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The Advantage of a Strategic Wealth Advisor: Are the Fees Worth it?

By : Jeremy Sorci | July 26, 2020

If you’ve ever wondered if the costs associated with a strategic wealth advisor are worth it, you’re not alone. In fact, an article at the Motley Fool described the cost of using a financial advisor as “brutal,” referring to a hypothetical 1 percent of assets annual fee reducing net returns, as well as the longer-term impact of fees that aren’t reinvested. 

Jeremy Sorci is a CFP, Certified Financial Planner and a 401(k) Financial Advisor with Premier Financial Group in Eureka Humboldt County

While the article may have come across as a bit hyperbolic, it wasn’t all negative… and it did bring up a valid point: Investors should always evaluate the services they receive from their strategic wealth advisor to determine if the services are worth it.

These tips will help you with the evaluation process. 

Quantifying Alpha: What’s Your Wealth Advisor’s Value?

In spring 2014, a Vanguard white paper took a quantitative look at alpha — or a risk-adjusted measure of performance — to determine how much, if any, value that working with a wealth advisor adds. Vanguard’s research found advisors can add up to a total of 3 percent to returns when providing the following services: 

  • Behavioral coaching: Potential value from 1 to 2 percent
  • Increased tax efficiency: Potential value up to 0.75 percent
  • Spending withdrawal order: Potential value up to 0.70 percent
  • Allocating assets to lower-cost funds: Potential value up to 0.45 percent 
  • Annual portfolio rebalancing: Potential value up to 0.35 percent: 

Does Your Investment Professional Practice Passive or Active Investing?

It’s no secret that Premier advocates a passive investment strategy. After all, an overwhelming body of empirical evidence and real-world experience support passive investing’s advantages.

In fact, a 2013 meta-analysis evaluates the active vs. passive approach across multiple time periods, using data from numerous independent, credible sources. The passive approach proved more effective over time; in particular, investors who invested in funds (passively) managed by Dimensional Fund Advisors gained 109 percent of returns, while those invested in actively managed index funds only 78 to 88 percent of returns. 

Strategic Wealth Advisor

In addition to the passive approach, the analysis posited that these higher returns may also be due to two specific services provided by wealth advisors:

  1. Behavioral coaching that helps investors refrain from reacting emotionally — and selling — when the market is on a downswing; and
  2. Regular asset rebalancing, which many investors don’t do as it seems counter-intuitive to sell performing stocks to purchase falling stocks.

Other Investment Professional Practices to Consider

When you’re determining whether the cost of working with a wealth advisor is worth it, also consider other services, such as tax-loss harvesting, or the practice of offsetting capital gains taxes by selling some under-performing stocks at a loss. While low-cost advisors may not harvest, or do it infrequently, regular tax-loss harvesting has the potential to significantly reduce your tax burden. 

Another cost to evaluate is that of holding too many mutual funds. If your investment professional recommends holding a number of funds, it’ll cost you more to rebalance, thus decreasing your returns. Finally, consider the number of services offered by a financial advisor. While some investment professionals only offer financial advice, a true personal wealth advisor provides a range of services, such as:

  • Estate planning
  • Review of insurance policies
  • Roth conversion advice
  • Retirement planning
  • Mortgage financing advising

While, of course, it’s essential to evaluate the fees and expenses associated with wealth planning, it’s also important not to view these costs in a vacuum. Instead, evaluate the added value a true wealth advisor provides.

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