The Value Of A Good Advisor In Your Retirement Planning | Retirement Planning at 60’s
Troy Sharpe: What exactly is the value of a good advisor in retirement? You have different types. You have brokers. You have insurance agents. You have certified financial planners. You have investment advisors. What is the best type of advisor for your situation, and what is the actual value? If you’re going to be paying 1, 1.25, 0.9, whatever that percentage is, what are the services you’re receiving, but more importantly, a good advisor? There are a lot of bad advisors out there, but there are also a lot of good ones. What is the value you’ll actually receive, and how do you quantify that? Vanguard did a study, and we’re going to look at it today.
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Hi, I’m Troy Sharpe, CEO of Oak Harvest Financial Group, host of The Retirement Income Show, Certified Financial Planner professional, and also a certified tax specialist. When we talk about an advisor, and what’s the value that they provide, you have to understand two distinct phases of your financial life first. The accumulation phase, which is when you’re saving, typically putting kids through school, and trying to accumulate a nest egg, so once you get to retirement, and those paychecks stop, you then enter the distribution phase. The distribution phase, a retirement advisor is, if you find a good one, is far more valuable, in my opinion, than someone in the accumulation phase, but an accumulation phase advisor can absolutely help you as well.
The most important thing is to find somebody you trust, somebody that is educated, somebody who has a lot of experience, and somebody who has your interests first. I know there are a lot of bad advisors out there. I know this, because we’ve sat with thousands of clients, and I’ve heard horror stories over the years. One of the biggest decisions you’ll ever make is, who do I hire to help me with my finances? Going out alone, which many people do because of the fear of hiring the wrong advisor or making a mistake, oftentimes, can be one of the most costly mistakes that you make.
Just want to go through how Vanguard calculated the value of an advisor. They say, on average, about 3% per year can be added to your returns over time working with a good advisor. If an advisor can get you 3%, and you’re paying them 1%, theoretically, it makes a lot of sense. How do they get to that 3% number? Is it true? Is it valid? First off, we have this little asterisk here. Essentially, what that is saying is down here, the value is significant, but it’s too unique to quantify for each investor. Every investor is different. You’re different. You’re different from the other person watching this video, but the value is significant. They just can’t quantify it.
The first one is suitable asset allocation. This is how much money do I put into maybe growth stocks or value stocks, or how much do I put into bonds? How much do I put into international? That’s your asset allocation. What percentage of your money based on either the economic situation, or if you wanted to follow what’s known as modern portfolio theory, how much should you have in each asset class? Real estate, for example. They’re unable to quantify it, but obviously, that is a very significant value. The cost-effective implementation. Here’s one of the things. If you work with certain firms, and I’m not going to name these firms, but there’s a lot of firms out there that will sell you really really crappy mutual funds that charge you a whole bunch of money. In my opinion, they’re simply not in your best interest.
You can have a diversified portfolio of single stocks. If you’re working with a good advisor, they can build that out for you. You can also use index funds or ETFs, or low-cost mutual funds. Cost-effective portfolios, they say, on average, it can save you about 34 basis points per year. What is a basis point? One basis point is 0.01%. A 100 basis points is 1%. This is .34% per year, 34 basis points. Rebalancing. Rebalancing, they say, can save you about 26 basis points per year. What does this mean? If you want it to be your traditional 60/40 portfolio in retirement, 60% stocks, 40% bonds, if the stock market does really well, and the bond market doesn’t, the percentage of your stocks at the end of the year of your overall portfolio, the percentage stocks are comprised of your entire portfolio will have increased.
There needs to be a rebalancing to bring those back into alignment to make sure your risk profile is still suitable for your income needs, your longevity, for your entire retirement picture. Rebalancing, they say, adds about 26 basis points. Behavioral coaching, 150 basis points, 1.5. Back when coronavirus hit, we put a series of videos out. Coronavirus market updates, they’re on YouTube. You can go look at them right now. We had calls in March of 2020 during the coronavirus pandemic of clients saying, “Troy, get me out of the market. My equity portion, get me out. Go to cash, go to cash.” Well, that’s because fear of the uncertainty was emotionally driving that decision.
What we do in that situation is we talk to our clients about what we see out there, why we feel it’s important to stay invested? We talked about how this was not a structural recession, but this is what’s known as an event-driven recession. Historically, event-driven recessions only last four to eight months. With all the stimulus the government was providing, along with the stimulus the Federal Reserve was providing, along with eventually being a vaccine, the scientists being able to figure that out, or at least, an effective treatment option, the economy reopening, and then, consumer sentiment improving over time, we felt it was pretty certain that we would follow the historical trend of an event-driven recession and see a V-shape stock market recovery.
Now, we also talked about the economy taking longer to recover. Maybe, you’re in this situation. Maybe, you sold out. Maybe, you’re regretting that decision now that you know what the market has done in retrospect, or in hindsight. The second story I’m going to share with you is a story a client shared with me recently. He said, “Troy, before the presidential election, everyone I worked with, they were telling me I was crazy for hiring a professional to help manage my money, and help with an income plan and a tax plan.” They said, “Oh, you can do it yourself. You can do it yourself.” He was sitting in his office and he said, “Troy, every single one of those same people also told me I was crazy for not going to cash before the presidential election.” They thought because the election was upcoming. What they expected the outcome to be, they expected the market to go down.
The market, of course, went up since the presidential election. Based on what we were seeing, based on, again, the historical trends, looking at a lot of the behind-the-scenes indicators that we pay attention to, we knew the right move was to stay invested. While that client has done very well over that timeframe, many of those other people are still out of the market, playing the guessing game, not knowing when to get back in. The behavioral coaching component is probably the most valuable thing you will get out of hiring a good retirement advisor, because they can provide insight. They can provide understanding as to what’s going on that you don’t see just because you’re reading the headlines or watching the news. Those things are designed to motivate in instill fear.
Fear is our worst enemy when it comes to making decisions, especially when it comes to managing our money. They say, it’s 1.5% per year, 150 bps. Asset location, 0 to 75 bps. This is, if you have bonds that pay interest, which is subject to income tax, where do you have those accounts, or where do you have those investment tools in your accounts? Do you have it in your IRA or your non-IRA? I call this congruence with tax characteristics of your account and investments. Different investments are taxed differently. Different accounts are taxed differently. You want to have congruence with your investments, and the accounts that they’re in. They say this creates about 0 to 75 basis points per year.
Spending strategy, which is withdrawal order, how much do I take for my IRA in retirement? How much do I take for my non-IRA? Do I take from my Roth? When do I turn Social Security on? If you’ve watched any videos, you understand how important spending strategy, and withdrawal order is. Most advisors tell you to do the conventional wisdom route, which is defer your retirement accounts. For most of you, that’s the exact wrong way to do it. You want to be taking money out of those retirement accounts. You want to be doing Roth conversions. Everyone’s situation is unique and everyone’s circumstances are different, but that’s far more often than not, from our experience, the right thing to do. They say, it equals anywhere from 0 to about 110.
Finally, total return versus income investing. Too often, people go into retirement and they want a high dividend portfolio or income portfolio. One, in a low-interest-rate environment, you really have to stretch for yield. You have to take excessive risk to generate 5-6% interest. If you do that, and interest rates go up, your underlying investments historically go down in value. When you have high-income portfolio, you’re missing what’s known as the capital appreciation component. There are two components to return. You have the capital appreciation component, and the income component.
Over very long periods of time, they end up being equally responsible when we look at dividend stocks for the total return, but it takes many, many, many years for the income investor to ever catch up to the person who’s investing for total return. It just simply doesn’t make sense. We should be investing for total return. We want income generated from our portfolio, and we want to focus on total return. They say, total return versus income investing, again, we have the little asterisk here, 0 basis points. Again, the asterisk means that value is significant, but it’s too unique for each investor to quantify. Add all this up, they say, it comes to about 3% per year in net return, with two asterisks here, for asset allocation and total return versus income investing.
Again, I’d say the behavioral coaching component is probably one of the largest components that a good advisor can help you navigate through because they can reign in some of the fears and the uncertainty, and anxiety that we feel when things are going a little bit haywire out there. If you want to have a conversation and learn, if you’re a good fit for what we do, if we could help add value to your situation, there’s always a link down below you can click on, schedule a phone call with one of our advisors. The subscribe button, hit that if you want to stay connected to us. Of course, hit that thumbs up if you like the video. If you don’t like the video, hit the thumbs down, write a comment, let me know why. If you hit that little bell icon next to the subscribe, you’ll stay connected to us by being notified whenever we upload new content.
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