FINANCIALLY
Speaking
Professional Advice Pays
by Daniel T . Newquist , CFP ®, AIF ®
Daniel T . Newquist , CFP ®, AIF ® is a Principal Wealth Advisor with RNP Advisory Services , Inc ., in Morgan Hill with over 17 years experience advising clients on their personal wealth , retirement planning , insurance , and business planning needs . Born and raised in Morgan Hill , Dan is available for private consultations and speaking engagements . Investment advisory services offered through RNP Advisory Services , Inc . – a registered investment advisor . Securities offered through Foothill Securities , Inc ., member FINRA / SIPC , an unaffiliated company . Visit his website at www . RNPadvisory . com or call 408-779-0699 .
Financial advisors and professional money managers provided investors significant value before , during and after the Great Recession . A recent study by Aon Hewitt , a human resources consulting firm , explored how retirement plan investors who had professional investment help faired versus investors who did not .
In the study , “ Help in Defined Contributions Plans : 2006 Through 2010 ,” Aon Hewitt looked at the investment behavior of over 425,000 individual defined contribution plan participants and their $ 25 billion in assets . The investors were divided into two distinct groups : “ Help ” investors , those receiving investment help ( from a managed account , a target date fund or plan provided investment help ) and “ Non-Help ” investors , those who managed their investments on their own .
The study uncovered three fascinating insights about the performance of investors with Help versus the Non-Help investors .
n Investors who received help had better returns with less risk than Non-Help investors . This was true across all age groups and market conditions studied .
n Investors who had help outperformed those who didn ’ t by a median annual return of 2.92 % over the five-year period from 2006 – 2010 .
n The downside of 2008 was about the same for both Help and Non-Help investors , but the upside returns of 2009 were noticeably different . Non-Help investors tended to have more concentrated portfolios , and they didn ’ t fully participate in the recovery .
While a 2.92 % median annual return doesn ’ t seem like a big number , let ’ s give some context to the advantage that the Help investors received . Over the 5 year length of the study , an investor with help would have 14 %* more wealth than a Non-Help investor . Over 10 years , this median annual return grows to a 30 % advantage , and over 20 years it is a 70 % advantage .
The study found that the poor performance of the Non-Help group came primarily from two sources :
n Inappropriate risk levels and
n Inefficient portfolios . For every age range Non-Help investors had riskier , more volatile portfolios than investors who had help .
While the study reviewed above was focused on investors in defined contribution plans like 401 ( k ) plans , the case for professional advice holds for investors and their investments outside of a plan . According to Meir Statman , PhD ., a Santa
Clara University professor and member of our investment oversight committee , investors should seek an advisor aimed at improving the whole of their financial wellbeing . Statman , a recognized behavioral finance expert , says investors who align themselves with “ professionals who examine the financial resources and goals of investors , diagnose deficiencies , and educate investors about financial health ,” will assist investors in maximizing their potential e . g ., tax optimization , savings , spending , planning , etc .
In other words , success in financial planning and investing is more about making sure that investors are making “ healthy choices ” than it is about beating the market every year . Are you saving regularly ? Are you living within your means ? Is your asset allocation appropriate for your goals and personal temperament ? Do you have your estate in order should the unthinkable happen ? Are your beneficiaries up to date ? Do you plan to alter your spending in retirement ? Are you maximizing your tax situation each year ?
While the value that financial advisors provide their clients is sometimes taken for granted , the time advisors spend trying to understand each individual investor matters greatly . We spend time to understand your goals , objectives , risk comfort and needs . All of this is essential to recommending an efficiently diversified portfolio that is appropriate for you and in your best interest .
Questions to keep in mind when interviewing a financial advisor :
n Is the advisor a registered investment advisor ?
n How does the advisor charge for services , and how much ?
n What is their experience and professional credentials or certifications ?
n What services does the firm provide ?
n Why types of clients does the advisor specialize in and can they provide references ?
n What is the investment philosophy and approach to financial planning ?
n How often will you interact ?
n Is the advisor your only point of contact , or is there a team ?
n What makes the client experience unique ?
n Did you like the advisor and your initial experience ?
* Assumes $ 10,000 invested at an illustrative return of 8 % and 10.92 % ( 8 % + the 2.29 % advantage ). This article is intended for educational purposes only . It is not intended as investment advice . Always consult your financial or tax-planning professional for guidance with respect to your specific situation .
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