What is Advice Only Financial Planning
With the growing popularity of index funds and the overall increased ease of creating a low-cost diversified portfolio, a growing number of individuals are deciding to manage their own investments. In the past, the client would transfer their assets to a custodian account, where the advisor would have full discretion. And a fee called “assets under management” or AUM, would be deducted directly from your account to pay the advisor for managing your investments. This model is now changing towards paying a one time fee for a comprehensive financial plan, which will include an outline for a client specific investment portfolio. But now it is the clients responsibility to make the trades and implement the advisors recommendations. In the personal finance industry this new model is know as advice only financial planning.
SHOULD YOU HIRE AN INVESTMENT PORTFOLIO MANAGER OR MANAGE IT YOURSELF:
Advice only financial planning services will not manage your money for you, therefore you will make all trades and have full discretion over your portfolio. They will walk you through the process, and even join-in on important phone calls with the financial institutions, but ultimately it is your responsibility to take action (or not) on the recommendations. They will give you an outline and answer your questions but you remain in control and are responsible for the implementation. Below are a few questions to help you decide if advice only is right for you.
Do you have the time and inclination to manage an investment portfolio?
Do you want to learn about money management?
Do you want to save money by eliminating the portfolio management cost and rather pay a one-time fee?
Do you have the discipline to hold your portfolio until retirement and avoid other common investment mistakes?
For people that don’t have the temperament and desire to manage an investment portfolio, we do recommend hiring a investment manager. The cost of making a mistake outweighs the AUM fee.
One of the more interesting qualities needed for being an investment manager is the need for a contrarian mindset. When the market is down there is a tendency to feel depressed or stick to your stomach. These emotions are usually followed by the inexperienced investor liquidating an investment position or halting contributions to a retirement account. It is painful to lose money and its very normal to avoid the feeling of pain, so individuals will try to remove the source of that feeling. But, for a good quality money manager these emotions will trigger a mindset of opportunity and they have the ability to overcome the standard reactions of liquidation and halting contributions to actually increasing contributions. The same contrarian mindset is needed when markets are doing well. The inexperienced investor will feel elated and follow the normal reactions of increasing the contribution. Or even speculating with riskier assets during this time. But an experienced money manager will be more cautious when he feels elated and could even slow down contributions depending on valuations.
The inexperienced investor or someone that doesn’t invest for a living will not have the above habits in place. And could be susceptible to the standard reactions that follow an emotional feeling. The cost of reacting emotionally, even if it was only once during your investment career will outweigh the AUM fee paid to a financial advisor.
Yes, Advice Only Financial Planning is a great way to go for a hands on individual that is motivated to understand a few basics. You will save money in the long run on management fees. But will be costly for someone that doesn’t have the time, inclination or temperament for investing and money management. Being honest with yourself when answering the above questions is a great place to start when deciding which route to go.
Risk Rewards of finding the next Pepsi
I have always found Pepsi to be in interesting example of a good way to invest in the stock market. If you bought Pepsi in 1980, you would be being buying the stock on a split adjusted cost of under $1 dollar. That <$1 dollar investment would be worth $166 dollars today not including dividends.
Lets say you bought $1,000.00 dollars worth of pepsi back in the 1980s. That thousand would be worth $166K today. Not super exciting for a 40 year investment, but if you reinvested the dividends now that $1k investment is worth over a million. That’s a risk reward ratio of greater than 1000 to 1. That means you can invest in 1000 individual stocks and if all of them fail but you find one Pepsi you will make money.
Thats the power of investing in the stock market. You don’t have to be right on every stock, but buying small amounts of companies you believe in can pay off over a long period of time.