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The Race to The Bottom Devalues Planners

September 15, 2016

There is little doubt that a financial planner can add substantial value to the personal finances of most individuals and their families. There have been many studies done over the years quantifying this added benefit. The Wall Street Journal reported on a study from September 2012, “Are Financial Advisers Worth Their Fee?” quoting David Blanchett, co-author of the study and head of retirement research at Morningstar, “Gamma (the added value of hiring an advisor) is something everyone can do ... it really is worth it to pay someone 1% a year.”

In a study by Financial Engines, “The Secret to Building a Bigger 401(k)” from May 2014, reported in the August issue of Money Magazine, they quote, “On average, employees getting advice had median annual returns that were 3.2 percentage points higher, net of fees, than workers managing their own retirement accounts.”

I could quote many other studies reported in FA-IQ, Forbes, Vanguard, etc. that all come to a similar conclusion.

These studies typically only quantify the investment advisory services provided by financial planners. But financial planners add much more value to families than simply providing investment advice.

One example might be risk management through insurance advice and review. What is the value of having recommended umbrella liability insurance when someone is subsequently sued and has a million-dollar liability judgment against them, or the value of having the proper medical insurance when faced with a catastrophic health problem requiring expensive medical care, etc.?

Financial planners also add value in tax planning. There have been a number of times I personally covered all my financial services fees for the lifetime of a client with one piece of tax planning advice. For example, we have a 52-year-old client who is self-employed in her own sales business making in excess of $600,000 a year. We set up a defined benefit plan (pension plan), 401(k) and profit sharing plan for her and she was able to defer close to $100,000 a year in income taxes into her retirement plans.

What about the value of retirement planning? How can you put a value on the peace of mind a husband and wife get from a retirement plan that gives them confidence that they are able to retire early and maintain their current standard of living?

The proper approach to taking Social Security can mean hundreds of thousands of dollars in additional income for retirement. Converting IRAs to Roth IRAs can also save thousands in retirement dollars.

Then there is estate planning. Many clients do not even have a will, durable power of attorney, living will or even proper beneficiary designations on retirement plans and life insurance.

Most individuals do not know the best way to give to their favorite charity, plan for college, approach a pre-nuptial agreement, sell their business, establish a trust for children or grandchildren, create a special needs trust for a handicapped child, use a charitable remainder trust to sell a highly appreciated asset or handle being executor of their parents’ estate -- the list goes on and on and is unique to each family.

There is almost no end to the value of a long-term relationship with a good financial planner.

Nonetheless, the current landscape would have you believe that a robo-advisor at little or no cost is all investors need.

Many brokerage firms would have investors — and our current and prospective clients — believe their free online financial planning calculators will take care of their needs at minimal cost. A number of mutual funds will provide free planning services. When a service like personal financial planning is seen as a commodity, the lowest-priced service provider gets the business.

This is why robo-advisors are growing so fast. All this puts downward pressure on fees for planning services and makes it very difficult, especially for financial planners who want to provide only objective planning without managing investments.

The public needs a better understanding of the value a financial planner can add over time by providing assistance with many personal finance issues. These services, done correctly, cannot be done online and the advisors deserve to be compensated for the time and added value they provide.