Increasingly, the role of a financial advisor isn’t picking stocks or even working through the intricacies of asset allocation. It’s coaching clients through decisions that have the greatest impact on returns and aligning life goals with financial realities as well as keeping people from making financial mistakes as some financial mistake can be unrecoverable. Finding the right financial advisor to work with is very important as studies show that working with the right advisor can add up to 4% in long term portfolio returns.
Financial advisors generally fall into one of two camps when it comes to their approach to planning…. Cash Flow or Goals Based. Let’s take a look at the difference….
Advisors who take the cash flow approach generally lay the foundation of a financial plan with a budget. It’s all about the money coming in and going out and how to manage that flow of money to reach your needed monthly savings amounts and manage debt. This is a more detailed and managed approach to financial planning and if you need help with debt reduction and budgeting as well as reaching your financial goals, then a cash flow-based advisor may be just what you need.
Goals based planning generally skips the budgeting part and just focuses on the goals and what strategies it will take to reach them. This approach assumes that a person can manage their own budget and figure out how to save the amount needed to reach his or her goals.
I am a Goals Based financial planner. I do not get into budgeting with my clients or advising on where they can cut back on things like Starbucks to reach their goals. I help clients identify exactly what they want their financial future to look like, what it will take to get there along with the smartest strategies to use.
Some people like this straight forward approach to financial planning and don’t want or need help with a budget. If you would like to work with a fiduciary advisor who cares and won’t tell you to cut back on your latte’s in order to reach your goals, then we may be a good fit. Shoot me an email or give me a call to have a friendly chat.
- Value of advice sources: Envestnet, Capital Sigma: The Return on Advice (estimates advisor value add at an average of 3% per year), 2016; Russell Investments, Envestnet, Capital Sigma, The Advisor Advantage (PDF)(estimates advisor value add at an average of 3% per year), 2019; 2017 Value of a Financial Advisor UpdateOpens in a new windowestimates value add at more than 4% per year); Vanguard, Putting a Value on Your Value: Quantifying Vanguard Advisor’s AlphaOpens in a new window® 2016, (estimates lifetime value add at an average of 3%); Morningstar Investment Management, The Value of a Gamma-Efficient PortfolioOpens in a new window, 2017, (estimates value add for a subset of the service identified in this paper at an average of 1.5% per year). The methodologies for these studies vary greatly. In the Envestnet and Russell studies, the paper sought to identify the absolute value of a set of services, while the Vanguard and Morningstar studies compared expected impact of advisor practices to a hypothetical base case scenario. Please follow the links above to see important differences in the methodologies of these various studies.