How does a financial planner/advisor make and save you money?Last year, Vanguard released a study showing that financial advisors can add about 3% in net returns annually. I have a great recent example of a client who is now going to save about $3,000 a year.
The client inherited a couple of annuity contracts from her parents. After digging deep to uncover all of the fees I tabulated their annual costs to be over $6,000 per year. Because I am an independent financial planner I can work with any number of companies that offer more appropriate investment products for my clients at lower costs. Although I do not place annuities in high regard it made the most sense for the client to exchange their existing contract for another annuity company that didn't charge a commission. By doing a 1035 exchange to a low-cost, flat fee annuity company the client will receive more service, be more diversified, use low-cost index funds with better historical performance and have their fees cut in half.
Asset location is another overlooked area to help save in taxes and increase returns. I have done many reviews for prospects where the other company had their money in all the wrong places. Investments that pay out a lot in interest, capital gains, and dividends were in taxable accounts. But stock funds that were tax efficient were in IRAs. A better option would have been to own income investments in the IRA to protect it from being taxed at the highest income tax rate. It is important to combine all your assets, determine an appropriate asset allocation, and then place the pieces in the right account for the best tax treatment. Depending on your tax bracket, Vanguard figures the value added from an advisor providing proper Asset Location can be up to 0.75%.
These are just two examples of how an independent Certified Financial Planner, like myself, can help clients build and protect their wealth. There are complex matters that need to be considered from many different angles. Having an expert that is working in your best interest, is trustworthy and has the right skills, knowledge, and tools to do the job gives you a much better opportunity of accomplishing your goals.