Frequently I am asked: “Is financial advice worth it?” One way to look at the question is whether, in the end, you will have more money for having paid for such advice. If the guidance is worth a smaller amount than it costs, you will actually end up with less. Or, as my English friends might put it, does such financial advice provide you with “value for money.” There is a simple answer to the query. Valuable financial guidance is worth many, many times what is typically charged for it. On the other hand, a great deal of what passes for advice out there in the marketplace is worth nothing. It is self-evident that such worthless financial advice is not worth even a penny. The problem is to separate the wheat from the chafe or, in this case, the valuable from the worthless. It would take far more than one column to describe which financial assistance has real value. Indeed, it would take a book
A long journey begins with a single step, though, so let’s start now. A good financial advisor can add extraordinary value by guiding you in what economists know about investing, taxation and finance. And, perhaps most importantly, using that knowledge for your benefit rather than his own or that of his company.
It is worth noting that investment advice and financial advice is not at all the same thing. Financial planning considers the entire range of economic issues facing your family now and into the future. Investment advice, on the other hand, is a small sub-set of that. While solid financial advice must include a strong investment plan, investment advice alone is wholly inadequate as a means of planning one’s financial future. With that said, though, let’s think about investment guidance.
Economic science knows a great deal about investing, markets, and what actions an investor should take. By extension, highly trained economists have tremendous insight into what financial talk is nonsense, reflects nothing but random chance, or is dishonest. Using established economic facts as a polestar in financial decision making is one of the smartest things you can do. I am indebted to Apollo Lupescu, PhD of Dimensional for suggesting the term “Evidence Based Investing.” Of course, most investors do not have the depth of economic knowledge to incorporate all that economic science has learned. But this is exactly where trained and skilled advisors can offer something of unquestionable value.
Among the ways that evidence based guidance can help you are diversifying fully, avoiding excessive risk, understanding how markets actually work, changing investments efficiently and holding costs to an absolute minimum. Beyond these, a skilled advisor can create tremendous value by optimizing the tax consequences of how you invest. Taking advantage of the various preferences and pitfalls in the tax code can often put even more money into your pocket than excellent investment advice. The key, though, is to work with someone who understands taxation on a deep level – worthwhile tax advice is unlikely to come from someone with less than complete understanding. And be careful regarding investment tax management that is tied to products; those often cost almost as much as the tax savings achieved.
The most valuable thing of all, though, that a worthwhile financial advisor can offer is help in avoiding the excessive costs, bad ideas, scams and “gotchas” that seem endemic in the financial arena. Perhaps because there is so much money at stake, there are rip-offs, cons, and terrible advice everywhere. Robert Schiller and George Akerloff, both Noble Prize winning economists, have co-authored a book
a book exploring how a capitalist economy can breed dangers for individuals. They argue that so long as it is profitable, sellers will systematically exploit lack of knowledge and psychological vulnerabilities. Markets are not solely the bringers of material wealth and the greater good. They are also inherently filled with “tricks and traps [that] will phish us as phools.” It seems fair to say that the dangers pointed out by these two Noble laureates are particularly great when one deals specifically with financial markets.
It is here that financial advisors can confer assistance of overwhelming value. If they will bring superior knowledge, training and diligence to guiding us away from the tricks and traps, help us to reject making decisions by gut instinct (which leaves us psychologically vulnerable), and fix our gaze exclusively on what economic scientists know to be true, they can add huge value above and beyond their fees. And if they will do all this as true professionals, with their sole intentions focused on what advances our best interests without being swayed by their own desires or needs, then they will truly be worth their weight in gold.