Author: Chad Wotton
Topics: Industry Ideas
I recently read an article about the value of working with a Certified Financial Planner. Many firms offer financial planning as a service to their clients, but there is often a wide range in how these plans are constructed. It’s always important to make sure that your financial planner is experienced and preferably accredited with the CFP® designation, the highest standard in financial planning.
A financial plan is a process and a Certified Financial Planner® will walk their clients through this process from start to finish. The process is often defined as establishing and defining the relationship with the client, gathering client data, analyzing and evaluating the client’s financial status, developing and presenting financial planning recommendations, implementing the financial planning recommendations, and monitoring. Throughout all of these steps there is a significant amount of value that a CFP® can add through knowledge and experience.
Working with a CFP® ensures that you are working with someone that will put your interests first. In order to retain the CFP® credential, planners must work with clients under a fiduciary contract.
So just how much value can a CFP® add to your portfolio and how much should you pay for advice? According to Vanguard, the world’s largest mutual fund company that caters towards “do it yourself” investors, there is significant value in having a financial planner. Vanguard conducted a study called “Quantifying Vanguard’s Advisor’s Alpha” and determined that working with an advisor may increase client’s returns by as much as 3%.
This 3% is achieved through several different areas. One of which is behavioral coaching. This stems from the discipline with which a planner approaches investing and the subsequent guidance they provide their clients, which can result in about 1% - 2% in additional market performance annually. Financial planners often stand between their clients and “the big mistake” that can cost them. Even something as small as stopping investors from buying high and selling low, the most common “big mistake.” Obviously, the larger the portfolio, the bigger impact this has. Compounding 2% annually over several years can have a staggering impact. Take 2% on a $500,000 portfolio, which is equal to $10,000. This additional 2% in return compounded on your $500,000 portfolio over 5 years is an additional $52,040.40! This is in addition to the returns achieved from the market. Depending on your current portfolio structure it is possible that an advisor may be able to add more than 2% additional return. Because many investors act on emotions, having an advisor with a disciplined, tactical, approach can take the emotions out of the question.
It is extremely important that an individual stick to a regular investment plan to achieve their financial goals. This can provide additional excess return, especially if there is a plan in place to protect an investment portfolio and grow it at the same time. While doing this it’s extremely important to keep fees in mind. .50% to 1% in excess returns can be achieved through the reduction in advisory and administrative fees. Vanguard’s study found that low fees are extremely important for an investor to achieve their goals. Here at Gainplan we consistently invest in some of the lowest cost and transparent exchange traded funds on the market.
Additionally, CFP®’s often partner with other industry experts to provide you with the best advice in specific areas. For example, like financial planners, all CPA’s and estate planning attorneys are not created equal. A CFP® should be able to provide a well vetted recommendation for a client in these areas, and provide even more additional value. If you’re not working with a Certified Financial Planner and are curious how one could help your family, let’s talk.
We encourage you to check out the CFP® Board’s website for additional information.
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