Prospective clients will often ask, “How do I know working with you will be worth the money?” This is a really great question, and is one that financial planners have historically struggled to answer. How do you quantify the benefits of being able to sleep better at night, knowing you have a financial plan? Or the extra time you have to spend with your kids because you are spending less time obsessing over your investment portfolio?
Morningstar did a research study that sought to quantify the benefits of having a financial plan. Their focus was strictly on the benefits to retirees. Their results? Retirees on average experience a 1.8% benefit from working with a financial planner. This benefit is equivalent to 29% higher retirement income. This benefit came from strategies such as having a proper asset allocation, tax optimization of their investments, and using an ideal withdrawal strategy.
In my opinion, while the benefit to retirees is substantial, it is much less than the benefit younger clients would receive. The research suggests that a financial planner can give retirees a 1.8% benefit with just their current assets. Imagine if the financial planner had helped the client save more money, had recommended a better asset allocation earlier in their career, and used tax saving strategies over time?
While the research study is far from perfect, it is the first step towards having substantial research showing the benefits (and possible drawbacks) of having a financial plan. We have been able to quantify some benefits, such as reduced investment expenses and tax savings, but haven’t been able to show the benefits from reducing the emotions involved in investing, having proper insurance coverage, having an estate plan, or improving the relationship couples have when communicating about money.
Financial planners have been trying to separate their value from just increased investment returns. For many financial planners, they don’t believe you can ever beat the market so the benefit is in keeping the investor from making poor investment decisions… while difficult to quantify, evidence suggests the benefit is substantial, as investors underperform the market by 5% on average. This means the value must be found in the financial planning process, and isn’t easily quantifiable.
This all leads to the most important question, What do prospective clients want/need to see as the benefits of financial planning? What “evidence” would convince you that it’s worth the money? I would love to hear your answers and feedback!