Financial planner vs financial advisor

Anyone that has spent any time participating in American society has surely noticed that someone is almost always trying to sell them something.  It might be a product, a service, an app, a restaurant, or even prescription drugs.  All of our entertainment and communication outlets are continually and relentlessly bombarded with a stream of advertisements.  Given the way our society has developed, most people are rightfully very skeptical of salesmen.  To take that further, most are (and should) be skeptical of paying a financial planner.  To complicate matters, the insurance industry sows confusion by calling their salespeople “financial advisors”, when in reality they are annuity or life insurance salesmen.  They are not going to advise you to do anything other than to purchase an expensive insurance product.  Once you wade through the sea of insurance salespeople, it is then possible to find an independent registered fiduciary and/or a certified financial planner (CFP) that genuinely cares about helping people with their financial and retirement goals.  Here at Arrow, we offer 100% of our clients free ongoing financial planning if they invest with us, specifically because we want to provide the best advice possible, and tailor all of our decisions to our client’s total financial outlook.

In my (admittedly biased) opinion, there is a huge number of often overlooked benefits to using a financial planner:

1.)    Small mistakes lead to massive financial losses over decades

2.)    Objectivity & accountability

3.)    Limiting poor decision making and underperformance

4.)    Developing a fixed-income plan for the future

5.)    Budgeting and “seeing where your money goes”

6.)    Professional recommendations and plan monitoring

 Small mistakes lead to massive financial losses over decades

 Seemingly harmless mistakes when making allocations in your IRA, or the order in which you pay down your mortgage can lead to massive “invisible” losses that can severely limit your ability to grow wealth over time.  Common mistakes I see are overpaying for high expense ratio funds when cheaper options are available, paying down debts in the wrong order, investing much too conservatively in your 30’s and 40’s, not rebalancing properly, putting the wrong types of funds in tax sheltered accounts, or simply choosing the wrong funds to generate income in retirement.  For example, the difference in paying 1% in fund costs and advising fees compared to 0.75% over 20 years, with $100,000 starting and a $1,000 monthly contribution is around $30,000.  So imagine paying an “invisible” price of $30,000 simply for choosing the wrong the fund.  A good financial planner will account for these small-scale losses and help limit them over time, particularly if they are independent and not obligated to sell specific funds.

 Objectivity and accountability

 It probably comes as no surprise to most that it is much easier to see faults with others than it is with ourselves.  Financial planners provide a neutral and experienced 3rd party to give unbiased advice on your financial decision making.  They also hold you accountable to change those poor decision making habits.  Most of us aren’t very good at keeping ourselves accountable to our decisions, but find it much easier with someone else helping to steer the boat.  I give all of my clients “tasks” to complete between financial planning meetings to keep them on track and accountable.

 Limiting poor decision making and underperformance

 It can be hard for many people to remove the emotional aspect of making investment and trading decisions.  There is a plethora of behavioral mistakes and biases that most people make (I’ll explore these in a later article!) that leads to general underperformance compared to advisors.  Numerous studies have shown that the majority of people underperform compared to professionals because of poor decision making and impulsivity. This effect is often a 1-2% difference, which can costs hundreds of thousands of dollars over a lifetime.  Financial planners act as behavioral coaches and encourage people to not panic at the wrong times, to stick to their investment plans, and help their clients deal with the emotional aspects of losing money.  They also use more sophisticated rebalancing techniques, maximize tax losses (“tax loss harvesting”) and other tricks to maximize return over time.

 Developing a fixed-income plan for the future

 Somewhere in their 60’s most people make the decision to retire and switch to a fixed income situation that incorporates their social security, possibly a pension, and their investment income.  In my experience, most folks don’t really know how to go about starting this process or how to maximize their investment income.  Further, it becomes imperative to develop a plan that calculates how much you need in retirement.  For example, what are your monthly expenses?  How consistent does your income stream need to be? How often are you going to travel and how much is it going to cost?  Can you afford to set-up college savings accounts for your grandchildren?  What tends to happen is many people get suckered into extraordinarily expensive insurance annuities because they provide consistent returns.  But the end result is often a huge fee loss that wastes the money you spent a lifetime building!  A good financial planner will assess your needs, come up with a strategy to “draw-down” your funds and/or use your interest to generate income, and work through the different scenarios with you over time.

 Budgeting and “seeing where your money goes”

 At Arrow, we build an online portal for our clients that integrates all of their financial information into one place.  That includes loans and mortgages, investment and retirement accounts, insurance, housing, credit cards and lots of other information.  The end result is very powerful.  For the first time, many people “see” where all of their money goes, what their net worth is, and what happens to their funds month-by-month and year-by-year.  This is the first step to building and sticking to a financial plan, and ultimately reaching your goals, whatever they might be.

 Professional recommendations and plan monitoring

 Finally, it’s just really important to note that there is a lot of value to using a professional that deals with financial issues every day.  Your financial planner is continually monitoring large-scale trends that can impact your future significantly.  For example, at a glance he or she will probably know if you’re overpaying for life or homeowners insurance based on “going rates”, and will be able to make recommendations accordingly.  Considering refinancing your mortgage?  Financial planners continuously monitor interest rates and will let you know a good time to refinance.  There is a lot of more advanced tax considerations for clients that invest in real estate, use municipal bonds, or run businesses that your financial planner can help you with.  History is filled with “do it yourselfers” that accidentally stuck themselves with enormous tax bills they couldn’t pay.  Your financial planner is intimately aware of the tax considerations involved with your investments.