Retirement Age Anxiety: Answers to Your Questions

Historically, financial advisers earned their keep primarily by outperforming the market. But with study after study showing that outperforming the market consistently is unlikely, the landscape has changed.

Now financial advisers derive their value through relationship-oriented services, such as providing wealth management through financial planning, discipline, and guidance, rather than by trying to outperform the market.

This was illustrated by Vanguard, the leader in do-it-yourself investing, when it set out to quantify exactly how much financial advisers could add to the bottom line of their clients in their Advisor’s Alpha study. Across all metrics, the study found advisers can add approximately three percentage points to a client’s investment return per year. Investors can now arm themselves with the knowledge of what to look for in an advisor that truly adds value to their portfolio.

If you want to know if your financial adviser is adding worth to your life, ask yourself the following questions:

Does my financial adviser know my goals and do we have a plan for them?

Just as a doctor cannot prescribe a treatment plan without knowing the patient’s symptoms, your adviser cannot suggest an appropriate investment strategy or financial plan without knowing your plans for your money. Once your goals are identified, your adviser can work with you on defining an investment objective that matches the goals of each account and achieves an overall risk level appropriate for you. Your adviser will also be able to pair the objective of the account with a manager that excels in the desired approach. They can strategize which account, based on tax type (tax-exempt, pre-tax or after-tax), would be best suited for each of your desired goals. It can be helpful to seek out advisers who are independent, meaning they are not tied to using only one investment company and can choose from a wide variety of managers and strategies to get you the best results.

According to the research done by Vanguard, working with clients on asset location can add up to 0.75% to annual return. This is a crucial part of the overall financial plan and should be a part of your conversation with your adviser.

Do we ever discuss or implement tax-efficient strategies?

Taxes can be a huge drag on portfolio return. A good adviser is well aware of this and is equipped to mitigate this burden as much as possible. For taxable investments, your adviser can match you with the appropriate managers and strategies that are designed to reduce your tax bill both short-term and long-term. This may include practices such as gain/loss harvesting, utilizing municipal bonds for tax-exempt income, and bracket management, where they can look at your tax returns and work with your tax professional to identify if there are ways for you to maximize lower tax brackets and efficiently spread anticipated tax burdens. 

Did we establish a spending strategy for retirement?

You spent a lifetime saving up for retirement, but once you get there, where do you start? Do you start taking income from your cash reserves or your 401(k)? Maybe you should empty your Roth IRA first? When should you start taking Social Security? The answer to these questions could significantly affect your bottom line and your total tax bill. A good adviser can help you design, implement, and monitor a withdrawal strategy as well as balance your goals with your income needs. The process of developing a withdrawal strategy may highlight key years in which you can take advantage of certain tax benefits, further maximizing potential tax strategies. This spending strategy will coexist with your overall investment strategy to maximize your money’s value in relation to its objective. The Vanguard study found that this practice can add up to 0.70% to your annual return.

Does my adviser help me stick to my plan in good and bad markets?

Humans beings are, by nature, emotional creatures and these emotions can drive unwise investment decisions. Consider an investor who is drawing on his retirement funds that are invested more conservatively to mitigate the sequence of return risk and protection from bad markets. This investor saw markets soar in 2019 while his account is up only half of what the market was. Feeling that he is missing out on a bull market, this investor becomes more aggressive in his account in January of 2020 and enjoys some additional gains temporarily. Little did this investor know that in a couple of short months, the world would be in the middle of a global pandemic with the S&P falling from its peak in February to  minus 34%. Panicked by the sudden and intense downturn, this investor moves his money to cash out of fear of any additional losses. This investor would then have missed out on an almost complete rebound in the markets over the next few months and would ultimately damage his total portfolio return in a big way.

It is human nature to try to time markets, but it is a fruitless pursuit. This is where an adviser can add tremendous value to your portfolio by building a plan that can survive market turmoil and help you stick to it. According to the previously mentioned Vanguard study, an adviser who practices behavioral coaching with his clients can add approximately 1.5% to annual returns. In many circumstances, this alone can more than cover the cost of retaining your adviser.

Have we talked about the costs of my investments?

A good adviser is able to balance manager or investment fund performance with his costs and is conscientious of investment costs’ impact on his client’s bottom line. For example, it may be helpful to utilize a manager whose tax-management strategies add enough benefit to the client to justify his cost whereas in other instances you may benefit from a lower cost index solution. Your adviser will work with you to build a portfolio and should be transparent with the associated costs of each investment.

Is my adviser a fiduciary?

An adviser that is a fiduciary is required to put his client’s best interest over and above his own desire to make a profit. He must avoid conflicts of interest and disclose any potential conflicts of interest to his clients. It is important to know that not all financial advisors are fiduciaries and are therefore not bound to these standards. How can one tell if his adviser is a fiduciary? A quick way to tell is if they have achieved and maintain his status as a Certified Financial Planner (CFP®). All Certified Financial Planners are bound to the fiduciary duty.

Copyright 2020 The Business Journal, Youngstown, Ohio.