Why Some People Never Seek Financial Advice

And the value others obtain when getting it

Senior couple need to seek financial advice

A few months ago, I was chatting with some of my firm’s planners about the things we do for our clients — advice and services we know they appreciate and that we know others would enjoy as well. That led us to wonder: Why don’t more people ask us for help with their financial planning and investment management needs?

Of course, we each had assumptions and theories. But I wanted to be sure, so I decided to hire a research firm to find out. It assembled some focus groups across the country, totaling about 200 people. The participants didn’t have an advisor but wanted one; some had heard of me and Edelman Financial Services and some hadn’t.

The researchers presented several statements about our firm and asked the groups whether they found the statements appealing. The statements included the following:

  • Advisors at Edelman Financial will evaluate your total financial situation comprehensively — not just your investments.
  • We provide advice to folks like you.
  • At EFS, you’ll have access to the same quality advice that rich people typically get. You don’t need to be rich to be treated as if you’re rich.
  • Our advisors will explain things to you in plain English.
  • We have experience developing tens of thousands of financial plans for people just like you.
  • EFS advisors give you advice that makes sense to you and for you.
  • All of our advisors follow a consistent philosophy and methodology, working as a team instead of as individuals going in different directions.
  • We are fee-based, so we won’t try to sell you products to earn commissions.
  • We give our clients free copies of Ric’s books.

When the researchers asked, “Does that appeal to you?” the answer every time was in the affirmative — yes, they liked that very much.

Then came the key question:

Having heard all of this, do these facts make you feel more inclined or less inclined to want to become a client of EFS?

The responses to that question surprised me. People said these facts did not make them feel more inclined to become a client. So the researchers asked, “Why not?”

The most common reply floored me. It was:

Because I don’t believe it.

I gotta tell you, I’m feeling a little dejected. Oh, not about myself or the firm, but over the fact that so many people who need and want a financial advisor refuse to seek one because they don’t believe in the promises.

Their apprehension and suspicion are understandable. Everyone knows the stories of Wall Street abuses — from the Bernie Madoff scandal to “ordinary” deception by pretty much every sector of the financial-services industry. And yet I know — having been in this field for 26 years — that the great majority of financial advisors are honest, ethical, hard-working and talented individuals who do right by their clients. I’m referring not just to those in our firm, but to advisors generally.

So, yes, I’m a little dejected. My colleagues and I are here, ready and willing to provide exactly what you want to receive, yet your skepticism — paranoia, even — may be preventing you from doing what you need to do. I fear that the result will be that you won’t achieve all the financial goals you have set for yourself and your family.

Well, this story doesn’t end with those research results.

I lamented about this on my radio show, and over the next few days I received calls and emails from people around the country. They believe there’s a different reason that more consumers aren’t hiring financial advisors.

The No. 1 reason why people won’t hire an advisor, they said, is that people are afraid of the fee an advisor will charge.

This never would have occurred to me, for the simple reason that if the fee weren’t worthwhile, nobody would pay it. Yet millions do. I know that our 25,000 clients believe they get value for their money, and I’m sure it’s true of the clients of other fee-based advisors too.

Sure, you could avoid our fee by putting together a portfolio on your own. Discount brokers and the Internet make it easy to buy low-cost exchange-traded funds like the ones we provide our clients. But you know there’s a lot more to it than that.

Such as:

  • Knowing which investments to buy and in what combination — so your final portfolio consists of the right mix for your situation.
  • Knowing which type of account registration you should select. Individual or joint? And if joint — tenants in common, by the entirety or with rights of survivorship? Should the account be tax-sheltered, and if so, how? By using a plan at work or an IRA? And should that IRA be deductible, non-deductible, Roth, spousal or beneficiary? What about trust accounts? And when it comes time to generate income from those accounts, from which should you withdraw first for tax purposes?
  • Knowing when and how to rebalance your accounts, to preserve the asset allocation you so carefully constructed.
  • Knowing how much to save and figuring out ways you can save more, without sacrificing your lifestyle.
  • Knowing how to avoid panic selling and euphoric buying — decisions that can wipe out much of your life’s savings.
  • Knowing the type and amount of insurance you need (life, long-term care, umbrella liability and more) and how to avoid overpaying for it.
  • Knowing how to maximize your employee benefits at work. Pretty important, since noncash compensation comprises 40% of total comp for many employees.
  • Knowing how best to save for — and eventually pay for — your kids’ college education.
  • Knowing how much you can afford to pay for your home and the ideal way to handle your mortgage.
  • Knowing how to design your estate plan to protect yourself, both while you’re healthy and when you become unable to manage your own affairs, and to protect your family after you pass.
  • And finally, having the knowledge you need to make all the above decisions, and then taking the time to do them all — not just once, but on an ongoing basis. That’s because each of these financial decisions must be periodically re-evaluated: As you and your parents and children age; as you experience changes in health, occupation, income and marital status; as births and deaths occur; as relationships evolve; as tax laws get amended, and so forth. These events and more all require you to redo every one of the above bullet points.

These benefits probably strike you as highly valuable. So why don’t other consumers think likewise? We think we know why: Because we are financial planners/advisors, our fee doesn’t point specifically to these services. In fact, the fee does point specifically to only one thing: the value of the client’s account. This is because historically, the investment advisory field largely has based compensation solely on the size of a client’s account because, well, that’s the only thing advisors handled.

As a result, many people think that growth in account value is the only way to evaluate whether they are getting value for the fee. That’s unfortunate, but it’s hardly their fault. It’s the industry’s fault.

As financial planners/advisors vs. strictly investment advisors, my colleagues and I do ourselves a disservice because “investment performance” as shown on statements doesn’t reflect the benefits of all the other elements of our advice. And this disservice spills over to hurting consumers — because they (confusing us with investment advisors and not realizing all the value we as financial planners/advisors can provide) end up not hiring us, which means they fail to gain the value of all the benefits we can offer!

Here’s what I mean. Say you invest with us, the account grows or falls in value, and we debit our fee from the account. You might review the account’s change in value when trying to decide whether the fee is worthwhile. But what you might not be taking into consideration are things like the following hypothetical examples:

  • We notice that your IRA beneficiary is “my estate” rather than the names of your adult children, meaning that upon your death the proceeds would be fully taxed and your children would incur the cost and delays of probate. By fixing this problem, we save the children hundreds of thousands of dollars and a year or more of delays in getting their inheritances. But the account value on your statement doesn’t reflect this — nor do we charge a fee for it.
  • We discover that you’re entitled to spousal benefits under Social Security rules. The result: Your monthly income from Social Security doubles. But the account value on your statement doesn’t reflect this — nor do we charge a fee for it.
  • We show you that you’re at risk because your spouse doesn’t have life insurance. When he later passes, you receive $1 million tax-free from the insurance company. But the account value on your statement doesn’t reflect this — nor do we charge a fee for it.
  • We notice on your tax return that you’ve failed to deduct the interest on your mortgage payment, because you never sent your tax preparer the Form 1098 you received from your lender. We contact your preparer, he files an amended return for you, and you get a refund of more than $10,000. But the account value on your statement doesn’t reflect this — nor do we charge a fee for it.
  • You’re unhappy that you can’t obtain long-term care insurance because of a health condition, so we ask if you are a member of any professional, civic or religious organizations. You discover that you’re able to obtain coverage through your alma mater. Now, should you incur LTC costs, your policy will pay hundreds of thousands of dollars on your behalf. But the account value on your statement doesn’t reflect this — nor do we charge a fee for it.
  • We help you refinance your 6% mortgage, saving you $4,000 a year.But the account value on your statement doesn’t reflect this — nor do we charge a fee for it.
  • We stop you from spending $30,000 on a timeshare, which would have cost you an additional $12,000annually in fees, and you later agreed that you never would have used it. But the account value on your statement doesn’t reflect this — nor do we charge a fee for it.
  • When your spouse dies, we help her deal with the financial matters survivors are faced with — such as handling Social Security, pensions, retirement plan assets and account re-registrations. Easing the stress during this most difficult of times is not quantified on your statement — nor do we charge a fee for it.
  • We show you how to increase the amount of money you’re saving in your retirement plan at work, and how to improve the investment choices in your account there. As a result, you reach retirement with a few hundred thousand dollars more than you otherwise would have. But the account value on your statement doesn’t reflect this — nor do we charge a fee for it.
  • We recommend that you buy an umbrella insurance policy for a few hundred dollars. Later, your dog bites someone and the insurance pays $20,000 to settle the lawsuit. But the account value on your statement doesn’t reflect this — nor do we charge a fee for it.
  • We stop you from selling during a severe drop in the stock market, and today your account value is higher than ever. OK, that one does show up on your account statement.

How much is our advice worth? Hard to say in each case, but it’s fair to note that the value extends far beyond the account statement. In fact, it’s easy to see how just one piece of advice can be worth years of management fees!

If you are under the assumption that you can’t afford an advisor, we would argue that you can’t afford not to have one.

Originally published in Inside Personal Finance October 2014

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