How to Evaluate if Your Financial Advisor Is Delivering Value, #205
How do you know if your financial advisor is delivering value? Is seeing a financial gain in your investments the only metric you should use? I’ve identified four key areas where your financial advisor should be delivering value to you: Awareness of costs and fees, performance of your portfolio, financial planning benefits, and communication.
I’ll cover each of these areas in detail in this episode. I’ve also included a checklist you can use to make sure your current financial advisor is delivering value.
This is Part 5 of a five-part series about financial planners to celebrate the release of my first book, “Fiduciary: How to Find, Hire, and Establish a Trusted Partnership with a Fee-Only Advisor.”
You will want to hear this episode if you are interested in...
[3:03] Area #1: Awareness of costs and fees
[9:25] Area #2: How your investments perform
[15:32] Area #3: The financial planning provided
[17:54] Area #4: Communication
Area #1: Awareness of costs and fees
Do you know what you’re paying your advisor annually for their services? Do you know the ongoing costs of your investments? Most people don’t know the answers to these questions.
But if you’re paying too high of a fee, it can detrimentally impact the long-term growth of your assets and the long-term success of your financial plan. Your advisor should easily be able to provide this information.
The larger your portfolio grows, the lower the percentage you pay should be. Our fee starts at 1.25% per year for portfolios under $1 million. It continues to decline as your portfolio reaches $1 and $2 million. Most firms collect their management fee quarterly and it will show up on your statements.
If your advisor is investing your money in mutual funds or ETFs. Your advisor should keep the costs at less than 0.30% per year. Actively managed funds may cost slightly more. If you’re paying more than 1%, it’s too high. Talk to your advisor.
Area #2: How your investments perform
If you discover you’re paying unnecessary fees or your performance is worse than if you didn't have an advisor, it may be a sign it’s time to move on. However, you also need to understand what reasonable investment performance looks like over time. How? Understand what you can or can’t control:
You can’t control market conditions (whether it will go up or down).
You can control how you invest your money (investment products and asset allocation/risk).
You can control your reaction to market volatility.
You can control how you react to the markets (and your comfort level with risk)
The goal is to buy low and sell high. You can’t chase performance. Does your advisor have a target asset allocation and a rebalancing strategy? Do you have easy access to monitor the performance of your portfolio?
It helps to compare the performance of your portfolio to a benchmark like the S&P 500. If your portfolio is earning more than the S&P 500, it’s doing well. If it’s earning a lot less, you’d have to evaluate your portfolio’s performance. Just make sure your benchmark is comparable to your portfolio.
Area #3: The financial planning provided
If your advisor is assisting you with financial planning, you want to feel confident their guidance is valuable.
Is the plan aligned with your retirement goals? Is the plan being realized or moved forward?
Is your advisor helping you review your insurance policies to make sure you have the right coverage?
Does your advisor go over your taxes with you to help you with annual tax planning?
Do they help you review your estate plan?
Has your advisor followed through with the delivery of your financial plan? Do they update your plan annually?
Financial planning must address these key areas.
Area #4: Communication
Do you hear from your advisor at least once a year to find out if any changes in your life that would warrant a deeper dive into your financial plan or portfolio? Do they regularly stay in contact with you via email, phone calls, zoom or in-person meetings?
If you reach out with updates or questions, do they make time to discuss your needs? Do they follow up in a timely manner? Are they coordinating with other advisors (accountant, attorney, insurance agent) when applicable?
If key elements in these four areas are present, you should feel good in your partnership. If they’re lacking, you may need to address it with your current advisor.
Resources Mentioned
Subscribe to the Retire with Ryan YouTube Channel
Head to RetireWithRyan.com to get this free checklist