As an LPL financial planner, I try to stay abreast of the discussions regarding my industry in the media. I’ve noticed lately that the cost of financial planning services and internal costs of the investments themselves has been coming up more and more frequently, and this is good. Cost is definitely an important issue in financial and retirement planning, as it detracts from the total return experienced by the investor. Since we’re on that topic, I’d like to shed some light on a cost associated with retirement planning that is rarely mentioned but equally important and far less understood.
Without a doubt, one should take care to minimize the costs in the investments she owns. I understand why at first glance, it would seem that having a discount broker would lower costs even more. This assumes though, that one is able to choose the appropriate investments and formulate (and stick to) a plan that will allow her to retire and live at a comfortable standard for probably 30 years during which, the cost of living will likely increase by 2.5 times, assuming long-term inflation trends continue.
Let’s assume the investor is able to pick some really solid investments, since the discount broker helps very little in this area. Still, the odds are against him. Why? Research (rarely discussed on television or in print) shows that the typical investor achieves around half the return of the actual funds he owns. How could this be? Quite simply because many folks make ill-advised decisions, often emotionally, at the worst possible times. For example: they panic out of a declining market and then get back in after it has already risen above where they sold out. Or, they bail out of a fund that has had a tough year and get into the 5-star fund that was on the cover of this month’s issue of Money magazine. Then, next year, the 5 star fund has a terrible year and the previously lagging fund has a great year. Or, they pile into technology stocks in 1999 (just before the “tech bubble”), or sell all their investments and go to 100% cash in 2009 just before the start of the current multi-year bull market. The nest eggs that people have spent time away from their families shedding blood, sweat, and tears to build, rightfully, have a lot of emotion tied to them. Because of this, at the critical junctures I just described, an investor needs a thoughtful, trusted, caring advisor between his forefinger and the mouse-click that can destroy a lifetime of work and planning.
That is what the small cost of a caring Financial Planner affords the investor. They say that cost is only an issue in the absence of value. I am here to say that a good planner can add much more value than her services cost. According to research firm Dalbar, over the last 30 years or so, the typical investor earned roughly 4% on an annualized basis, while her actual funds earned about 10%. The discrepancy being due to the investor selling and buying at the least opportune times, or buying or selling the wrong things at the wrong times. Because I’ve watched so many well meaning people inadvertently undermine and often destroy their own plans, it has become quite clear that the roughly 1% or so annually the investor pays a planner for her long term financial advice and behavioral coaching could potentially save the investor many multiples of what is charged (required disclaimer: However it is important to keep in mind that a financial planner cannot guarantee success as investing does involve risk.)
My message: cost IS important. What, though, is the cost of NOT having a qualified, caring, battle-tested advisor by your side in what could be your darkest hour?
The opinions in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. No strategy can ensure success or protect against loss. Investing does involve risk, including loss of principal.