An article was published recently by The Vanguard Group Inc. stating that financial planners may add about three percentage points of value in net portfolio returns over time. The article reinforces how critical it is for individuals to not only have a financial plan, but to have a Certified Financial Planner Professional™ to help them implement and monitor their plan.
How does a CFP® professional add this much value to individuals? In addition to adding peace of mind and time to clients (both of which are important, but not easily quantifiable), planners assist with portfolio construction, wealth management and behavioral coaching. Let’s look at each area in more detail.
Proper portfolio construction involves choosing a suitable asset allocation and subsequently finding broadly diversified mutual funds or exchange traded funds. Using low cost index funds or institutional share classes can reduce total investor expenses. Monitoring asset location between taxable and tax-advantaged accounts can add value. Finally, focusing on total return versus just income investing can add significantly to the portfolio. The potential value for portfolio construction is around one percent.
Wealth management involves regular rebalancing of the portfolio, which is a critical component to help keep the portfolio in line with the appropriate risk tolerance levels. Wealth management also involves proper withdrawal strategies to help minimize taxes. This could involve an appropriate Roth conversion strategy, estate planning strategy or Qualified Charitable Distributions. The potential value for wealth management is around one percent.
The final component mentioned in Vanguard’s article is behavioral coaching. This is often where investors receive the biggest value. A good planner is there to provide counsel, listen to your concerns and guide you down the right path. This becomes extremely important during market turbulence when investors may want to abandon their allocation strategy. A CFP® professional will keep the investor focused on the long-term strategy and help them ignore short-term fluctuations. Behavioral coaching may add up to 1.5 percent according to the study.
If you would like to find a fee-only advisor in your area to begin realizing the value of working with a CFP® professional, visit napfa.org (National Association of Personal Financial Advisors) and search for advisors in the Directories section. If you are interested in pursuing a career as a fee-only advisor, visit the Career Corner on the NAPFA website.