What's the value of good financial advice (after fees)? That's what I'm talking about in this episode of The Atomic Retirement Podcast.
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What's the value of good financial advice (after fees)? That's what I'm talking about in this episode of The Atomic Retirement Podcast.
Resources Mentioned
Start Your Atomic Retirement Journey
📱 Follow Ryan on Twitter
🗞 Get Atomic Planning's Weekly Newsletter
🚀 Ask Ryan a Money Question
Ryan Kilkenny 0:00
Hi everyone and welcome to The Atomic Retirement. I'm your host, Ryan Kilkenny, the founder of Atomic Planning, an independent, veteran-owned, fee-only financial planning firm bringing tax and retirement planning to families over age 50. Atomic Planning is a virtual financial planning practice in Kansas City, serving families from coast to coast from California to North Carolina.
Ryan Kilkenny 0:24
Thanks for joining me this week and welcome to episode three of The Atomic Retirement.
Ryan Kilkenny 0:29
What's the value of financial planning or financial advice, according to Vanguard? Perhaps you'd be surprised to know that Vanguard has a lot to say about this. That's right! Vanguard, the company you may know for low cost indexing strategies put together a 28 page report for advisors called, "Putting a Value on Your Value: Quantifying Vanguard Advisor's Alpha." I'll be sure to include a link to it in the show notes.
Ryan Kilkenny 0:59
Vanguard's report states that the value proposition of advice is rapidly changing. It used to be that advisors had unique access to markets. That's not the case today. Everybody has access to markets, thanks to the internet. And today, investments are a commodity. There's not a lot of value in just selecting investments, even though some advisors try to sell people on the fact that their investments are likely to outperform the client's current portfolio. Some advisors like to play the, "my investment can drive faster than your investment game, and I can beat the market and get you to your destination quicker." If you ask me, these are not advisors. They are sales people. If they say they are using their forward-looking views on the market to determine how to position your money, it means they're taking a less than scientific wild-blank guess with your money. Nobody, and I repeat, nobody has the ability to consistently forecast the market. And we all know what happens to folks that try to forecast the weather. They usually have us wearing the wrong clothes, staying in because of a storm that completely missed us, or even my favorite, leaving us absolutely stranded in a storm because of something their model didn't see coming. And I'll be the first person to tell you that you shouldn't hire anyone because they say that they can beat the market, or that they know what's about to happen next. More on that in a future podcast.
Ryan Kilkenny 2:30
Vanguard's report outlines ways in which advisors can add value to the people they serve through relationship oriented services, like financial planning, discipline, accountability, and guidance. Their paper takes their framework one step further, by attempting to quantify the benefits that advisors can add by offering these services using best practices.
Ryan Kilkenny 2:56
It's right there in black and white on page one. Vanguard says they believe advisors can add about 3% in net returns (that means after fees) by implementing their framework. They do note that just like any guesstimate, the actual amount of value added may vary significantly. And I definitely agree with that. You know, not all advisors are equal or have this same set of skills. Going back to golf from a previous episode, if you put Tiger Woods' golf clubs into the hands of your everyday golf, or even the club professional for that matter, it probably isn't going to result in them shooting lower scores. But Tiger Woods may be able to break par with the amateurs' clubs. His art and skill matter.
Ryan Kilkenny 3:45
Okay, so Vanguard thinks good financial advice may be able to add about 3% to an investor's return after fees. So how did they get to that figure? Well, they looked at seven different areas and tried to quantify each of them. They did this on page four of the report and then they go into more details later.
Ryan Kilkenny 4:07
So what are the seven areas?
Ryan Kilkenny 4:09
Number one is suitable asset allocation using broadly diversified funds or exchange traded funds. Vanguard placed a 0% with an asterisk next to this one. And it's just that reading the report word for word here they mean, "the value is significant to this, but it's too unique to each investor to even try to quantify." So there is some value here, but it's just too difficult to quantify. And as a result, it gets a zero.
Ryan Kilkenny 4:39
Number two is cost-effective investment implementation using investments with lower expense ratios. Essentially, every investment, every mutual fund, exchange traded fund or index fund has a cost to it. A lot of investors are unaware of but it is called the expense ratio. It's expressed as an annual percentage so that you can compare funds to one another. This percentage, the expense ratio, is your annual cost of ownership to hold the fund. For example, if you have $10,000, and a fund is charging a half a percent a year, you would multiply your $10,000 by a half a percent to get your annual cost of ownership. Vanguard says using cheaper funds will result in better outcomes for people, allowing more of their money to stay in their investments and to compound. And that makes sense to me. Cost effective implementation is estimated to add 0.34% to a client's net returns.
Ryan Kilkenny 5:44
Number three is rebalancing. Everyone should have a target allocation for their investments, a certain percentage of their investments in stocks, bonds and cash, percentages that are right for their own unique situation. More on this in a future episode, but what I'll say today is that stocks and bonds can tend to move around over time, and they can stray from their original target allocation. So rebalancing is the process of getting us back to our target allocation. If we want to have a certain percentage of our investments in stocks, and we're above that threshold, because they've done really well and have gone up in value, it may make sense to rebalance and to sell some stocks and move the proceeds to our bonds or cash. It works the same way if stocks aren't doing so great, and they've gone down in value. Perhaps in that scenario, we'd want to sell some of our bonds, assuming that they've held their value, and use the proceeds to buy stocks while they're on sale. Rebalancing helps control risk, and can also be looked at as a systematic process to buy low and sell high. Rebalancing is estimated to add 0.26% to a client's net returns.
Ryan Kilkenny 6:59
Number four is behavioral coaching. Investing brings out all sorts of emotions and advisors can help their clients maintain a long term perspective and stick to a discipline to plan. Behavioral coaching can add a large amount of potential value. Vanguard's study looked at more than 58,000 Vanguard self directed IRA investors over a five year period. And here's what they found. Vanguard self directed IRA investors in the study underperformed Vanguard's target retirement funds over the same period. Vanguard assumed that the target date funds offered some of the same structuring guidance that would come from an advisor. What Vanguard found was that investors who exchanged money between their funds, and into other funds, fared considerably worse than those that just owned the target date funds. Behavioral coaching alone is the biggest one here and it's estimated to add 1.5% percent to a client's net returns.
Ryan Kilkenny 8:04
Number five is asset location. Not to be confused with number one, which was asset allocation. So asset location is holding investments in taxable or tax advantaged accounts because of the value that they can bring from a tax perspective. Good asset location can minimize the impact of taxes, and Vanguard estimates it to add anywhere from 0% to 0.75% to a client's net returns. It really varies quite a bit just based on the unique situation of the client.
Ryan Kilkenny 8:40
Number six is spending strategy. It's the withdrawal order that you pull from your accounts. This one also varies quite a bit based on your unique situation. But Vanguard estimates having a good spending strategy, and taking income from the correct accounts, in the right sequence, at the correct time can add anywhere from 0% to 1.1% to your net returns.
Ryan Kilkenny 9:06
Number seven is total return investing versus income investing. Total Return investing is a combination of capital appreciation and current income, perhaps a balance of some dividend paying stocks and non dividend paying stocks. It's a balance of the two, and this approach, if used for income, means that you may have to pull some of your original principal. Income investing, on the other hand, is investing for the sole purpose of just living off the income that your investments produce. This sounds really great in theory, but there is less of a possibility of capital appreciation, and a lot of income generating investments don't really pay as much as they used to. The value of total return investing versus income investing is significant, but too unique to quantify. This is another one that gets 0.0% with an asterisk.
Ryan Kilkenny 10:01
A quick recap of the seven areas that an advisor may be able to add value to the people they serve.
Ryan Kilkenny 10:08
Number one is suitable asset allocation using broadly diversified funds or ETFs.
Ryan Kilkenny 10:15
Number two is cost effective implementation using investments with lower expense ratios.
Ryan Kilkenny 10:21
Number three is rebalancing to control risk.
Ryan Kilkenny 10:23
Number four is behavioral coaching.
Ryan Kilkenny 10:26
Number five is asset location.
Ryan Kilkenny 10:29
Number six is spending strategy, the withdrawal order that you pull from your accounts.
Ryan Kilkenny 10:34
Number seven is total return investing versus income investing.
Ryan Kilkenny 10:39
Vanguard estimates that all these add up to a net 3% benefit for clients of good advisors that implement these best practices.
Ryan Kilkenny 10:48
As a reminder, I'll put a link to the report in the show notes.
Ryan Kilkenny 10:52
That's it for this week. If you have questions or would like to learn more, or see if we'd make a good team, you can find me at atomicplanning.com. There's a "Contact Us" button in the upper right hand corner of the website where you can schedule a quick zoom meeting with me. That's right. We don't have to play phone tag and send 20 emails back and forth to schedule an appointment.
Ryan Kilkenny 11:12
If you love the podcast and find it helpful, I'd really appreciate it if you hit the subscribe button, leave a five star review and a short comment. It really helps people find me. It's also okay to spread the word. That helps too.
Ryan Kilkenny 11:26
This podcast is for informational and educational purposes. It should not be relied upon for any investment, tax, or legal decisions. Clients of Atomic Planning may maintain positions in the securities discussed in this communication. I try my best to bring you valuable information, but I probably don't know anything about you or your personal situation. So please talk with your fee-only financial planner, tax, and or legal professionals before taking any action or making any decisions about your own financial plan. Atomic Planning is a veteran-owned Kansas state registered investment advisor providing independent tax and retirement planning.