The Value of an Advisor

This emoji cycle represents the lives of investors.

Warren Buffett has a famous quote: “Price is what you pay, value is what you get.”

This seems to ring true with almost everything people buy. It’s something to consider when deciding whether an advisor can be a benefit.

A lot of this depends on what the advisor is doing. At the end of the day, a person should want a value at least equal to –  and preferably above – whatever advice/services he may receive.

There are some people who believe they can go it alone and don’t need the help of a professional. This can be a difficult role due to the depth and extensiveness of the financial industry.

Are you capable of building out a financial plan that manages insurance needs, emotions, fear, longevity risk and order of returns risk, to name a few? My investing idol is Warren Buffett, and he is well quoted as saying most people would be best off sticking their money in low-cost index funds and forgetting about it. I agree to the extent that the long-term performances would most likely be well served; however, the physical investments are only a small piece of the puzzle.

The most difficult part of investing is managing emotions. This is one of the most important roles that an advisor plays. As we all know, Mr. Market could vary in highs and lows; and when this happens, a lot of money is lost due to panic selling.

An advisor’s job is to help manage these emotions and educate clients on the pitfalls of giving in to these emotions. Shelby Davis, a famous investor, said, “You make most of your money in a bear market; you just don’t realize it at the time.” 

This is hard for most people to see. A well-educated advisor could help manage this inevitable situation.

How do you avoid longevity risk? Today the average life expectancy is approaching 85 years old, and this number grows as advances in the medical field continue to strengthen. An advisor should be able to help manage one of the most feared parts of retirement, which for some is outliving their assets.

There are many ways to position a portfolio to avoid this risk, whether it’s in the asset allocation, payout structure, annuities or some combination of each. If you are not well educated or have strong partnerships in place, how will you fare in managing this? 

The last topic I want to touch on is order of returns risk. What is order of returns risk? 

This means that the order in which people receive returns versus when they begin taking withdrawals could result in the difference of their money lasting many years or running out early. This is worth a Google search.

This does not apply to some people, as they have accumulated more wealth than they could ever spend, even with order of returns; however, most do not have this luxury. As people age, they must be more geared toward a risk-adjusted return. This can be customized for each client, depending on several factors, but is another area of professional experience that an advisor can offer to help maximize withdrawals in retirement. 

The world of finance is not an easy field to navigate independently. An advisor could help read that journey. I like to compare life to a 40-foot putt. For golfers, they understand that there are not many straight 40-foot putts. These putts can break a few different directions and could be uphill and downhill in the same putt. Doesn’t this sound like life?

The best way to read a 40-foot putt is to read it in sections. You might read the first 10 or 15 feet; then, the next, and so on. After you break down the putt, it’s easier to see how to best account for the twists and turns and maximize the likelihood of making it.

An advisor can help do the same thing with your financial life. For older folks who don’t have 40 feet left, it could be that they have a shorter putt, but it also should be read in a similar manner.

In closing, take a look at this emoji cycle. For a moment, focus on the top cycle. This is how most investors’ investment lives look. You can see that when times are good, emotions run high; but when the cycle turns, so do the emotions. Sadly, a lot of investors ultimately end up making poor decisions at the bottom and sell or reposition their assets in negative ways.

The second emoji cycle shows the “meh” investor. This investor is never too high or too low.  Emotions have been managed through a strategy or plan that helps to manage expectations, longevity risk and order of returns, to name a few. The role of advisors is to add this value and more into the services they provide. 

~ Lee Williams is a financial advisor with Nowlin and Associates Wealth Management. He can be reached by email at lee@nowlinwm.com.