Quantifying the Value of Financial Planning Advice
By: Curt Stowers
Making the decision to hire a financial advisor normally comes down to one key question: Will I get value out of retaining this individual?
This question is why it’s important for financial advisors to quantify the value of the financial planning advice they give. Some say it can’t be measured; others attempt to put a value on it but overhype the intangible aspects of their advice. For example, many people understand on a theoretical level that avoiding big financial catastrophes and missteps is advantageous, but if a real monetary cost can’t be attached to those missteps, then the intangible benefits of a financial planner can sound like a luxury unworthy of the investment.
How to quantify the value of a financial advisor
We believe it is possible to demonstrate what a financial advisor’s advice is worth in a way that helps clients connect the dots from the intangible to the tangible. Let’s start by outlining the 3 main ways advisors create value:
- They can cause your lifetime portfolio return to be higher than it otherwise would have been
- They can save you more in time, effort, worry, and record-keeping
- They can save you more in the cost of mistakes that you will avoid
If any combination of these benefits exceeds the advisor’s cost, then the economics of hiring an advisor make good sense.
If EACH of these benefits exceeds the advisor’s cost, the economics of hiring an advisor make GREAT sense.
Bullets 2 and 3 describe services that, at first blush, seem to have no physical value. In the table below, adapted from "The Kitces Report" by Michael Kitces (Volume 3, 2015), we can see that these intangible benefits can actually be quantified by their real-world impact and the time-savings they provide:
| Financial Planning Strategy | Potential Economic Impact | Real-World Impact |
|---|---|---|
| INCOME TAX BENEFITS | ||
| Claiming tax deductions, credits, and tax-free investing opportunities Deductions, credits, Roth IRAs and 529 plans, etc. |
$1,000s or $10,000s |
|
| Tax deferral - Retirement contributions, tax loss harvesting | $10,000s or $100,000s |
|
| Tax bracket arbitrage - Roth conversions, tax sensitive liquidations | 0% - 30% of total wealth |
|
| INVESTMENT PLANNING BENEFITS | ||
| Picking Lower-Cost Investments | 0.45% - 0.82% |
|
| Tax Loss Harvesting | 0.20% - 0.60% |
|
| Asset Location | Up to 0.75% |
|
| Investment Selection for Alpha? | 0% |
|
| Rebalancing | 0.35% - 0.44% | |
| Diversification | Risk Reduction |
|
| Behavior Gap | Up to 1.50% | The Behavior Gap is caused by "irrational investing decisions driven by the desire to avoid pain and seek pleasure in the form of above-average returns." Examples of this are selling when investment prices are low or switching from one investment to another based on the pick of a stock analyst on television.
This Behavior Gap results in lower returns. A financial advisor helps you avoid the pitfalls of the Behavior Gap. |
| ESTATE TAX BENEFITS | ||
| Federal estate tax savings | Millions |
|
| State estate tax savings | $100,000s or Millions |
|
| Probate and settlement cost savings | $1,000s or $10,000s |
|
| Ensuring assets go where they should and when | Time Saved: Unquantifiable |
|
| RETIREMENT PLANNING BENEFITS | ||
| Retirement portfolio tax strategies and withdrawal sourcing | 0.50% - 0.70% | |
| Maximizing Social Security benefits | $10,000s |
|
| Retirement-sensitive tax planning strategies (e.g. Medicare Part B and Part D premium surcharges) | $1,000s to $100,000s |
|
| Setting spending policies and budgeting | Making retirement work |
|
| Determining when you can stop working | Emotional Well-Being | |
| INSURANCE PLANNING BENEFITS | ||
| Optimizing Insurance Coverage | $100s or $1,000s |
|
| Eliminate Financial Catastrophes | Time Saved: Unquantifiable |
|
| DELEGATION BENEFITS | ||
| Enhanced Value of Your Time | $1,000s to $10,000s |
|
| Spend Money to Free Up Time | Emotional Well-Being |
|
| Ensure Things Actually Get Done | Time Saved: Unquantifiable |
|
| BEHAVIORAL BENEFITS | ||
| Debiasing | Time Saved: Unquantifiable |
|
| Financial coach for implementation | Time Saved: 50 - 100 hours |
|
Though not every aspect of a financial planner’s advice and services can be quantified through monetary gains, realizing the time-savings and real-world benefits that result from expert financial planning lets us see that their value goes beyond peace of mind. We encourage anyone interested in hiring a financial advisor to ask to be shown, with real-world examples that apply to your situation, how the advisor’s services will result in a net benefit to you. This will be your first test to see if they really can deliver sustainable value.