Video: Are Financial Advisors Worth Their Fee?

Do Advisors Add Value Beyond Their Fee?

Marcus Schafer (00:05)

Are advisors worth their fee? This is episode 13 where we are asking and answering the tough questions when it comes to personal finance so that individuals and institutions can go out and make decisions that matter to who they care about most. This is me, Marcus Schafer, Greenspring Advisors an advisor  and director here and Pat Collins, our CEO .

Pat, we’re going to talk about that exact question, are advisors worth their fee? I think there’s kind of four major sections we’re going to hit on. The first is a little counterintuitive. It’s when you ask investors why they have advisors, it is typically not return-based. There are some qualitative reasons that people are selecting advisors. So we’re going to talk about that research.

We are going to talk about the quantitative aspects. Are advisors worth their fee? Can an advisor add more in terms of percents than their fee costs? Shout out to Russell for having the most egregious estimate there, I thought. 5 % value. We’re going to distinguish between different types of advice. So can you think about an hourly advisor versus commission versus somebody like us, fee only?

And then how does value change over time? Different things matter to different people at different points in their life. So we’ll kind of talk about how value might evolve over time. Sound good?

Patrick Collins (01:36)

Sounds great. Sounds great. I think this is one of the questions that comes up pretty regularly with, with prospective clients. Does it make sense for me to pay your fee? Am I going to get more value than I’m paying basically? And it’s a, it’s a, it’s a great question. I think it’s important to note that we don’t have, we’re not without bias in this. Obviously we are a fee only advisor. We’re going to talk about that and how that compares to other levels of advice. I also think.

When appropriate, we’ll talk about when maybe it doesn’t make sense for an advisor, or for a client to not hire an advisor or do it on their own, or maybe look at different types of advice. But I’m really looking forward to looking at the research behind it because I do think it’s interesting. And then maybe talking a little bit more about what we’ve seen over time and where we think a good advisor can add value and maybe where a bad advisor can maybe even detract from value. So I’m looking forward to the conversation.

Marcus Schafer (02:32)

Yeah, it’s, I mean, talk about talk about high stress or are we worth our own fee? But I think it’s really important for us to ask this question, because we are looking at, where do we make the most impact for investors? And then also, where would the fee not not make sense where you’re kind of your fee is going to create a bigger headwind than the than the value, I think maybe some other benefits potentially.

for this is also for any individual that has an advisor. Hopefully we could give some stories about here’s how you can maximize the value you’re getting out of an advisor. Here’s the things that you might not even know they can do. So we’ll talk about some examples of that. So anybody kind of listening or watching can say, man, hey, I didn’t know my advisor could help me do that. And then,

maybe they ask their advisor and if they can’t do it, that tells you you might have a different type of advisor than ⁓ you thought you had. So that’ll be kind of the purpose and the benefit. Here, let’s jump into kind of the first thing we outlined, which is I think a little counterintuitive. So we won’t spend too much time on this before we get to the percentages. But when you look at surveys of investors, and I think this is true for us anecdotally as well, and you’re asking them,

Investor Motivations for Hiring an Advisor^1,2 – only 7-12% of investors cite returns as the primary reason they are hiring an advisor

why do you select an advisor or why are you continuing to work with your advisor? Return-based rationales are one of the lowest. I’m looking at Morningstar. They say 12 % of people with an advisor continue to work with their advisor because of fees. Dimensional Fund Advisors they have a study of individual investors working with advisors and that’s 7 % related to investment performance.

So it’s a much smaller component. So Pat, maybe it’d be helpful for you to jump in and talk about if it’s only a small component investment returns, what is kind of the driving factor that people are looking from their advisor for.

Patrick Collins (04:39)

It’s really shocking because I think most people would look at this and say, it seems strange. Wouldn’t you hire an advisor to earn you higher returns? And while I think that there is some truth to that and good advisors do this, when you do ask clients, why are you working with your advisor? It is kind of an interesting thing to see what they say. And they’re not really that financially kind

quantitatively measured type things. So if you look at the studies, the number one reason that investors say they work with their advisor is discomfort handling finances, at least through the Morningstar study. If you look at Dimensional’s study, it is this idea of they understand my goals and needs. And so I kind of put them in the same bucket, which is this idea of having a partner, having peace of mind.

that somebody is out there looking after your overall finances and making sure that you’re staying on track. And if there’s things that need to, that need to happen, that they are getting in touch with you proactively to make sure you’re bettering or improving your financial situation. There’s just a lot of people out there that don’t particularly love handling their finances. And the idea that somebody out there can take this off their plate really matters. It’s, while it’s not in the study, I do think it’s interesting when we’ve

just anecdotally talked to clients about this, we hear the same things. We also hear this idea that I really trust you. And I think that kind of goes hand in hand with discomfort, discomfort handling finances. If you had discomfort handling your finances and you wanted to really partner with someone to help you manage it so you didn’t have to deal with it on a day-to-day basis, so you could spend time with your family and your friends and focus on your career.

Well, you’re going to want to partner with someone that you really trust because the last thing you want to do is hand over. I don’t want to say hand over, but partner with someone that you think you’re getting bad advice from. So I think, I think while that’s not probably was not a response, I do think that was interesting. The second area in the Morningstar study was quality of advice. That was the number two reason people work with their advisor. So clearly

They want to, a lot of people want to hand over some of the day-to-day stuff. They just don’t want to deal with kind of making mistakes potentially. But at the same time, they want to make sure they partner with someone who knows what they’re doing that stays on top of this stuff that understands tax and investments and estates so that when they do have questions, they’re getting really, really good, thoughtful advice. And I think that’s important, those two areas. So.

I’m not surprised by it. Once you start working with clients and understand their needs, but at first glance you would think it should just be returns. Well, I just want to hire someone that’s going to earn a higher return than I would be able to do on myself or by myself. this kind of interesting, but not surprising.

Marcus Schafer (07:37)

Yeah, well, ⁓ you know, there’s so much around investments. Sometimes people come to us, they don’t even want to give up the investment. That’s like the reluctant piece of it. But I think when you talk to most individuals out there, they’re kind of, it’s this old school idea of an advisor, which is like a stockbroker from the 90s. And I just think the world has moved so much beyond that and the tools available to advise.

have changed beyond that, where most people can, hey, you can go out there and build a super diversified portfolio that’s low cost, that’s tax efficient. There’s tons of online information about that. And as that kind of becomes easier to do for individuals, what are some other components of that advice? Really starts to matter.

Patrick Collins (08:24)

Well,

yeah. And one of the things that kind of struck me as you’re speaking there that we tend to do, and I think most advisors might do in the early stages of a relationship before someone even agrees to become a client is we typically will gather a bunch of information from that prospective client, like their tax return and their investment statements. And we’ll do a full analysis to say, here’s what our thoughts and observations and recommendations are after looking at this, at least at a very high level.

And I think that get quickly helps clients to understand, wow, this is pretty comprehensive. I hadn’t even been thinking about these items and you’re pointing them out. And I guess to some extent that goes to quality of advice, maybe even discomfort handling finances. just kind of like, you know, it’s one of those things where people might buy things over time, open accounts, not really think about them. And then over time,

It kind of is like, that’s some account that I have over there. I don’t really look at it anymore. It’s, know, hopefully it’s doing okay. I don’t really coordinate it. And so, so anyways, long story short there, I do think once people kind of experience it, which is interesting because these studies are people that already have advisors. Once they experience it, they realize, wow, this is actually kind of nice. And I don’t have to worry about it as much anymore. It does give me peace of mind.

Marcus Schafer (09:34)

Yeah.

⁓ You also have to think there’s a reason why individuals are coming to us and didn’t pursue this as a full-time career because they might not be excited to read tax code like you are. ⁓ Let’s maybe just start jumping into how do we think about quantifying a lot of this because a lot of what we’re talking about, peace of mind, is pretty tough to quantify. ⁓

Quantifying Advisor Value^3,4 – the challenges of estimating value that is dependent on actions someone would take otherwise and incorporating nonfinancial factors

What many people have tried to do is figure out what are some ways where we can start to quantify the value. Word of caution, a lot of these studies tend to be backed by the industry, which has some bias in there. So they’re trying to estimate, hey, what’s the value of advice? Well, we also sell advice or we sell to advisors. So there’s going to be some inherent bias.

I think it’s helpful to understand what are these different kind of components of advice and let’s do our best to quantify it. But the challenge of quantifying advice is it really matters where you’re coming from and what the optimal answer is. And that’s a very personal decision between two people, right? So it’s kind of some people, hey, I’m already in low cost diversified portfolios.

How much help can you give me in product selection? That’s a less valuable skill. Other people, it’s, hey, I’m coming from active mutual funds that I don’t even know how I selected them. Somebody called me and I bought them. What’s the estimate of value is a little bit bigger there. it’s very personable and it kind of ranges, but we’ll kind of do our best to try and walk through.

some of this and talk about different components. We’ll probably start with the investment component, because that’s, I think, what people are probably most interested in.

Patrick Collins (11:40)

Yep. I think ⁓ to your point, you can count me as skeptical on the claims that Vanguard and Russell have made as to the value of an advisor to try to, I appreciate the fact that they’re trying to quantify it, but I think it’s such a broad range for the reasons that you mentioned that it’s hard to do that. When I have this conversation with a prospective client, I usually tell them it’s really difficult. We can show you quantifiably.

some areas that we can help you in. But at the end of the day, there’s that plus some of these other factors that are non-financial that people say, this is why I keep working with my advisor. They have to factor into the equation. I do think it’s worth looking at, because as we looked at each of these areas, we realized, yes, we do help clients in these areas. here’s, may, it’s probably a wide range of how much value we add in each area.

But think it’s worth going through because it’s a good advisor should be touching on each one of these these areas.

Asset Allocation and Rebalancing^5,6,7 – are you taking the right type of risk (diversified) or enough risk?

Marcus Schafer (12:39)

Yeah, yeah. First area is asset allocation and rebalancing. Vanguard separated these. I kind of lumped them together because I think they’re the same. And the point is 0 to 14 basis points, 0.14 % per year is kind of what they’re estimating. And that’s about helping an individual understand what asset allocation gets them closest to their goal.

And then how do you stay in to that asset allocation?

Patrick Collins (13:13)

Yeah, it’s an interesting figure because it feels like it actually could be even higher than this if you get someone that really has not thought through this conversation, or this decision that is really important. So I thought I jotted down a few things that we tend to see that are problematic in these areas where I think a good advisor can help.

Probably the biggest one on asset allocation and rebalancing for that matter is this idea of concentration. So oftentimes prospective clients will come to us with a very concentrated portfolio, sometimes unknowingly concentrated. So meaning that they may own five mutual funds, but they’re all US mutual funds and they all overlap each other significantly. So that means every mutual fund owns Nvidia and every mutual fund owns Apple and so forth.

So I think that right off the bat, if you don’t really know what you own, especially if you own mutual funds and ETFs, sometimes you kind of have to pop the hood and figure out what’s under here. What do we own and do they all overlap with each other? And so sometimes that’s hard because unless you have software or some sort of analysis tool to do that, it may be a little bit more challenging to do.

Sometimes even managers inside those funds, you think I’m buying a mid cap fund, but it really is buying small cap stocks or whatnot. So you don’t know what that overlap might look like. We also see that with, know, and so in the areas we see concentration, obviously it could be just individual stocks. That’s easy. Somebody comes in to us and says, have 30 % of my money in Nvidia stock or Amazon. Okay. There’s a lot of risks there with their asset allocation.

But it can happen too in like sectors of the market or areas of the market. So we tend to see this recently. What we’ve seen is people that are really, really overweight in U S stocks because U S has done well. Not surprisingly over the last 10 years, you would expect it. People like kind of overweight. If they haven’t rebalanced their portfolio, then they’re going to be overweight U S. And even if they’ve just been very, maybe they’re very into their portfolio and they’re like, why would I want to buy international?

US has done so well, so they overweight US. So obviously this year we’ve seen, you know, we’re sitting here in June and it’s nearly a 20 % swing of international versus US, international doing better. We also see this in like styles as well, like growth and value. Growth stocks have done extremely well over last 10 and 15 years. So you see a lot of clients that are overweight and concentrated in that area.

Even though the data and the research tells us over long periods of time, value stocks actually outperform growth. We tend to see that. And then one of the other areas that I just see in concentration is cash. There’s just, sometimes this is one of those things where somebody who’s not that into their finances, but maybe they’re a good saver. Maybe they’ve, you know, had some, some liquidity event or something like that. You’ll tend to see a lot of money sitting around in cash.

Sometimes it’s even sitting in cash, it’s not earning much interest, which is like the worst scenario. But I think that’s something obviously a good advisor can help you with is what’s the appropriate level of cash? And then let’s get the rest of that money invested at a much higher expected return. But the other thing cash can do is just sometimes people just don’t wanna take risk. so…

The idea of cash is not going to lose money. I can go to the bank. I can take it out if I need to. It’s very liquid, all understandable. So I think a good advisor can help educate you on the dangers of just holding too much cash, losing to inflation every year. It doesn’t feel like it’s a big deal, but a good advisor is going to talk to you about how that can really erode wealth over time.

Marcus Schafer (17:03)

Yeah, it’s a, am I taking the right types of risks, compensated risks? And then as an advisor, can you help me take a little more risk maybe than I’m comfortable with or a little bit less risk? So like you said, am I taking compensated risks, individual stocks, very wide range of outcomes. And then when you look at the average stock, pretty disappointing average returns. The more diversified you get,

narrower range of outcomes, but you’re kind of limiting that downside. So can you take the right type of risks? And then as an advisor, can you help me take a risk I might not be comfortable making on my own? Cash is great example. I had a professor at school. He wrote a paper called Money Doctors. And his theory is that

advisors and institutions, one of the major values they provide is exactly that, where they’re helping you increase your risk tolerance through trust. And it’s not, you know, your undergrad advisor in 101. This is somebody that ran a hundred billion dollar investment management firm. So he knows what he’s talking about. And that cash example is so great because it’s, hey, you could go from zero to 4 % almost risk-free.

Right, that’s incredible value add. So just thinking about those two components. And then I think the other side is level setting your expectations beyond that.

It hasn’t been shown that advisors can go out there and beat the market. You can go back to episode two that we did, three sources of alpha, pretty tough to find somebody who can systematically and continuously outperform the market in a way that’s not them just taking a little more risk. You could go back to episode five, the elite institutions episode where we’re looking at, here’s what people say are the smartest and the brightest.

And it turns out that they’re performing almost exactly like a 60-40 or 70-30 passive structure. So understanding, hey, here’s some help that I could get, but not over-expecting ⁓ results, I think, is super important as well.

Patrick Collins (19:19)

Yeah, one, a couple last things on this topic of asset allocation and rebalancing, because I think it’s, it’s important. A good advisor, one of the, one of the values that they’re going to bring is marrying your asset allocation with your financial plan. ⁓ And that’s a really important aspect because most good advisors will start with a plan. I mean, you know, that’s kind of a standard in probably lots of industries. Hey, we want to have a framework here before we start just investing.

Marcus Schafer (19:33)

Mm-hmm.

Patrick Collins (19:46)

We want to know what we’re investing for and what do we, and part of that is what do we need to earn on our money for us to be able to accomplish our goals in the next five, 10, 15, 20 years. And so if we decide on a rate of return we need, we can typically back that into an asset allocation because an asset allocation is going to be a mix of stocks and bonds. And we can look at what we think their expected returns are going to be. And then we can design it that way.

And, and so one of the things in the conversations we have a lot with clients is are you taking too much or too little risk? And do you have the wrong asset allocation? Because if you do, then you may be at risk of not accomplishing your goals or at least not doing it in an optimal way. So that’s such that you might have to work longer, and, you might put yourself in different, or you might have to spend less or things like that. Then there may be things you don’t want to do. So I think that’s really important. one of the things that we tend to do each year.

is we are looking at with our clients, what is the expected return that we have in your financial plan? And how is that comparing to your actual return that you’re realizing in your portfolio? And I can tell you one of the questions or one of the conversations we have a lot of times around asset allocation with clients is once they have saved enough and they have enough, then it comes down to probably preference to a degree, because if you have enough money,

a lot of times you now have the decision point of, do I want to get more risky? Because you could make the argument that I now have enough excess wealth to take more risk. I can afford to take risk. So yeah, let’s shoot for a higher return because even if we don’t get it and we have a lousy result, I still can do all the things I want to do. I’m not going to change my lifestyle. That’s one approach. The other approach is complete opposite, which is I have more than enough. Why am I?

taking more risk, let’s take the appropriate amount of risk. Yes, I understand that I’m not gonna earn a whole lot of returns, but I can still all do all the things I wanna do and I can sleep really well at night because my portfolio is going to be very low from a volatility standpoint because I’m taking less risk. So a lot of times some of these things are not like, this is the exact right answer that you have to do. It comes down to preferences.

and a good advisor will talk through those with you and decide what is most important to you. Is it, I want to maximize wealth and I’m willing to trade volatility and maybe some really uneasy periods when the market goes through some tough stretches. I’m good with that. Or do I rather, would I rather say I want predictability in my returns, much more kind of low volatility.

but I understand the trade off there is gonna be less ending wealth, but still being able to do all the things I wanna do. anyways, this is all kind of asset allocation decisions. Probably one of the more important decisions that you make with your advisor is figuring out that mix, but there’s a lot that goes into it if the advisor is doing it correctly.

Marcus Schafer (22:45)

Yeah, and ⁓ you made a statement there at end. One of the most important decisions, you have to continuously revisit that decision. And that process is fraught with errors too, right? Because you don’t want to overreact as, I’ll just generally say everybody in investing overreacts to short-term news, right? So, hey, we just came out of big tariff volatility.

somebody might come to you after that and say, hey, I think I want to revisit my asset allocation. Is this something you’ve been thinking about for three years or is this really driven by the recency? There is some things we can learn, but we also don’t want to overreact. I just think balancing that understanding, you will be probably changing your asset allocation over time. And how do you thoughtfully think about that to avoid as much as possible overreacting to some

to some short-term volatility or oscillating, or you actually end up looking like an active manager between taking more risk and less risk. ⁓

Patrick Collins (23:51)

One last

thing on that point, not to belabor the asset allocation and rebalancing decision, because it doesn’t feel like based on the studies of 14 basis points, it doesn’t feel like that adds a whole lot of value. Actually, this is probably an area of study that I might challenge a little bit, especially if somebody gets it wrong. But one of the things that we found, and this might sound simple, but it is an issue with a lot of clients is,

just not even knowing what their asset allocation is at any given point, because most of us have accounts all over the place. We have our 401k workplace account. We have maybe some old 401ks from a prior job. Our spouse has accounts at other places. We have brokerage accounts. We may have some other kind of stock options somewhere. So when you put it all together, nobody really knows at any point in time what their asset allocation is unless an advisor is doing a really good job.

aggregating that data. So one, think a good advisor should hopefully try to consolidate it to make it easier to manage the accounts where possible. But the other thing is, is if it’s not able to be done, obviously, if I still work at it, if I, when I’m working at Greenspring here, I have a 401k, I can’t just go move that to an IRA account because I’m still employed here. So figuring out a way to incorporate that is important. And obviously there’s technology now allow that allows us to do that.

But that doesn’t make it challenging if you don’t just don’t know what you own because it’s a scattered in so many different accounts.

Asset Allocation and Rebalancing^5,6,7 – are you taking the right type of risk (diversified) or enough risk?

Marcus Schafer (25:17)

Yeah, and let’s talk about product selection next, but then we’re gonna come back to one of the ideas, which is your accounts should probably not look the same. So that should be by design to make it difficult because different investments have different taxes and you can kind of tax optimize your portfolios. But before we jump into that, maybe just talk about product selection, kind of made this.

statement, which is like it’s really tough to be indexing. So I guess the question is like, does product selection even matter? Vanguard has here somewhere between zero and 30 basis points. The way they’re kind of calculating that is they’re looking at if you’re in higher cost solutions, one of the easiest things you could do to lower your overall fees is just to lower the fees of the of the products. ⁓

And I, course, given my background, will argue that you can’t just assume all passive vehicles are the exact same. Their expense ratios are going essentially to zero, which means selecting between them. Now I think people are really starting to wake up and revisit the different ⁓ other components that actually matter a lot when it comes to your return and different passive vehicles.

in different asset class, in the same asset class, performed differently, which I don’t think most people would expect.

Patrick Collins (26:49)

Yeah, this one is zero to 30 basis points is kind of what they estimate. I actually, again, I think it can be much wider depending on what you were in before versus what you might move to. But we see things here that are egregious, products that cost 2%, 3%, 4 % from an expense ratio that

don’t add that level of value. So a good advisor is going to try to make sure that you are paying the lowest fee possible for the value that you’re getting basically. And to your point, if that’s all you focus on though is fees, I think that can be a challenge too, because what we know now is that to your point, we can look at three different index funds that are all tracking, let’s say small cap stocks.

And they’re going to have pretty vastly different returns over the next one, three, five years. So they’re not all built the same and a good advisor is going to help you understand, at least do it be at least internally be doing that research to say, what’s the best way for us to approach investing in small cap stocks? And yes, I have so many different options, so many products available to me. Yes, I want to minimize fees, but I also want to maximize returns. What’s the best way to get exposure to this area?

And so, you know, there’s research and evidence to suggest, as you talked about that active management, meaning this idea of buying and selling the best small caps, cap stocks or getting in and out at the right time. That is just a really, really challenging thing. There’s not any evidence really to suggest that that, that there’s people that can reliably do that over time. So that right, right off the bat, if you, if you see that as an advisor, that’s an area of areas we think there can be some value add.

But there’s also just even the nuances can kind of get really, really interesting around different types of index funds. And you think that might not matter much, but it really does over time. Obviously, if you have a 1 % difference in an index fund, that might be a stretch depending on the index, but it can mean real dollars.

Marcus Schafer (28:56)

Yes, and.

these kind of this item and asset allocation kind of run together as well, right? Where a lot of things we kind of talked about this in our episode on generating income, this “boomer candy” phenomenon. A lot of the trends you see in finance are taking things that are very simple and packaging them and making them complex and adding fees that they take. So one of our big jobs is trying to look at things, unpack them and understand

If we whittle them down into their components, is there a cheaper, more effective way to deliver what you might have in a co-mingled solution? And we kind of just see this all the time. I would also, the world is moving towards passive investing in public markets. There’s a lot of conversation around access to private markets and how that might affect retail investors.

When you start to see those fees compared to the battle that I think passive investing won for the most part versus active, which is, 1 % doesn’t make sense. Wait till you see the fees that are in these private investments and question, hey, it didn’t make sense at 1%. Are you sure it makes sense at 4 %? So I think that’s an area that’s super, super important. And then also a big one we come across is annuities as well.

Right. And just the product fees there. So there could be a ton more value that, and maybe like US stock markets are getting pretty cheap and they might be a little closer, but there’s all these other nuanced areas of the market that you really have to unpack in a complete financial picture and understand like, Hey, first off, what are the fees? And then second, are they reasonable? Could I do it cheaper? So maybe that is a reasonable range. Maybe it should be bigger.

Patrick Collins (30:49)

Yeah, think the other, I sometimes use this expression to describe portfolios that I see that come in that have products all over the board. They own an annuity, they own ETFs, they own mutual funds. It’s this idea of get a hunch, buy a bunch that, you know, I used to hear back in my brokerage days, which was typically, you know, advisors that kind of maybe sat through a sales pitch on an interesting product.

that they believed and they just decide to call 25 clients at the time and say, Hey, I have this really interesting product I came across. I think it’s something we could add to the portfolios could be additive. Then they put it in the portfolio. And then three months later, they go through, sit through another thing and they add it to the portfolio. so that both the asset allocation that we talked about before, but also the product selection, there’s not like an overarching investment strategy, investment policy that the advisor is taking to it. And so therefore.

you end up with these kind of Frankenstein portfolios that have all sorts of different things in them that are put together. And so again, that’s something I think a good advisor does is to have a framework and a policy that they think about when, when to add something to a portfolio, what types of products that they’re going to be using. And I think that’s really important to understand that if you’re a client of an advisor is what is that framework?

Asset Location – matching the tax-efficiency of different investments with the appropriate type of account

Marcus Schafer (32:08)

Yeah, and a little bit, we’ll kind of unpack what are the different types of advice. And I know we’ve probably talked about this before, but, are you getting advice that relates to your plan or are you getting a phone call? I’m not sure I’d call that advice. I think I just call that sales. All right, Pat, let’s jump into asset location Vanguard’s estimating between zero and 60 basis points. Quick reminder of basis point.

0.01%. So that’s 0.6 % max value they’re kind of estimating there as being somebody that runs with CPAs in the family, a enrolled agent, Pat, I’ll let you do this section.

Patrick Collins (32:49)

Yeah, near and dear to my heart. We get to talk about taxes here. So this is one I actually really enjoy because I think this we can, you with investments, there’s a lot of uncertainty. You know, we could pick a certain asset allocation that’s really suboptimal and it could do well over the course of a year or two because there’s just so much uncertainty with investing. As we’ve talked about before, make, when you make good decisions, it doesn’t guarantee a good outcome, but it, really increases the odds. And we believe if you do it over time,

kind of like being the house in a casino. If you’re the house, eventually you win. And that kind of feels that way with making good investment decisions. Taxes are a little different in that I can usually see the value of the year or that year that I implement the strategy because I can see exactly how much that creates in tax savings. this 60 basis points of savings is through what they call asset location. And this is the idea that

you should own certain assets in certain types of accounts. So for example, if I have an asset that produces lots of taxable income, I theoretically would not want to own that inside of a brokerage account because every year when tax time comes around, I got to pay taxes on that income that’s being generated by that investment. But if I own it inside of an IRA account or a 401k account or any sort of tax deferred account,

I don’t have to pay the tax on it when it’s earned. I only have to pay tax when I withdraw it. So that could be 30 years from now, or could be even longer from now. So I can really defer taxes in certain types of investments. And then in tax efficient investments, ones that maybe I have some more control over, I don’t have to pay tax every year on, I could own those inside of my brokerage accounts. So that could be things like,

US stocks, for example, I might own stocks, especially non-dividend paying stocks. If I own a stock for $15 and it grows to $20 and I own it inside my brokerage account, I don’t have to pay any tax on that. In fact, I can actually control when I pay tax on that because I can decide to sell that in a year, maybe where I’m in a low bracket, or can decide to sell that in a year when I have losses to offset. So there’s a lot of levers you can pull with asset location.

The last thing I would just say is this idea of diversifying. We talk about diversifying your assets between stocks and bonds and US and international and so forth. But there’s also a good advisor will talk about tax diversification is that you should have different types of accounts that give different tax benefits, just like stocks may go up in some periods and down and others and bonds make a kind of flip flop. You know, there’s basically

three major types of accounts that we would kind of counsel clients to think about. One is a brokerage account, taxable. There’s a ton of benefits to it. It’s entirely flexible. The taxes you do pay, if you manage it correctly, can often be qualified dividends or long-term capital gains, meaning they get preferential treatment. You pay a lower rate. So then we have that type of account. Then we have a tax-deferred account, like a 401k or an IRA.

The benefits there is we get a tax deduction when the money goes in. It grows tax deferred. So we don’t have to pay tax as it’s growing from dividends, interest, capital gains. The downside is that when I take it out later, I’m gonna have to pay tax on it. So if I put $100 into it and it grows to 200, it’s nice. I don’t have to pay any taxes on that growth of $100 when it went from 100 to 200, but.

the full $200 I got to pay tax on, I got to pay it at ordinary income rates, which tend to be the highest rate that you would pay. So it’s still good investments for most people because when they’re earning a lot of income, you get a deduction. can kind of defer income at high rates and maybe take that money out when you’re in a lower rate. And then the final one is Roth or tax free accounts. So most people that are working have access to this through like a 401k. They can put some of their money into a Roth 401k.

And depending on your income level, you might be able to make contributions to a Roth IRA. But the, of the biggest things that we see, uh, people do wrong in this area from an asset location standpoint is they treat these accounts kind of like every other account. if they’re, if they think they should be a 60 40 portfolio, they might have, you know, 60 % stock and 40 % bonds in every one of those accounts, but especially the Roth that’s we believe the wrong way to think about it.

you should have your stocks in the Roth IRA because if you think about a Roth, the difference there is the Roth is tax free. I get all of the growth. It grows tax free for me. And when I take it out, it’s tax free. I don’t get any tax benefits on the front end, but it’s all tax free on the back end. So if you think about, what do I want? What type of asset do I want to own in that account? I want an asset that is growing at the fastest rate possible because that is one of my most valuable accounts. want it to be the largest account if possible.

you know, over the years. so that’s probably this, this, the last thing I’ll touch on is with asset location, what you would expect if you’re doing it correctly is that you’re, each of your accounts are going to look different from another or from each other from a standpoint of asset allocation. So one account might be 50, 50 stock bonds. One account might be a hundred percent stocks and 0 % bonds. And then maybe another is 70, 30.

when you might average them all together and they get to a 60 40, which is your desired outcome, but you may have different weightings for purely tax reasons to get some of this 60 basis points that they claim that you can get. think I’ve seen all sorts of different studies on this. I do believe it’s greater than zero. So I do think there’s value here. and I, and I do think having a thoughtful approach to it is really important.

Marcus Schafer (38:45)

Yeah, a thoughtful approach that doesn’t let the tax tail wag your investment dog, right? Like sometimes you might make an investment decision that’s not super tax optimal because you’re actually trying to optimize for spending money, right? So like you have a big purchase coming up. Well, I know it’s more tax efficient to own stocks in a taxable account.

but you probably shouldn’t. You should probably think about relative to your goal. So I think that’s also something super, super important. And you think about municipal bonds as a great example versus taxable bonds in a taxable account. Hey, there might be reasons why you actually have taxable bonds in account. So it’s not absolutes. It’s not just rule of thumb, because investments, kind of the difference between

break-even point between taxable bonds, immunity bonds changes all the time. And it’s not like you could flip your investments. So there might be other reasons why you’re having different pieces of your portfolio and different accounts. But yeah, there’s, hey, how do you think about your asset allocation? How do you think about the location of that? And then also, I think this is where product selection does come play. You think about, hey, do I have

income producing assets that are masquerading as a different investment. Think about something like real estate for diversification reasons. Maybe you got to put it in a taxable account, but a lot of indexes hide real estate inside of them. Well, what does that do? They pass through 90 % of their income to investors. So they have super high dividend yields and you just have to be thoughtful about, hey, do I want that? Or can I peel that off and have it be a standalone?

piece. All right, I think we’ve, we’ve hit on all the taxes I could take for now. Let’s jump to I think the biggest, the biggest range, zero to 2%. So it’s quite a range. This is the Vanguard study, by the way. And it equates to about 3 % of value add. When you look at the Russell study, which was the higher end of options that we saw research done, it quoted 5 % total value add. So that was

Behavioral Coaching – helping investors understand when they shouldn’t take action and if they should take action, what is it?

pretty big jump. But this 0 to 2 % bucket is labeled behavioral coaching, which I kind of find as an offensive term, but then I unpack different behaviors and I think I might be susceptible to some of these if I’m not careful in watching out. But I think this area is the toughest to quantify and the toughest to talk through with clients because it’s a lot about decisions you might not.

make or you don’t think you would make and then you get to a point and hey there’s a lot of pressure to make a certain choice. So maybe talk to us about why we see such a big range and what’s happening here Pat.

Patrick Collins (41:35)

I agree. This is a really tough one to talk to with a client. If you haven’t been working with them, a prospective client to say, well, I’m going to help you, you know, not make the decisions you would have made on your own, which would have been wrong. and so I think, you know, that’s, that’s kind of a tough conversation to have with someone, but I think there, there is some truth. would say that with behavioral coaching, the interesting thing is I think it can be both. Decision, you know, trying to help people make better decisions that

You know, if that, like, for example, they would have sold out of investments after they went down. That’s kind of a, basic behavioral coaching kind of thing that we would help somebody with is making sure they stick with their plan. But there’s another side to it that actually see this more with our clients, which is taking decisions when they would have done nothing. you know, so the best examples that I can tell you through that has been through periods of crisis. So.

I remember the phone calls that we were getting in 2008, which was the global financial crisis. The market went down over 50 % peak to trough. And through that stretch, we were selling bonds and buying stocks. Now, what I think most of our clients, I think would have said, or even prospective clients when we talked to them, they said, I didn’t do anything during, I just let it ride. I didn’t touch my investments. I was a good investor during that stretch.

And I’d say they probably halfway got that right. But here’s the thing. If you had a 60-40 portfolio and that was your plan and the stock market drops 50%, your mix is no longer going to be 60-40 at some point. It is going to go down to 50-50. It’s gonna go down to 40-60 even. And so where a lot of people look at being, know, kind of hands off, great, I’m not gonna touch, I’m not gonna sell my stocks at a low price.

What they really should be doing though, is selling some of their bonds and using those proceeds to buy stocks and get them back to a 60 40 portfolio. And I can tell you the conversation we were, we, know, we, typically manage portfolios for clients based on an investment policy that we have for them. And when we were putting this in place and implement it, we were getting clients calling us saying, what are you doing? Not only are you buying stocks in the middle of the, you know, what could be the next great depression. But.

you’re selling the only thing that seems to be working for me right now, which is our bonds. And so I kind of count that as behavioral coaching is that we were doing something in, in light of, you know, in, in light of kind of these, these crisis, the same thing happened during COVID. We had a stretch where it was much shorter, but we were rebalancing portfolios, taking, harvesting capital losses that we could use to offset gains in the future. There was a lot of things we were doing.

And it did bring a sense of uneasiness to a lot of clients to follow that plan that we had. So I think that’s an important distinction in the behavioral coaching is if you’re an investor, what did I do? And you were maybe managing things on your own or you were working with an advisor during that time. What did I do during COVID? That’s probably the most recent example. What did I do during the tariffs? Did myself or my advisor take action because the portfolio got

out of whack from our total, you know, our planned allocation or did I just let it ride? Or the worst scenario is I acted on it. I acted on this event in a way that was not consistent with my financial plan and my overall investment plan, which was I was 60 40 and I made the case, you know, justifying it to myself to say the world’s changed. Yeah. This time it’s definitely a little bit different.

we should take some risk off the table. It sounds very reasonable at the time when you make these decisions and you justify them is, let’s, you know, and nobody says I’m panicking and I want to sell it’s usually, well, let’s revisit our asset allocation. Let’s revisit how much risk that we’re taking. Maybe we want to kind of lower our risk profile right now. These are all things that people talk about. What it really means is, is that I’m frightened. I had, you know,

I’ve had a lot of losses. I don’t really want to experience these anymore. Let’s make some changes in light of that. So I think there’s an element there on behavioral coaching. The last thing I’ll mention on behavioral coaching that I think a good advisor should be able to do is to really try to ascertain what level of risk that you’re comfortable with before you invest. It’s really hard to do. There’s, there’s all sorts of questionnaires you can take. personally think those are of

very small value. I do think actual past behavior of what you did during periods of stress are really good tells of what your risk tolerance really is. But these are all things and a really bad decision in behavioral coaching can cost way more than 2%. And good decisions can add, you know, can probably even add to value to some degree if you do them the right way. so anyways, I’ll, I’ll stop there and see if you have any thoughts.

Marcus Schafer (46:37)

Well, I think you hit the big decisions really, really well, which is staying with the financial plan. And by the way, everybody thinks it’s easy. It only becomes easier after you do it a few times, which is kind of what we hear from clients. The more times they go through the panic, follow kind of the playbook that you just outlined, the more times they’re, hey, I understand what’s happening now.

It is really tough for somebody to come in their first experience. It’s just different. Or as wealth increases, the stakes change, right? When you don’t have that much money and markets go down, your paycheck going in, like you actually don’t really see – my daughter’s 529 account kind of like never goes down. And I miss those days because investing felt so easy because your account balance always goes up, but that the second thing I just want to also talk on

touch on is investing is also a lot of little decisions along the way. And I think this is where our brains are not wired to weigh these trade-offs. Taxes, especially if implemented different friction, there’s a lot of different small nuances. I’ll give you an example of, I think it’s called disposition effect. I might be misquoting that, but here’s an example. You have individual stocks at a gain and you have individual stocks at a loss.

Academically speaking, you should say, well, I actually don’t know if there’s a difference between those returns. So let’s treat them as equal. Individuals seem to be more prone to selling the stocks at a gain as opposed to the stocks at a loss. Now, tax reasons, if you sell the stock at a loss, you get a small tax benefit. If you sell the stock at a gain, you get a, what’s the opposite of benefit? You get a tax cost, right?

But individuals are choosing to get a tax cost, whereas if somebody comes to us and they say, hey, I need some income from the portfolio, and we look at those two situations, our brain is trained to think just a little bit different where we say, hey, there’s a tax benefit here. We might as well maybe for diversification reasons, maybe we’re just trying to get tax neutral, sell some of this, sell some of that. But that’s an example of just one of these little decisions that

If you’re not in the game, I’m not sure you’re really thinking about these things, but a lot of those little decisions can add up ⁓ over time as well.

Patrick Collins (49:06)

Yeah. The last thing on behavioral coaching, we can kind of get to the last factor here is one of the value adds of hiring an advisor is that they’re not you. This isn’t their money. And it doesn’t, maybe that doesn’t seem intuitive, but they don’t have the same emotional tie to these assets that you do. And maybe you want your advisor to care a lot. I think that’s important. They should, they should care deeply about your wellbeing and the outcomes that you have.

but it’s a different type of care. And because they’re not so emotionally invested, they can make a lot of times more, I don’t wanna say more logical, but less emotional decisions around things and give you at least advice that tends to be much more level than what you might have on your own because this is so near and dear to you. This is your hard earned savings. This is your retirement. This is your kid’s college. Those are all things that can invoke a lot of fear or a lot of greed. And those are things that obviously a good advisor kind of maybe

behaviorally coach you back to more of a level head.

Generating Income in Retirement⁸ – and avoiding ‘Boomer Candy’ products that prey on the desire for income

Marcus Schafer (50:04)

Yeah, well, well said. The the last section that Vanguard has in their study is I’ll call it generating income. We did talk about this in episode 11, but Vanguard’s estimating zero to 1.2 % specifically focused on the withdrawal order of accounts, dividend versus total return investing kind of comes in into play here. But

This is a really, really big mindset shift for individuals, right? Because you’re going from, hey, everything’s about save more than you spend. And then you get to retirement. And by definition, you are spending more than you’re saving. So you have to think through that. But there is a way to maximize those decisions. So you’re paying as little in taxes as possible and getting maximum returns.

Any other comments you want to make on generating income?

Patrick Collins (51:01)

I think the main thing, like you said, is helping people answer the question, one, do I have enough? Because I’m flipping from an accumulation asset mindset to an income mindset. And so most people want to make sure that’s one of the biggest reasons people even come to us or to an advisor is, do I have enough to do all the things that I want to do? But then, like you said, there are elements of how to do it that a good advisor will think about. And some of that involves tax.

Some of that involves how the asset allocation is implemented across accounts. We could probably have a whole podcast on this. I know we kind of already have had, you know, touched on a good amount of this, but this is really an important aspect. you know, it’s not of particular value for someone in the accumulation phase, but it becomes extremely important when someone maybe turns 55, 60, and they start thinking about this, like, wow, I’ve really built up a lot of assets.

what do I do now? Because it doesn’t just automatically turn into an income. How do I, how do I do that? And there are a lot of problems that happen there because there’s people that prey on that. Uh, in my opinion, like certain products that are created, certain advisors that have, you know, whatever it is, a, you know, a magic bullet. Um, but I think a good advisor is going to think through a good income plan that’s sustainable, that makes sure that people can do all the things that they want to do. And if they can’t, they’re going to talk about trade-offs. And that’s important too.

Marcus Schafer (52:23)

Yeah. Yeah. So that gets us to kind of trying to quantify the investment component. Again, it wasn’t really about higher expected return, which I think is the right way to do it. There are some studies that try to cite higher expected return. And I’m not seeing it when I’m looking at the research. But there is a ton of value from doing these little things.

right as well. And then maybe let’s talk about some things that advisors should be weighing in for their clients that wasn’t really focused on these studies. And that’s kind of the change in advice from the stockbroker mentality, which is all about just investments to, let’s try and help optimize your complete net worth. Let’s try and focus on your highest after-tax spending we can create.

So another section that individuals need a lot of help evaluating is insurance. Do they have enough? Do they have the right type of insurance? Insurance is, if we think investments is foreign to people, insurance is super, super complicated to try and understand if you’re not in the game.

The Importance of Insurance – learning to detect the difference between insurance that protects and insurance that invests, which is typically inefficient

Patrick Collins (53:34)

Yeah, I would put this kind of under the category of risk management that, you a lot of times we’re helping people decide whether they need insurance or they shouldn’t even consider insurance because they can self-insure. And that happens a lot too as wealth increases and you have those conversations with people. I want to just tell one quick story because I think it’s a good example of what we’re going to be getting into in a minute, which is kind of our final part, which is different types of advice, how you could access advice from an advisor.

And that is very early on at Greenspring. We were working with a client on a one-time basis. We don’t do that as much anymore, but at the time it was kind of a one-off basis. We were just helping someone that had asked for some help and they had come to us and we recognize that they were underinsured that if something happened to the spouse, the husband in this case, that the family was really going to be put in a very tough spot. And so we recommended that they buy

term life insurance. I forget what for the dollar amount, several million dollars. It’s a fairly inexpensive type of insurance. and we sent them on their way. We said, this is, you really need to buy some insurance. They understood. They, they, they said, yes, we have an insurance agent. We’ll go buy that from them. Thank you. And they left. And then a couple of years later, they came back to us and, they had said at this time, they said, actually, we want to, know, we, we want to hire you now to kind of work with us ongoing. And.

what we went back through and kind of started to kind of go through their financial picture again when they came back was what we realized is that they didn’t buy that term insurance policy. They actually bought a permanent policy throughout like a whole life policy. And we said, well, what happened here? We had, we looked at our recommendations. said, you know, the recommendations were to buy term. You bought a whole life policy. They said, we went to our agent and they explained to us that there was just a much better option for us.

because this was going to allow us to save more money inside this policy. At the same time, all of our savings targets that we had recommended for them, hadn’t hit because they’d been spending so much more money on this insurance policy. And so it’s just a good example of the implementation of something like insurance is important, but a good advisor is going to walk with their clients through that. It’s one of the reasons that we kind of now insist that we

work with clients ongoing and in a more ongoing fashion because we think that we need to be there during the implementation phase. A lot of times clients can’t, I don’t want to say they can’t do it on their own, but it can be very difficult to try to implement on your own where there’s so many different options, so many different products available. You know, just kind of a point in time advice. Sometimes there can be some, some challenges with that. So again, insurance, there’s things, you know, everything from

life insurance, disability insurance, just your personal lines insurance like car, home. A good advisor should not be just focused on, if everything goes right, here’s what our plan looks like. In my opinion, a good advisor should be thinking strategically about what are all the things that could go wrong based on your circumstances. And let’s make sure we understand what those risks are and ensure against them, self-insure, figure out how we might mitigate some of them based on just taking some actions.

And I think that’s really important.

Marcus Schafer (56:47)

Yeah, shoot, know, agent versus advisor. That’s probably a distinction. Insurance as an investment. Talked about this before. A lot of traps in that one. That sucks. Well, let’s maybe come back to tax. I know we said we were done with it for the moment, but tax, a very important part. There’s the investment component of, hey, how are you

Tax Planning and Projections – good investment advisors should fill the gap left by tax preparers focused on tax compliance

Optimizing the location of your assets, how are you thinking about what products are you actually buying with the minimum income and capital gains tax? You could defer your tax liability as long as possible. What other components of tax can advisors help with?

Patrick Collins (57:28)

This was actually one of the big reasons we started Greenspring 21 years ago now was the firm I came from, and it’s still the same way at all the bigger firms, you were not allowed to give tax advice. I mean, it was very, very clear that they did not want you to give tax advice, partially because of the liability. They had so many advisors, they have to think about, is everybody really well-qualified to be able to give tax advice when they have 15,000 advisors, let’s just say.

At Greenspring, what we recognized was that for most of our clients, 30 to 50 % of their income was going to tax. They also had to deal with the state taxes and they all wanted advice around it. So I would say I think a holistic good advisor is incorporating tax into the advice that they give. And when we think about it, we are actually doing tax projections. So we are looking to say, what exactly are you going to owe? You know, when year end comes around.

What are you going to owe by next April? And are there things that we can do to lower your taxes either this year or in future years? And it’s an area, a lot of times our clients said they weren’t getting a whole lot of advice and they may love their accountant, but their account was more doing their tax prep. They weren’t doing the planning part of it, which is what we’re, where we focus. So one of the best examples that kind of is, I don’t want to say it’s across the board. It’s not, but for a lot of our clients, they deal with this is the time that they retire.

until the time that they start collecting higher income levels. So if you think about you retired at 65, you may have almost no income at that point, you know, you, and that might sound scary, but it’s actually an opportunity. So you have no income because you haven’t taken social security yet. You haven’t been forced to take money out of your retirement accounts yet. And so all of a sudden you might just have some dividends and interest and you may be in the 0 % bracket. You may be in a very low bracket. It creates an opportunity to say,

should we bring income into this year when we’re paying very low taxes so that we don’t have to pay, you know, bring income into future years when we’re going to be at a higher rate, when we do have social security, when we do have minimum distributions out of our IRAs. And so that, again, that is not a really easy answer. You could, you could give a very off the cuff answer to that, which is, yes, of course. But then when you get into, well, how much income should I bring into this year? And that’s usually done through

One example would be through Roth conversions, taking some of your IRA and converting it to a Roth. Well, how much should I do? Well, now you have to get into tax projections. You have to really understand if I bring this income in, how does it impact all sorts of other areas of my tax? And so I think, again, a good advisor should be thinking about proactively lowering your overall taxes over your lifetime. And I think that’s what Greenspring does. We’re not the only ones.

I would certainly be asking if someone’s listening to this saying, A, am I getting that type of advice from my advisor? If you’re not, I would kind of question that. But two, if you’re interviewing advisors, I would be asking about what kind of proactive tax advice am I going to be getting from you?

Marcus Schafer (1:00:33)

Yeah, it’s a it is a really good point. I heard somebody say this on on Friday also, tax advice is not not a home run game. Like a lot of people when they see this and they read something about what the super super affluent are doing, it’s hey, can I unlock all this value? It’s more about singles and doubles and doing a lot of the little things right.

And as you kind of talk about the difference between projections and planning and prep, I think one misconception is an accountant, a lot of times, and this is for probably the average person, you’re going to an accountant that might be helping you do your taxes. They’re preparing them at the very end of the year when there’s very little flexibility for something to do. And a lot of times you might get one or two pieces

of advice like, maybe next year you could do this, or hey, can you think about this, but there might not be enough time to consider it. And the advice, hey, next year, let’s think about this, it’s pretty tough to remember in a year, hey, we’re going to do this. So it’s just more about, here’s what you did, and I’ll file it for you so the IRS doesn’t sue you. But how can you be a little more forward thinking?

is I think really, really important when it comes to taxes. Pat, let’s jump to different forms of advice. Because we’ve kind of been giving this through our lens of, hey, here’s what we think is good advice. But the truth is everybody kind of has a source of advice. And those sources are different, and they have different trade-offs. And there’s different trade-offs with working with somebody like us.

Commissioned Advice – knowledgeable about the products they sell but incentivized to sell you more than you need

So let’s just maybe talk about what are some different ways that people get advice and what are some of those trade-offs. ⁓ And I guess I’ll speak to advisors and one type of “advisor,” maybe I should use quotes, commissioned advice. What are some trade-offs for individuals if they’re being paid by commission?

Patrick Collins (1:02:38)

I actually think if someone is holding themselves out as a commissioned advisor, it’s not necessarily a bad thing. We might bash it a little bit on our show here, but I actually think if the client understands that this person is going to earn money if I buy this product or earn more money, I think that’s important. So the pros there is they tend to be pretty well-versed in whatever it is that they’re selling. They tend to be very product focused.

selling you this product, I know all about it. And I am going to give you, I don’t I’ll use the word advice loosely, but if you ask a question about it, they probably are going to be able to answer that, because that is their focus. That’s who pays them. They are representing that product to a large degree. So I think if you know what you need, if you said, I know I need to buy this life insurance product, I know what I’m looking for. I think that a commissioned agent, commissioned advisor,

may not be a bad solution. The cons to a commission advisor is there is all sorts of conflicts of interests that are very, very hard for you as a client to understand and mitigate. So I’ll use that same example. I need a life insurance policy. I kind of told this story already. There are different, even though this person may be representing life insurance products, there might be three or four different flavors of them, all of them paying them different commission rates.

term insurance pays different than whole life insurance, for example. So you have to be really well versed in what you’re buying so that you, and you have to have to understand the conflicts there because that person may come to you and say, actually, I think I might have a better product for you. And that’s where you start to be. You want it starts sounding like advice. You have to be very careful because all of the sudden now you don’t know if that advice is in your best interest or not. But if you just said,

I know I want to buy this product. I have some questions about it. It’s kind of like going to a car dealer to a large degree. It’s like you don’t go to a Ford dealer and ask them advice about Chevys and Audis and Porsches and all these other cars because they’re not going to be, you they’re not going to be unconflicted there. But if you said, I want to buy a Ford Explorer, I know I want that car.

but I have some questions about maybe some of the features of it. How does the computer system work? What kind of horsepower does it have? All this different stuff. They’re gonna be able to answer those questions for you. So it’s kind of a similar type of thing. So I think commission advice, you have to be careful. It does serve a purpose though.

Marcus Schafer (1:05:09)

Yeah, and it’s also maybe this is the same part. Maybe it’s a subcomponent. I call it product advice. A lot of products are, in a sense, giving you similar types of advice. You know, I would say we just talked about the value of generating income from your portfolio. You could also buy an annuity buy a SPIA, not one of the variable ones. That’s going to give you an income strength.

The trade off there is you’re paying a little bit more, maybe you get a little bit lower income stream, but it’s just a different way of paying for advice. And I think a lot of the boomer candy stuff that I’m a little negative on is just advice wrapped in something different. And I might think it’s a little inefficient and I might gripe about, hey, you can replicate it this way. But in a sense it’s, hey, if you want income from your portfolio, dividend producing stocks.

do generate more income. You don’t actually have to make decisions, right? Because the income gets generated, just don’t reinvest dividends, which is a really crazy thought if you care about income. But that’s another way of generating an income stream that might not be as reliable as a different approach. But for many people, if you say, actually, for a bunch of reasons, I listed out all these trade offs, I don’t need that. I need this. That’s another form of getting some advice.

And it’s just a fee wrapped in something slightly different. Sometimes those fees are upfront in the form of commissions. Sometimes they’re ongoing. What I do think is maybe a danger is when you start to combine some of these aspects. Hey, I’m going to a 100 % fee only advisor, but I also want to buy this annuity. Well, you’re kind of like doubling up on your fees. Maybe you should think about that. Hey, I’m going to a fee only advisor. I want you to generate income by dividend.

producing stocks. It might be a little more doubling up. I think there might be a trade off there to consider.

Fee-Only Advice – point in time advice is good but proactive advice unlocks more opportunities to add value

Patrick Collins (1:07:12)

Yeah, I think the last two pieces of advice, I’m going to kind of, I don’t want to lump them together, but I want to use them to kind of compare because I think this is, they’re, they’re similar in some respects in that these types of advisors don’t get paid by products. They get paid directly by the client, but you can, there’s probably two ways to think about it. There’s what I would, you know, what we would call like point in time advice where you hire someone for that specific time period or moment to make a decision about something. So this would be like an hourly.

Marcus Schafer (1:07:19)

Yeah.

Patrick Collins (1:07:41)

financial advisor, it would be somebody that maybe works on like some sort of consulting basis for some short period of time. And ⁓ there’s a lot of value in that obviously you have a decision to be made. You can get hopefully objective advice from somebody who you just pay an hourly rate to. So I think there’s pros to that for sure in that I think you’re gonna get probably decent advice. The cons is that this person

is you may not know when to call them or when it’s appropriate to call them because there can be things that come up that you just don’t even realize. That was a decision point that I maybe didn’t even make a decision on, but I had this opportunity. maybe one of the best examples is what we just talked about, which is somebody retires. They have all of this low income years that they think to themselves, oh, great, I don’t have to pay much in taxes. They miss this huge opportunity.

because they didn’t know to go to anybody to even ask about it. Um, because it just didn’t seem like it was a big deal. And there’s so many other examples like that in a client advisor relationship. I have a client who was recently looking to buy a, uh, help their, their, their children buy a house or child buy a house. And, uh, they were just, you know, calling us to say, Hey, Hey, you know, wire this money over to help my child buy a house. There was like four or five different things that we had to think through. So one is, uh,

you know, we were working with them on how to minimize the tax. I think we saved them probably, you know, tens of thousands of dollars in taxes by restructuring how we did it. We had to think about tax, the, the gift tax laws of now you’re making a gift. How does this impact your estate and your other kids? Is this, know, are you, you know, are you giving more to one to another? And then how do we mitigate that? So there were all these things that they just hadn’t thought about because, you know, they hadn’t reached out. So a good advisor,

that you’re in constant con[tact], you know, that’s kind of the second part of this is an ongoing advisor will be able to add value at times when you ask them because you have it, you know, you have a need for advice, but also times where they’re being proactive to say, wow, there’s an opportunity for us to improve something in your financial life. It could be your portfolio, could be your tax situation, it could be your insurance coverages, could be your cashflow. There’s so many different areas. Um, I, I kind of use this analogy.

And I think it’s, I think it’s kind of interesting, you know, with investing, returns are lumpy. You know, they don’t happen. You don’t get, if you’re invested in the stock market, you don’t get 10 % a year. You could have, and in a year, even when you earn 10%, it could be that you earn almost nothing for eight months of the year and all the returns come in a month or two. And so I think that’s really important. It’s similar with advice. When you work with an ongoing advisor is.

you may not see a whole lot of value from that advisor, at least what you perceive for months at a time. And then all of the sudden something happens. This example of my client that’s buying a house and all of the sudden this advisor could save you tens of thousands of dollars because of a good decision that you made. Or it could be that the market crashes, you’re scared and you have a conversation with that advisor and that gives you some perspective to say, you know what, let’s rebalance the portfolio.

These types of things, a good advisor that’s proactive, that’s ongoing, that’s really where they add the advice. I know Vanguard and Russell tried to quantify it with three to 5%. I think it’s really hard to quantify, but I do believe that these things happen and they’re lumpy. The value you get from an advisor is lumpy. It’s different every year, and it’s a lot of times based on your circumstances.

Marcus Schafer (1:11:20)

Yeah, it’s also a lot. You you talk about your circumstances. What’s the value of your time? Because all of our clients are super, super smart. They’re super successful in their specific fields. And I think if they wanted to be super smart, super successful in our field, they could absolutely, absolutely do it. It’s just tough to stay on top of it. A lot of times there’s also, you know, debating between a point in time versus

ongoing, I’ll give you an example. We moved up here, we didn’t have primary care physicians. We needed to go get something specific checked out. Or like, hey, you actually need a referral from a primary care physician. Okay, where can I find a primary care physician in Maryland that’s taking somebody in five days notice? No shot, right? And then what are the chances that they’re going to be your primary care physician forever?

Right? Like you found the one. You did all your research. You’re very confident. This person is going to give you the best advice. So you go to somebody and you’re not really too amped on the advice, but you need the referral. Don’t worry. Long story short, throughout this whole process, everything went away. We didn’t even need anything, which is fine. But it goes to show that there is value in having at least knowing, hey, here’s who we would go to. Let’s make sure we could get

some access to them because if we have a question, think about how much effort it takes to understand a new client situation so that we can give the best advice, understand their personality traits, what’s gonna resonate with them, what do they wanna do with their life? And if you don’t have that, call it 20 hours of pre-work, 40 hours of pre-work done, somebody calls you up, hey, I need advice on this specific thing.

tax days and I gotta get it back to my account in seven days, what do you think I should do? The options are pretty limited at that point in time. It’s just kind of like having a lawyer on retainer, right? It’s just easier to be able to have access to somebody. I think that’s a trade off. It is more expensive to have that, right? Like that’s just.

Patrick Collins (1:13:28)

Yep,

absolutely. That’s the trade off is it’s more expensive than just paying for a point in time. So I think that’s the trade off that you have to determine. The last thing I thought maybe we’d touch on is just conceptually before we wrap up is this idea that you get different value at different phases of your life. And so the example kind of we use was

Different People Value Different Things At Different Times – the value of an advisor changes over time

busy professionals. So you think, you you’ve started in the workforce, you’re now saving, you have kids, you’re raising a family, you’re buying homes, you’re, you know, sending the kids to college. You’re busy with just life. I think an advisor adds value in all sorts of different ways in that sense. Probably the biggest is just coordination of all of these different things. A lot of times people just don’t have the time wherewithal.

to be able to manage it. being able to rely on an advisor that can oversee this is really important. Then you think about phases of life, people, kids move out, maybe you’ve paid for college, you’re now preparing for retirement. The value of advice you get is maybe a little bit different at this point. Now you really are trying to answer this question of, do I have enough to retire? How am going to take this pot of assets that we were talking about and turn it into income? Your mindset is now shifting significantly. You’re going from kind of contributing through work

through maybe doing some other things, an advisor can help you think through those things. And it might seem like a little bit, you know, therapy type stuff, but I think good advisors, you know, kind of borderline on that. And then once you fully do retire and you kind of get into that phase of retirement, I do think that there’s some peace of mind that that brings of having advisor to make sure that somebody’s overlooking this, that my income is showing up every month, that we have a portfolio in place that can generate that.

I also think there’s all sorts of big decisions that come into play when people get into the retirement. So where you live, you so, you you might have multiple homes, which stage should I live in? You know, should I downsize? I have these homes, I don’t need this space anymore. What’s that going to mean for our overall lifestyle? And then dealing with healthcare expenses that can start to come into play, long-term care.

and your estate plan. you kind of, it’s all the issues that people are dealing with. A good advisor is going to help them through each phase of life. So I think these are all things that we just have kind of noted as important aspects of if you’re looking to hire an advisor, you could certainly ask about these questions, but a good advisor should be helping in each of these areas.

Marcus Schafer (1:15:55)

Yeah, yeah. And if we go all the way back to those beginning surveys, why do people keep having an advisor? They give me good advice and that good advice helps me go out there and live my life. And retirement is a relatively new concept. And this concept of, you’re no longer gonna rely on your kids to…

fund your retirement, you’re going to convert your wealth that you accumulate through your working years to fund your retirement, do so independently. That’s a relatively new phenomenon. The ability to invest as broadly diversified as possible. Like these are new phenomenon. That’s a, it’s helpful. The tax code not getting smaller, despite what every politician, you know, promises at the start, it just gets more complicated year on year. So

An advisor should help you handle that so you can go out there and ⁓ focus on living your life. Pat, anything else you ⁓ to share as we think about wrapping up?

Patrick Collins (1:17:05)

I think the main thing is hopefully everybody that’s listened to this podcast has gotten a little bit more of the inside baseball on advice, the advice industry, the different types of advice. And I think asking good questions kind of leads to hopefully making better decisions. so having a list of questions, and I think if anybody that’s listening to this wants some help with those questions, we actually have what we think are some of the best questions to ask an advisor.

And we were happy to share that with you because I think it’s important that people get good advice and we want to make sure that people are listening to this, hopefully get some value out of it.

Marcus Schafer (1:17:39)

Absolutely, and you know for us, now markets just open and it’s on us to go carry out. So let’s get to it. Thanks, Pat.

Patrick Collins (1:17:49)

Thank you.

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Sources:

¹ Why Do Investors Keep Their Advisor Around (Morningstar, 2024): https://www.morningstar.com/financial-advisors/why-do-investors-keep-their-financial-advisors-around ¹

²Dimensional Investor Study (2021): https://my.dimensional.com/2021-global-investor-study-key-takeaways

³ Vanguard’s Advisor Alpha (2022): https://corporate.vanguard.com/content/dam/corp/articles/pdf/putting_value_on_your_value_quantifying_vanguard_advisors_alpha.pdf

⁴ Russell’s Value of An Advisor (2025): https://russellinvestments.com/content/dam/ri/files/ca/en/individual-investor/insights/value-of-advisor.pdf

⁵ Money Doctors (Gennaioli, Shleifer, and Vishny, 2012): https://ssrn.com/abstract=2133429

⁶ The Three Ways To Beat The Market (Greenspring, 2025): https://youtu.be/XeGNGWNbF-8

⁷ What Can We Learn From Elite Institutions (Greenspring, 2025): https://youtu.be/2wXKgVGUmyo

⁸ Generating Retirement Income and the Allure of ‘Boomer Candy’ (Greenspring, 2025): https://youtu.be/Ms8uRmOC6EE

⁹ The Truth About Annuities (Greenspring, 2025): https://youtu.be/2gGq4lX2yP4

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