More Than a Tax Deduction: The Real Value of a Financial Advisor

As many are aware by now, one of the central features of the tax law that went into effect on January 1, 2018, is the repeal or limitation of a number of deductions that many taxpayers were accustomed to listing on their Schedule A forms. Among these were state and local taxes, mortgage loan interest, homeowner association fees, tax preparation fees, safe deposit box rental fees, and investment expenses, including fees paid to financial advisors. In exchange for the elimination or reduction of these itemized deductions, the law features a much higher standard deduction for filers—almost double the previous amounts.

Because many financial advisors—and all fiduciaries—are compensated on a fee-only basis, some taxpayers may be re-thinking the benefit they get for the costs associated with their investments. You may be wondering, “If I can’t deduct the fees and other expenses associated with my investments, is the relationship still worthwhile?” The answer to this question depends heavily on how you perceive the value delivered by your financial advisor.

In a March 2016 guest column for financial writer and blogger Michael Kitces, Bob Seawright, a New York investment officer and blogger presented a thoughtful review of the principal benefits of working with a professional financial advisor. Referencing studies by the investment rating firm Morningstar and the Vanguard mutual fund group, Seawright points out in his article “A Hierarchy of Advisor Value” that helping clients select, buy, and sell investment vehicles is only a small part—perhaps the smallest part—of the value they offer their clients. Instead, he suggests, the most important things that advisors do for clients have more to do with “coaching” and overall strategies related to investing, spending, and planning behaviors. Here is Seawright’s list of the sources of advisor value, in descending order of importance:

  1. Encouraging Consistent and Increased Savings.
  2. Encouraging Consistent Investment.
  3. Financial Planning.
  4. Managing Expectations and Behavior.
  5. Asset Allocation.
  6. Managing Costs and Fees.
  7. Portfolio Rebalancing.
  8. Security Selection.

If you’ll think about it, the order of importance is almost exactly the reverse of what many investors consider when they think about their financial advisors. This is understandable; for decades, the popular image of “stockbrokers” is of persons who have “hot tips” and get their customers into investments that are ready to explode on the upside. For many years, the financial industry has been transaction-driven, dependent on somebody selling something to someone. New financial consultants were expected to go out and convince everyone they could of the superior returns the consultant would generate for the client. And, as Seawright correctly notes in his article, relationships built on such unrealistic expectations will almost always prove disappointing, especially for the client.

But this business model is fading away—and justifiably so. More and more, clients are turning to advisors who, rather than trying to sell the client the latest hot stock, are seeking to build long-term relationships founded upon always seeking the client’s best interests above all. To do that, professional advisors must prioritize exactly as Seawright’s list suggests. Our most important job, as trusted advisors, is to help our clients take actions that will lead to long-term success and achievement of their most important goals, whether those include financing a child’s education, funding a secure retirement, preserving an estate for future generations, starting a business, or assuring the availability of necessary health care in later years. To do this, we must be much more than “stock pickers.” We must coach, teach, advise, reassure, and explain. We must help clients overcome their own tendencies to act out of emotion—either fear or greed—and instead lead them to stick to a strategy that we have helped them design, taking into consideration their long-term goals, risk tolerance, resources, and dreams.

Interestingly, the Morningstar study that Seawright cites suggests that “better financial decision-making” such as that outlined above can add as much as 1.82 percent annually to portfolio value. Over time, such “best practices” can be expected to add as much as 29 percent to retirement income. Such hard-dollar benefits are certainly significant. But beyond the mathematical value, the benefit of professional, evidence-based financial advice, delivered and implemented in the client’s best interest, goes far beyond anything that can be entered in a spreadsheet or listed on a tax return.

Stay Diversified, Stay Your Course!