Is it better to own a boat than furniture? How much value does an advisor add?
July 24, 2014

Dear Clients & Friends,

Tax season is over and hopefully you can make some time for your personal finances.   It makes good sense to get a midyear update on your investments by making sure that you are properly diversified and your financial plan is in order.  

Below, I share with you the reality of buying furniture, and the eye opening research by Vanguard and Morningstar on how much an advisor adds value to a client’s portfolio over someone that chooses to do it all on their own.

Owning a Boat Is Even Better than Owning Furniture
 
     VS.    
 
I recently took the other side of the argument about people who buy houses and then cannot afford to furnish them in my blog in Today’s Chicago Woman, “Buying a Dream Home vs Buying Furniture.”  I explained the better choice of putting money into real estate, which appreciates in value (most of the time) versus furniture (never). I argued that buying the house now that you want to own in 5-10 years means lower transaction fees compared with trading up from one house to another (assuming you don’t put yourself into a risky debt situation).

Since that writing, I have had personal experience that further drives home the poor value of buying furniture. It makes me think of the joke about owning a boat. They say when you own a boat, the two happiest times are the day you buy the boat and the day you sell the boat. I am now in the camp who believes owning a boat is even better than owning furniture. When you buy furniture, the day you buy your furniture you might be happy. Worse than owning a boat, the day you go to sell your furniture will not be a happy, because you find there is little or no residual value in those pieces. 
I recently chose to redecorate and sell off my 10-year-old furniture, well cared for, still kind of in style, and manufactured by fine, well known furniture makers. I found out how worthless my furniture really is. Perhaps I should have read the recent Wall Street Journal article on “The True Value of Priceless Antiques.” Passed down through the generations, high-end furniture pieces are fetching pennies on the dollar.

The author says when selling your fine furniture plan on getting around 20 cents on the dollar. “And if you have ‘brown furniture,’ any article whose defining characteristic is ‘brown’ wood, continues to tank in value.”

As I work my way through my options, such as selling these pieces on eBay, craigslist, local auction houses and resale shops, I wonder if this is all worth my time. It is certainly easier to donate it all at once, take the deduction and move on. 

How Does Your Advisor Help You…Counting the Ways in $$

Quantifying how an advisor adds value has always been easier to describe than to define.  Vanguard recently released a study that stated that an advisor adds on average 3% to a person’s overall return.  Morningstar came out with their study in 2012 and calculated that number at an extra 1.82% in additional returns each year.
                      
I will attempt to describe the value added with the understanding that since each client is unique, benefits will vary among individuals and their situations.

Many individuals and understandably,  don’t want to take on the hours of trying to do it all themselves; the investment climate has gotten so complicated and firms selling investment products have become so aggressive,  it is hard to know what to believe; many of “products” are generally embedded with high fees for the selling firm and the broker.  Even though the yield looks attractive, once you look under the hood, you realize the yield has little to do with what you ultimately get. 

Building a properly diversified portfolio to match up with your objectives takes numerous inputs to attempt to quantify the risk and potential return. Ongoing oversight into each of the investments needs to be maintained and portfolio adjusted for opportunities that can be exploited.  Many have decided that they prefer to spend their time doing something else, anything else.

The most significant opportunities to provide added value to a client often appear randomly and cannot be anticipated; For instance, when the market is under extreme duress and an investor wants to abandon a well thought out investment allocation, we can have an opportunity to add tens of percentage points of value by talking and assuring our clients to stay the course and counseling them on the merits of their investment strategy.  The client’s performance from staying invested according to our predetermined plan vs. abandoning it doesn’t show up on a statement at the end of the year, but the value and the impact is very real.

Much can be said about rebalancing a client portfolio and paring back on the winning positions in a euphoric market. There is much temptation to reach out and take on more market risk, but this is exactly the time to have a healthy blend of asset classes.

Left out of the Vanguard and Morningstar analysis are items of true financial value but perhaps too hard to quantify.  These include:
•Helping clients get on course for proper saving and sending so that they will have enough funds for retirement.
•Objective review of insurance where we recommend only what you need, not what you were once sold.
•Coordination with accountant to minimize tax liability either through tax sensitive management and or tax deferred retirement plans
•College tax advantaged planning opportunities.
•Social security planning
•Charitable giving strategies that favor your tax and estate planning.

Investment performance is another factor of measurement. ”.  Interestingly a study by Dalbar shows that the average investor has had a 2.3% return on their portfolio over a twenty year period ending 2012.  If you look at this chart, you will see that if you factor in inflation, then the individual only made a real return of .2%!

Vanguard’s recent study where they outline the 3% in added value that an advisor can add in net returns is below.

Strategy                                                                                                        Benefits
 

Proper asset allocation with focus on risk controls

                                          >0

Cost effective management- institutional funds vs. retail funds and ETF’s

                                         .45%

Rebalancing

                                        .35%

Investment coaching – staying the course in volatile markets

                                       1.50%

Asset location- management of assets to minimize tax impact

                                       0 to .75%

Withdrawal of funds strategy in retirement

                                       0 to .70%

Moving toward a total return vs income investing approach

                                        >0

Potential Value Added

                                      “About 3%”

Source: Vanguard. Row 1 and 2, although significant are too unique for each investor to quantify.  We did not sum the values because there can be interactions between the strategies. 

Please let us know if you would like to talk further about how we may be of help to you and your family.

 

My Best,





Read my blog; Leasing vs. Buying a Car in Today's Chicago Woman Magazine




 

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Susan Templeton

July 2014