Originally published on Advisor Perspectives, January 16, 2019
Many advisors struggle to define their value, especially when questioned about their fees.
Vanguard made a valiant attempt to quantify the value of an advisor. It calculated the benefit of focusing on low management fee funds, rebalancing, behavioral coaching, asset location and spending strategy.
While the logic is compelling, few investors will read that study, much less find it persuasive. Much of the “good” advice offered by the planning profession never gets implemented.
I deal with many advisors. Some of them give advice that could be considered “bad,” but the benefit to their clients is tangible.
Here are a few examples.
Simple trumps complex
There are many sound reasons why investors are well served with portfolios of 10 or more funds, with broad exposure to all markets. There’s also ample justification for including alternative funds in portfolios, which include “diversifying across a unique and uncorrelated source of risk.”
Simplicity is not one of them.
I have an advisory client who is a very successful. He places many of his clients (including some with very significant assets) in one core fund, depending on their tolerance for risk. He carefully explains the pros and cons of this approach, which includes giving up some tax benefits. Overwhelmingly, his clients agree to the core fund.
He tells me they “love getting a statement with only one holding” and that many tell him “this is the first time they can understand their statements.”
Those benefits are real. Here’s another one.
Few clients are capable of understanding how alternative funds work. They can be exceedingly complex. Owning funds you don’t understand creates significant anxiety.
That’s a major negative.
On balance, for some clients, you can add value by simplifying their portfolio.
Owning a home
There are many reasons why advising clients to rent rather than purchase a home is sound investing advice.
We own our home. We paid off our mortgage. It gives me peace of mind to know that our shelter is secure.
While our home has appreciated, I would have done much better if I invested in a broadly diversified index fund.
I don’t care.
I can’t quantify the value we derive from owning our home, but it’s significant.
It may be bad advice for others, but it was good for us.
There are many pros and cons to partial annuitization using deferred-income annuities (DIAs, also known as longevity insurance). They are nicely summarized in this blog post.
The pros and cons of buying an annuity are unique to each investor. More risk-averse investors may find them attractive.
About three years ago, against the advice of my advisors, I started purchasing DIAs. I was fully aware of the objection that it didn’t make sense to do so in a low-interest rate environment.
When I bought my first annuity, I was able to get one pegged to actual inflation. These policies are no longer available. My subsequent purchases were geared to historical inflation.
What’s the value of knowing we will always be covered for a portion of our current expenses for the rest of our lives? Again, I can’t quantify it, but it’s substantial.
“Peace of mind” means different things to different people. You can add significant value by understanding what it means to your clients. You can provide it by presenting options typically maligned as “bad.”