Does Investing in a Financial Plan Make Sense?

Does Investing in a Financial Plan Make Sense?


Does Investing in a Financial Plan Make Sense?
Tuesday, 16 July 2019

After all, you manage and plan for most of the other things in your life, why do you need to pay someone to make a plan for what comes next financially? It turns out that not investing in a financial plan could cost you in the long-run and not just because of the investment component of financial planning.

According to a Morningstar study[i] which tracked households for a fifteen-year period and then ranked their financial soundness and the quality of their financial decisions, those who got planning advice from a financial planner fared better than those who sought advice from the internet, friends or transactional advisors. In fact, those who sought planning advice from transactional advisors (brokers and bankers) had the least positive outcome in this study.

Morningstar concludes “…households working with a financial planner made the best overall financial decisions. Meanwhile, those households working with a transactional advisor made the worst financial decisions of the group.”[ii]

One of the key findings in the same study indicated that only about 50% of households made choices about portfolio risk, credit card debt, and emergency savings that resulted in positive outcomes over the duration of the research period.[iii] What this suggests from a planning perspective is that access to ongoing financial planning advice could benefit people as their circumstances change over time.

A financial plan is dynamic, and a one-time assessment may not be able to account for unforeseen circumstances as your financial situation may change. Additionally, advice from a professional financial planner can help keep you from making investment decisions that are overly emotional or to overlook key areas of tax and insurance planning that could help you protect your assets.

Another study that was summarized in February of 2019 by Erik Conley in advisor perspectives[iv] identified that those who sought out financial planning advice wound up with a 200-300% higher balance in IRA or 401(k) accounts at retirement than those who did not. So why such a disparity between those who sought trustworthy advice and those who did not?

Often times investors who do not incorporate comprehensive planning into their retirement savings approach make the same mistakes. Here are a few:
  1. They do not balance their portfolios often enough and properly allocate their assets. This results in a lack of diversification and often, higher costs of investing or losses.
  2. They react to market volatility in an emotional rather than pragmatic manner.
  3. They pay too little attention to their investments which results in missed opportunities and the risk for unsuccessful investments dragging down the portfolio.
  4. They “brand buy”; investing in a stock because of its previously strong performance thus paying a premium on a fad.

I often consider the analogy of doing your own plumbing, fixing your own car or rewiring your own house. Nine times out of ten you wouldn’t try nor would you be equipped with the skills to know where to start. Sure, you can change your tire, but can you change your oil? Sure, you can unclog the drain, but can you install a new toilet? Sure, you can reset a blown fuse, but can you replace it? You get the point.

Now consider this and apply it to your entire retirement future, which is arguably far more important. Why would you try to go it alone?

Getting your car repaired and maintained isn’t the same as getting ongoing financial planning and investment input but it’s clear that most people can’t repair their cars fully themselves and expert advice is needed to keep your car running well over longer periods of time. I would say the same applies to financial planning and investment input – some advice is better than no advice but investing in detailed financial planning advice (not just buying things from brokers and other “transactional advisors”) produces the best long-term outcome. 

[i] Morningstar Magazine Spring 2019 pages 31-34. The Morningstar survey tracked these areas over a 15-year period to gauge how well households did regarding portfolio risk, savings habits, life insurance, credit card management, and emergency savings. These 6 areas were chosen using the Survey of Consumer Finances (2001-2016) in order to clearly capture the different outcomes of household “financial soundness.”

[ii] Ibid

[iii] Ibid


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About the Author

Carroll W. “Bill” Hayes

Carroll W. “Bill” Hayes

Carroll W. “Bill” Hayes, MBA, CFP® Mr. Hayes started his financial career at Merrill Lynch in 1989. In 1992, Bill left Merrill Lynch for Fidelity Investments. During his career at Fidelity Investments he held roles in various divisions of Fidelity. Those roles included positions in the Trust, 401(k), Brokerage, and Money Management divisions. Bill held management positions at Fidelity and in 2001 led a Private Access team based in Boston. In the Private Access role his responsibilities included managing a book of business in excess of $3 Billion and a client base that was international in scope. 

In 2008 Bill established Charles Carroll Financial Partners. The firm is an Independent FeeOnly Financial Planning and Investment Management firm. Charles Carroll Financial Partners embraces its fiduciary responsibility to its clients. 

Bill is a graduate of Marquette University, and holds an MBA from the Sawyer School of Management. Bill holds the designation, CERTIFIED FINANCIAL PLANNER, and currently presides as a Commissioner on the Disciplinary and Ethics Commission of the Certified Financial Planner Board of Standards. Bill resides in Massachusetts with his wife Christine and travels up and down the East Coast meeting with clients of the firm.

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