The reality is that the value of financial advice extends far beyond just a focus on investment returns. The value ranges from advisor insights about taxation and tax efficiency, to helping clients through a long list of their behavioral biases, to all the other parts of financial planning that matter besides just the money itself. Following are certain areas where a financial planner can help:
Most of the individual investors face trouble while establishing realistic goals. They find it difficult to decide what things to focus upon and what to accomplish. A good financial planner can help in chalking it out.
The total return of any portfolio has three components
(a) Returns from overall market movement
(b) Incremental returns due to asset allocation
(c) Returns due to market timing, security selection, and fees.
According to researches, about three-quarters of a typical portfolio’s variation in returns comes from market movement (a), with the remaining portion split roughly evenly between (b) and (c). The exercise of allocating funds among various investment vehicles and asset classes is at the heart of investment management. Asset classes exhibit different market dynamics, and different interaction effects. Thus the allocation of money among asset classes and among investment vehicles within asset classes will have an enormous effect on the performance of an investment portfolio. This can be managed with ease by a financial planner.
Adjustment of asset allocation can be done on account of non-market factors like advancing age, a change in goals or a change in circumstances. Good advice can make such adjustments more effective. It can also provide other tools for managing risk, including asset/liability matching and tactical adjustments due to long-term factors like low expected returns. Good advice from a financial planner can offer various hedging and insurance strategies.
It is basic human nature to be prone to behavioral and cognitive biases impede our progress and inhibit our success. We are prone to flitting hither and chasing after the next new thing, idea, strategy or shiny object. A good financial advisor can help overcome such biases.
The ability to make effective financial decisions declines with age. Research shows that financial literacy declines by about 2% each year after age 60. Despite that decline, our self-confidence in our financial abilities remains undiminished as we age. That’s a scary combination. A financial advisor can help by guarding against this.