Provided By Andy Parker, CFA, CFP®

Have you ever speculated about how much better off your portfolio would be under the careful stewardship of a financial advisor? It’s difficult to quantify, but a recent study by the world’s largest mutual fund company attempted to put a numerical value on expert financial advice. What they found is that you can potentially add up to 3% in net returns over time when working with an advisor that adheres closely to best practices.

Financial Planning for Physicians

While there are many different philosophies and schools of thought when it comes to portfolio management, certain methods are universally recognized as the foundation of a sound investment strategy. For example, diversification is an effective way of spreading your risk across a wide range of asset classes such as local and global bonds, domestic and developed market equities and emerging markets. However, these standard practices can only take a portfolio so far. Strategic investors differentiate themselves by following these seven wealth management principals:

  • Maintaining a long-term, disciplined approach: Investing is a marathon, not a sprint. Advisors can help their clients see the big picture by essentially coaching them to evaluate their portfolio in a long-term context instead of seeking instant gratification. Investing is an inherently emotional experience, so advisors have to maintain a disciplined approach that avoids the temptation of chasing returns.
  • Applying an Asset Location Strategy: The coordination of assets between taxable and tax-advantaged accounts can add value to your portfolio every year that builds up quickly. A properly structured portfolio will hold broad-market equity investments in taxable accounts while holding taxable bonds within tax-advantaged accounts. Doing this generates higher and more certain returns by spreading the yield between taxable and municipal bonds.
  • Asset Allocation: Most firms request that their clients fill out an investment policy statement that outlines the financial objectives of the portfolio. Having this blueprint in place provides a solid foundation for the advisor/client relationship. Not only does it allow them to adopt an investment philosophy and embrace it with confidence, but it also makes enduring the inevitable ups and downs of the market a little more tolerable.
  • Employing Cost-Effective Investments: Advisors constantly seek ways to control costs so they can efficiently deliver higher-than-expected returns. Every dollar spent on management fees, trading costs and taxes is a dollar less for your potential net return. By paying less you are essentially keeping more, regardless of how the market is performing in general.
  • Maintaining Proper Allocation Through Rebalancing: Risk tolerance is different for every investor. It’s up to the advisor to reconcile the risk/return characteristics of a portfolio with the client’s appetite for taking risks. The objective of a properly implemented rebalancing strategy is to minimize risk, rather than maximizing return.
  • Implementing a Spending Strategy: When the time comes to divest your portfolio, it’s important to consider this income in the context of your estate so that tax liabilities are minimized. The acceleration of income taxes and the resulting loss of tax-deferred growth can negatively affect a portfolio. An informed withdrawal order strategy will minimize the total taxes paid when a client reaches retirement which ultimately increases the wealth and longevity of their portfolio.
  • Investing Income Vs. Total Returns: Ideally, an investor could live off the returns generated from their holdings, but that often sacrifices the tax efficiency of the portfolio in the process. Ultimately, this increases the portfolio’s risk by becoming too concentrated in certain sectors which could potentially reduce the lifespan of the portfolio. For retirees to avoid the risk of falling short of their long-term financial goals, experts advocate an approach that considers both income and capital appreciation.

Active fund managers haven’t been able to consistently outperform benchmarks despite having a wealth of experience and resources at their disposal. The value of every advisor varies based on each client’s unique circumstances and the way the assets are actually managed. Ideally, you want a responsive advisor that you can trust with your financial future.

Transparency is critical, but you also want to make sure that you’re receiving truly independent advice. This means avoiding the recommendations of someone who is receiving a financial incentive from the provider of the product they are promoting. You don’t want to contract with advisors that are sales representatives for a particular company. The ideal advisor is independent and committed to a fiduciary relationship with their clients.

A fiduciary relationship is defined as “one founded on trust or confidence reposed by one person in the integrity and fidelity of another.” Although this standard is not required by law, an advisor pledging to make recommendations solely with the client’s best interests in mind will be able to manage your portfolio as objectively as possible. This standard of conduct includes controlling excess costs such as transaction fees, taxes and efficiency in implementation.

Markets are uncertain and cyclical, but a disciplined approach to investing will yield better results over the long run. An advisor that will work tirelessly on your behalf day-in and day-out to provide the highest level of service possible will allow you to have peace of mind and confidence that the foundation for a secure financial future is in place.

The projections or other information included in the linked report prepared by Vanguard regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results. Although we believe the information contained in the linked report to be accurate, we can’t guarantee its accuracy.

Larson Financial Group, LLC, Larson Financial Securities, LLC and their representatives do not provide legal or tax advice or services. Please consult the appropriate professional regarding your legal or tax planning needs.