm barely in a tax bracket. I just don't want to pay any tax.” And so they're going to take it maybe out of a Roth IRA, or they want to take it out of a non-qualified account.

Well, when we do our projections, we do long range tax planning projections. And it may actually make sense to pull money that particular year out of a taxable account that would create a little bit of a tax hit because long term it makes more sense.

Another one is where people just say, “Hey, I'm going to live on the same amount, no matter what happens.” Sometimes we have to make adjustments based on what's happening in the market or based on future goals. And so that's where a dynamic conversation with a client is so important and why we do reviews so we can explore some of these things.

So those are some of the less well known mistakes that people make in their withdrawal strategies.

Jim Uren: Yes. And the other thing of course, is withdrawals don't tend to be even.  So you've got one year where a client, you know, their car dies, their roof leaks, their hot water heater goes.  And so even though we've been pulling money primarily from two certain accounts, for this extra money it may not make sense to do that.

This is where we look at each client's case and say, actually, for the rest of this year, this extra money needs to come from this third account, because that makes the most sense from a tax portfolio withdrawal strategy.  So that is the withdrawal strategy that can add up to up to 1.2% excess return according to the research.  Again, it's going to vary.

The next advantage of working with an advisor that has been identified in the research is behavioral coaching. Now it's funny because research shows that the value of this is way underestimated by clients, but the benefits are huge.

It's kind of like if you ask anybody. “Hey, does advertising work on you?” Absolutely not. None of us buy anything based on advertising and yet the advertisers spend billions of dollars every year because it does influence us.

 Behavioral coaching is really, really important.  Investing is a very emotional undertaking and it can be easy to start selling when the markets are down and start buying when the markets are up.

I don't think we have a week that goes by, particularly when the markets are down, that we don't have conversations with clients who are concerned. And so a lot of what we do as advisors is we have the advantage of saying, “Okay, even though the markets are down, let's rerun your analysis.  Look at that. You're still on track. We don't have to worry.”

So we can stay in there invest for the long haul, which is really important. And that's because one of the biggest challenges when it comes to retirement savings is what we call bad investment behavior. It's getting out of the market because you got nervous and/or getting back in when things finally go up.  It obliterates performance.

Every year there are groups that publish data that show there's a distinction between how a mutual fund performed and what the investors earned. So let's say you see a mutual fund advertised and it says we averaged a 10% rate of return over the past five years. That's probably true.  If you had been invested the whole five years, that was your return.

But John, if we look at the actual performance that the average investor in that fund received, is it going to be higher or lower than that amount?

John Bever: It is going to be lower and it is going to be substantially lower. It is shocking how much lower it is.

Jim Uren: Explain why that is. Why would they get less than the fund said?

John Bever: What you just said? Because people tend to put money into the fund after it's had a rally. They see the fund was up 25% - “I should put my money in.”  And they get scared when the market goes down or that particular fund goes down.

Jim Uren: Yes. And we see these research numbers all the time. If you ever see the performance numbers of anything, recognize that the average person probably earned less than that because they didn't stick with the investment. They got in, like you said, John, they chased performance as they say, and that often means they bought in at the wrong exact times.

John Bever: Exactly. That's what we call investing with your eyes in the rear view mirror. You know, it's good to glance in the rear view mirror when you're driving. It's not a good idea to keep your eyes in the rear view mirror as you're driving.

Jim Uren: Absolutely. And an advisor can help you stay focused on the long term.  They can help you keep from moving in and out of the markets.

I know we've had many conversations, John, where there's been issues, sometimes political, where people knee jerk react and they just want to get out.

John Bever: Yep.

Jim Uren: And we've been able to help them stay the course. Look at 2020, right, John?  That first quarter was awful and we were all scared to death. Not just financially. We didn't know what was going to happen and the market was taking a bad dive.  It was an awful quarter, one of the worst in about a 10-year stretch.  But by the end of the year, none of us would have guessed this that first quarter, the market had actually gained for the year.

 John Bever: Yep.

Jim Uren: And again, if you had sold because of COVID, you would have missed out on gains that year. And that's unfortunately though, what a lot of people do.

So a financial advisor can help keep us focused on our long term goals. And the, the research in these few studies indicate that that behavioral coaching can add up to 2% extra rate of return in terms of investment performance. That is significant. That is significant. And again, that's because we tend to be emotional investors and that does not help.

Okay, next benefit that the research identifies is asset location, and I'll throw in slash tax management because there's some overlap there. But essentially what this is, is identifying tax efficient investments, but then identifying the most efficient location.

John, can you talk a little bit about what asset location is? I mean, most of us have heard of asset allocation, but not a lot of people are familiar with asset location.

John Bever: So my portfolio design says I should have 30% in bonds. But where do I hold those bonds? Should I hold those bonds in my Roth IRA?  Should I do them in my 401k? Should I hold them outside of both of those accounts? So that's what is referred to as asset location, and it can make a huge difference.

For example, turning a long term capital gain, which has special, lower tax treatment, putting that into a vehicle like an IRA or a 401k can turn that into ordinary income down the road, which is not tax efficient.  So that's the idea of this asset location and how that relates to taxes

Jim Uren: Yes. And like in your example, what a lot of people do, (maybe they get right the fact that they should have 30% in bonds), they'll tend to in every account hold 30% bonds and 70% stocks. And that's a disaster. If you've got bonds that are kicking off taxable income every year, it's better to hold those, for example, in your IRA or 401k.  Because when that interest payment is made, it's tax deferred then.  But if it's in a regular account, you're paying tax along the way.

And like you said, John, for our growth assets that incur capital gains, (first of all, those are deferred until we sell), maybe we don't want those in our IRA because, you know, I can defer those [capital gains] for a while.  As long as I'm letting that particular investment grow, I may not incur much.  But even when I do, I'm still going to pay a rate much lower because it's a capital gain rate versus an ordinary income tax rate, as you alluded to.

And so where you're holding these assets can make a big difference. So it might be that in account A we have actually very aggressive investments, but in account B very conservative, but overall the blend is a more moderate to fit your risk tolerance.  That can really boost your after-tax rate of return, and that's not going to show up in a portfolio performance report, okay. It doesn't do that, but the research shows this is can add up to an extra 1% rate of return if you get these tax issues right in terms of your asset location and tax management.

John Bever: And here's a very practical benefit of working with a comprehensive financial planner because we look at the whole picture compared to working with someone that just might be helping you with your IRA.  They might not be aware of all the other holdings and the best asset location of all of your accounts. So when we take a look at the whole picture, we can really provide that key advice on getting the asset location right.

Jim Uren: Absolutely.

So I should have explained a little bit more, I'm looking at three studies that are put out by three companies.  Morningstar, which is out of Chicago.  Envestnet, which I believe is also out of Chicago – they’re a money manager/compiler.  And Vanguard, which we've certainly heard of. 

But they've each done these individual studies on trying to figure out how much excess return an advisor might provide to somebody.  And, it's hard to total from the numbers we gave because I was combining them. But if I look at each one of these studies, they range anywhere from on the low end, Morningstar believes that you can add up to 1.59% excess return with an advisor. But the Envestnet and Vanguard studies both end up a little bit around that 3% or higher.

Again, it varies greatly by person and how much knowledge you're bringing to the table and what behaviors and practices you're doing. But those are significant additional values that an advisor can bring to the table. And again, that's just on the more measurable side.  Not including the confidence or the holistic wealth plan.

So working with an advisor has the potential to provide an awful lot of value.  If you're working with the right advisor.  And if, they're doing the right things to help get you the benefit of each of these types of services.

John Bever: All right, Jim, I haven't heard you talk about picking the right stock yet.

Jim Uren: Yes. That's something that's missing. If you notice that was not on the list.  On the list was not beating the market or AKA stock picking.

What's interesting is a lot of the research shows that that's kind of what clients are expecting from their advisor. And most advisors are kind of like, that's not the value I'm providing.  And that's because, the research is also showing that’s becoming virtually impossible nowadays for a variety of reasons.  That's not where the advisor provides a lot of value. There's a ton of value the advisor can provide, but stock picking or “beating the market” is not one of them.

We can often provide excess rates of return through some of these things we mentioned, like keeping your tax bill lower, keeping you in the market, or asset location. I mean, there are things that can add extra rates of return, but not stock picking. And so I think that's important for people to understand.

So very good point, John, thank you for bringing that up.

John Bever: Sure. So what should someone do if they're thinking about hiring an advisor? What are the steps they should take?

Jim Uren: Great question. So if this is you, if you're thinking about maybe hiring an advisor, probably the first piece of advice we'd like to give is to look for a CERTIFIED FINANCIAL PLANNER™ professional.

As the trivia at the beginning of the episode indicated, right there you've eliminated at least two thirds to three quarters of all advisors out there.

John Bever: Down to 95,000 to choose from.

Jim Uren: That's right. And as John and I have talked about, not all of those 95,000 actually are client facing people.  They're not actually advisors. Some of them are academics. Some of them are support staff, etc. So there's even fewer, unfortunately.

But the CERTIFIED FINANCIAL PLANNER™ designation, of course, does not guarantee a great advisor.  But it at least helps ensure that this advisor has had a very involved education in terms of various aspects of, not just investment planning, but financial planning in general, which covers a lot of the things that we've discussed.  So we would recommend starting with that.

Second thing, we do encourage you to find an advisor who practices according to a fiduciary standard.  That's simply acting in the best interest of the clients. Not all advisors at this time are held to that standard by the government. Now, one good thing is all CERTIFIED FINANCIAL PLANNER™ professionals do take a pledge to provide fiduciary standards.

However, I want to say that it's helpful, but it's not a guarantee of great advice. So there was an interesting study out of Canada recently where they looked at fiduciary advisors.  And, you know, the fear I think is with non-fiduciary advisors is that they're telling you to do something and they're doing the opposite.

Well, what this showed was that these fiduciary advisors they weren't doing that. They were investing in the same things they were recommending to their clients. So it wasn't like they were trying to recommend things they didn't like.  The problem was, what they recommended still wasn't great.

And so the fiduciary standard it's helpful, but it's important to know more about your advisor than just that. Their philosophy, their approach still needs to be a good one. And not just fiduciary, but we certainly prefer fiduciary.

The third thing we encourage you to do is, is just to check the disciplinary record of your financial advisor.  Most of them actually are required to have this on their website. You can either go to FINRA, that's F-I-N-R-A. They have a broker check. Or the SEC has an investment advisor public disclosure page. Again, most advisors have this on their website. You can link to and check their particular record.  Hopefully it comes back clean.

You can also just Google search, “How to check an advisor's disciplinary record” and these two sites will show up. So you could probably spend two minutes and you can at least get a check. And if there's a lot of red flags, you'll know that.

The other thing we recommend is to just understand how the advisor is compensated. Keep in mind, there's a potential conflict of interest in any method of compensation for the advisor. Some advisors work on an hourly/project/flat fee basis.  Potential conflicts of interest are that advisor may not know what they're doing.   They may not do a good job and they may not stay up to date on the latest available investment in insurance products because they just don't have an incentive to do that. So you just want to be careful that.

Some advisors work on a percentage of assets under management.  They just charge you a percentage of your assets that they're managing.  Potential conflict there could be the advisor may be providing inadequate services for the fee that they're charging for the portfolio management. They also can have a bias towards keeping money in your portfolio because they get paid on that versus maybe if you're interested in paying down your mortgage or purchasing insurance, they may want to discourage that because that reduces their compensation.

Then the third option, of course, some advisors work on a commission basis. In this arrangement, of course, conflicts are a little bit more obvious.  But oftentimes, advisors who only work on a commission, do not provide comprehensive financial planning.  They maybe only recommend products based on the commission they get, not necessarily what might be best for you. And generally, they don't do any ongoing monitor monitoring of your financial plan if they even do a financial plan to begin with.

And of course, a lot of advisors work in a variety of these capacities like we do.  We can work in a variety of ways with clients, depending on what fits them the most. But again, just understand how your advisor is compensated. So you can take that into account when you're working with them.

Next thing we recommend is look for someone with experience. I mean, the rule of thumb is, if you can do something for 10 years, that's what's really needed to become really good at your particular skill or job. And so we look for someone with experience.

And then the last thing we just say is meet with the advisor.

John Bever: Yes.

Jim Uren: A lot of times, most advisors will do a no obligation phone call or a meeting or both.  We do that at Phase 3. Always happy to do that. If you're considering working with an advisor, happy to talk to you on the phone, happy to meet with you at the office. Again, no obligation. We don't charge for that. That's pretty common in the industry, but reach out. 

If youcdon't like it, don't worry about it.  You can continue to do it yourself.  But this is a great way that you can meet with a potential advisor and see if it's a good fit. Because at the end of the day, sometimes it just comes down to gut feeling. Is this someone I feel like I could work with, someone I could take trust, take advice from and that I have a connection with?

So that's kind of the approach. And John, the other thing we can do, even if someone is working with an advisor. Is give a second opinion. Maybe you can chat a little bit more about that.

John Bever: Yeah, I've had many occasions to give a second opinion.  Both the second opinion to the do it yourselfers (and we have a handful of those and it's a lot of fun working with them). But also a second opinion to people that have worked with other advisors.  And I've seen situations from those that have really had some bad advice to those that have actually had some decent advice.

I remember one case where the plan was perfectly fine. They just got to where they didn't like the advisor. There was some kind of an interpersonal issue that theymthey were looking for a second opinion. And it's always nice to get that second opinion.  Especially when it can give you that confidence, speaking of the beginning of this session talking about the confidence, the confidence that they are on track.

Jim Uren: Yes. And I know there's been many times where our second opinion has been, we think things are fine. I mean, we've sat down with folks who really came in sometimes because they were frustrated with investment performance and we said, “Hey, look this is, actually, a very appropriate portfolio.

It's just been volatile. And this is not beyond what's expected. Maybe you're taking more risks than you need to, and that's something to talk about with your advisor, but generally, this is looking pretty good.”   And, of course, we've seen the others where we've been embarrassed at some of the recommendations, fellow advisors out there, sometimes with designations we have, with the advice they've given.  But always open to a second opinion.

If you already work with an advisor, same thing. Feel free to schedule a no obligation call. Happy to happy to chat with you.

So that's an overview, John of the do it yourself versus financial advisor. Pros and cons of each.  Generally, we're heavily biased, but we do believe there's a lot of value that a good financial advisor can really bring to your financial plan that can really help you stay on track, boost your confidence and put you in a much better position to handle both the expected and unexpected challenges that life may throw at you.

So John, before we wrap up, talk about what we are thankful for today. Tell us what are we going to talk about on our next episode?

John Bever: Oh, this is going to be great. So one of the things that people worry about as they get to this year, when they retire, is do I have enough money? So one of the things that we look at is how to help people budget. Do you want to ensure that you don't run out of money in retirement? Well, one of the things that you can control is your spending.

You can't control investment return, but you can control your spending. And you need tools to help you easily track your expenses. So we're going to discuss tips and tools for building and keeping an eye on your spending in retirement.

Jim Uren: Wonderful. You will not want to miss that because we give some really practical options.  Because at the end of the day, there's a lot of great tools out there that can really help us do what we need to do.

So John, what are you thankful for today?

John Bever: Well, talking about working with an advisor, I have to tell you, I'm very thankful for landing in this industry. It is very rewarding and I have met wonderful people, fantastic people who have really added to my life.  It's very enriching. So I'm very thankful for this profession.

Jim Uren: I concur.  And I was thinking today just how thankful I am for our staff that we have at Phase Three. And, you know, we've worked with a number of people through the years. Some have retired, some have moved out of state, but I am thankful for the staff members that we have had.

They really make you and I look much better than we really are. They're better organized than we are, have a lot of skills they bring to the table, and do everything with such a great attitude. And I'm so thankful to have people who really help make the work experience more enjoyable, which makes it easier for us to serve our clients.  And I know our clients have felt the same way when they've talked to our people.

So thank you all so much for listening to this episode. Be sure to tune into our next episode and for additional show notes of The Year You Retire podcast, you can go right to our website at phase3advisory.com/podcast.

Thanks for listening.

Disclosure: The views expressed in this podcast are not necessarily the opinions of Phase 3 Advisory Services and should not be construed directly or indirectly as an offer to buy or sell any securities or services mentioned herein.  Unless otherwise specified, show guests are not securities licensed or affiliated with Phase 3 Advisory Services or Osaic Wealth.   Investing is subject to risks, including loss of principal invested. Past performance is not a guarantee of future results.

No strategy can assure profit nor protect against loss. Please note that individual situations can vary. Therefore, the information should only be relied upon when coordinated with individual professional advice.  Securities offered through Osaic Wealth, Inc. member FINRA/SIPC.  Additional investment. and insurance advisory services offered through Phase 3 Advisory Services Limited, a Registered Investment Advisor.

Osaic Wealth is separately owned and other entities and or marketing names, products or services referenced here are independent of Osaic Wealth. Phase 3 Advisory Services is located at 1110 West Lake Cook Road, Suite 265 in Buffalo Grove, Illinois 60089. Our phone number is 847-520-5545. For additional information, visit our website at phase3advisory.com.