The Value of Using a Financial Advisor

Blog - 18 - 02 - 15

There is no question that investing your own money is becoming easier and easier, thanks to the Internet: The Web provides a daily flood of investing news and information, and online brokerages tout their low costs and ease of use.

But the important question is whether handling your own investing will make you more successful. For many do-it-yourselfers, the cost savings of not using an advisor seems like an advantage. But research by Morningstar Inc. clearly shows that using a good financial advisor can be the better decision.

A study by Morningstar in 2012 found that investors can increase their retirement income by an additional 1.82% per year by working with a good financial advisor. The right advisor, Morningstar found, can help you make better financial planning decisions, and those decisions may result in more retirement income.

It may come as a surprise to some that superior results should be based in planning and decision-making rather than simply picking investments that outperform. But Morningstar’s research showed that the particular investments we own are generally less of a factor than some of the other decisions we make.

Morningstar’s study sought to quantify the extra income investors can earn by making better financial decisions in five areas:

  1. Asset allocation: Balancing risk and reward by adjusting the percentages of different assets in an investment portfolio.
  2. Withdrawal strategy: Deciding when and how to take distributions from your portfolio.
  3. Tax-efficiency: Investing to minimize the tax impact on your assets.
  4. Product allocation: Using the optimal investment products.
  5. Goals-based investing: Investing to meet specific objectives with specific timeframes.

Using this “efficient financial planning strategy” can create a significant performance advantage, Morningstar found. Making better decisions in the five key areas allowed a theoretical retiree to earn about 30% more income, or 1.82% annually, than a person not using the same approach.

Planning, guidance and coaching are key values that qualified advisors can deliver, and that are not available to do-it-yourselfers. Another key client benefit that Steel Peak provides is helping investors to remain disciplined in volatile markets.

A lack of discipline can lead to impulsive decisions that create a “performance gap” with market returns. According to research firm Dalbar, the S&P 500 stock index returned 9.22% annually over the past 20 years—but the average investor’s return was a mere 5.02%. A big reason for that gap, according to Dalbar: Self-defeating behavior by investors.

So the next time a colleague or an online brokerage pitchman suggests that you handle your own investing to save on fees, we hope you focus on the larger question. That question is how you’re most likely to meet your ultimate investing goals. As Morningstar’s research shows, the right advisor can deliver a clear and quantifiable advantage.