What’s Retirement Advice Really Worth? Part 2

Discount options often fall short—look for great advice, not cheap advice.

If you read our earlier post, you are no doubt aware we think you should be very apprised of both explicit and implicit costs in your portfolio. Fees are a crucial consideration. So, if tall fees and complicated payment schemes are out, are cheap alternatives like index funds, so-called robo-advising services or target-date funds the way to go? These all have their merits—but at the same time, there is more to the story than low fees, and investors should understand the risks before jumping in.

The Cost of Cheap Retirement Investments

In a way, these investments are even worse than high fees because they’re harder to notice—at least until it’s too late. Many retirees face a savings shortfall not because they paid too much in fees, but because their financial plans weren’t set up to yield the growth required to provide comfortably for their retirement. Thanks to longer lifespans and higher-than-expected expenses, most folks need more growth than anticipated—a fact that budget products and strategies often miss. People’s reliance on what feels comfortable rather than what their goals require also pulls them toward over-conservative investments. Some balk at the notion of investing itself, preferring to keep their cash in ultra-safe savings accounts, where the silent tax of inflation eats away at its purchasing power: Even a 3% inflation rate—the historical average—halves purchasing power in about 23 years. These are classic opportunity costs—forgone earnings thanks to faulty strategies.

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According to the survey we referenced in our prior post, most investors would rather get an outside look at their portfolios instead of relying solely on their own knowledge: “They want help making more informed investment decisions, they want better solutions for managing risk, and they want help setting goals and establishing plans.” Of course, there isn’t a guarantee a financial adviser will set you on the right path—more on how to improve your odds later—but a personalized review of your needs and financial situation is more likely to yield a plan that’s right for you.

Expensive Judgement Mistakes

One of the great ironies of investing in the last 20 years is that, while technology and competition have made DIY investing more common, a field of economic research—behavioral finance—has shown how humans just aren’t wired to make rational financial decisions. Taken in concert, one might see these as encouragement to manage your own portfolio—right into the ground. But they actually just speak to the real value a quality adviser can provide.

What Constitutes Value in Advice?

Some think a great adviser proves his or her worth by recommending winning stocks or strategies that consistently put market returns in the shade. In reality, stock-picking and short-term market-timing approaches rarely pay off. And yes, even the best adviser will—nay, must—have subpar years. Periods when returns are down. Decisions they made that turned out wrong. The harsh reality: You can’t—and shouldn’t—expect perfection.

A great adviser’s real value often lies elsewhere—in how they work with clients to keep them from succumbing to common investing pitfalls. Abundant research shows investors can be their own worst enemies, whether by overreacting to recent events, buying into bubbles or joining the rest of the herd when panic strikes. It feels like every conceivable pressure pushes us to buy high and sell low, turning the old adage unprofitably on its head. This is the greatest potential cost of all: simple judgement errors, often stemming from fear, greed, overconfidence or other emotions that drive and damage investors’ decision-making.

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Studies of investor behavior by market-research firm DALBAR suggest investors in equity mutual funds switch from one to another—and possibly in and out of stocks entirely—far too frequently to enjoy their long-term gains. Thanks to their skittishness and perpetual pursuit of recent top performers, these investors’ returns are only about half those of broader markets. You won’t have to write a check for those lost returns, but they are very real indeed, when you consider how incurring them affects your retirement. Expert guidance in turbulent times can help investors stay disciplined—by sticking with a plan unless circumstances change dramatically.

Avoiding Hidden Costs

In the survey, almost 70% of respondents agreed those “who work with an adviser are more likely to meet their goals.” More likely, yes, but professional advice doesn’t guarantee good advice—no title or certification can substitute for your own due diligence. Consider asking these questions before entrusting anyone with your savings:

  • What information do you use to craft an investment plan?
    • Is it based merely on risk tolerance, or do you actually have a conversation about what is needed to reach my financial goals?
  • What is your investment philosophy?
  • If a client asks to make a change you think is unwise, do you push back?
  • How do you educate clients?
  • Do individual employees have both sales and service responsibilities? How do you disclose and limit conflicts of interest?
  • When have you failed in the past? What did you learn?
  • How do you help clients avoid common judgement errors—and how do you try to avoid them?

This list isn’t exhaustive, but it should help start an honest conversation about what you need from an adviser, and whether whomever you’re vetting is up to the task. Reviewing visible costs to ensure they’re reasonable and clear is relevant, too—but don’t fixate on marginal differences in what you’re paying. Instead, look at what you’re paying for—committed service and shared values are key and can dramatically affect the odds of reaching your investment goals.

Goals, Advisers and You

Ultimately, your goals are what matter most: Later in life, how your finances compare to your needs will dwarf any other measure of investing success. Chosen wisely, an adviser can help you achieve your goals, particularly by reducing the toll of hidden costs on your portfolio. You want someone who can help you keep a cool head when it seems markets or the media are losing theirs; someone who tells you what you need to hear, not what you want to hear; someone who helps you identify and correct destructive decision-making tendencies before they exact opportunity costs you can’t recoup. An adviser with these qualities can be worth, very literally, a fortune.

More On Retirement

What’s Retirement Advice Really Worth? Part 1

By Fisher Investments Editorial Staff

Retirement Planning? Volatility Isn’t Your Enemy

By Fisher Investments Editorial Staff

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