Financial Planning Blog

The most common way that a person works with a fee-only investment advisor is through an investment management relationship. The advisor and the individual (or couple) work together to formulate an appropriate investment strategy, and responsibility for the implementation of the strategy is delegated to the investment manager. The advisor receives trading authority in the client's accounts and executes the required transactions. Monitoring the portfolio and regular reviews are part of the arrangement, as are (in most cases) other financial planning activities. The advisor is generally compensated with an on-going, asset-based fee, although sometimes it is a flat retainer fee.

Table Rock Financial Planning and other members of the Garrett Planning Network will also provide fee-only investment advice on an hourly or project basis. (Other advisory firms will also work on an hourly basis, but they are the exception, not the rule.) Under this model, the advisor works with the client to develop and document an asset allocation strategy, and recommends appropriate investments. However, the client is responsible to implement the plan--buying and selling the recommended securities and monitoring their own accounts. Usually the client returns to the advisor for regular check-ups where the plan is reviewed, accounts are rebalanced, and revisions to the plan are made. Other financial planning topics are usually discussed, and like the original engagement, these check-ups are billed on an hourly basis.

With an investment management relationship you will likely pay higher fees--compensation for the additional responsibilities the manager shoulders, often a higher level of value-added service and potentially a closer relationship. The hourly model, where you take more responsibility for implementation, will usually be lower cost. At Table Rock Financial Planning, you can receive competent, objective investment advice either way. You get to decide which model is a better fit, and establish a relationship that best meets your needs.

Four Key Reasons to Choose Investment Management

"The investor's chief problem-even his worst enemy-is likely to be himself."-Benjamin Graham

At Table Rock we believe that investors can be successful under both the hourly or investment management model. We recognize that the hourly model is clearly preferable and more affordable for many individuals. However, there are also people who would be better served with an investment management relationship, where they delegate day-to-day responsibility for their portfolio. Before you decide which is best for you, consider the following reasons where an investment management arrangement may be preferable:

• Implementation follow-through: You have taken the time to meet with your advisor and formulate an asset allocation and investment plan that is designed to help you meet your financial objectives. Under an investment management relationship, the investment advisor will immediately begin implementing the plan with an experienced hand--after all, this his or her full-time job. Alternatively, if you have retained the responsibility for implementation, will you get after it promptly? Or, will the plan get laid aside for implementation when you have more time, or the mood suits you. One of the biggest disappointments of hourly planners is working with clients to develop a sound investment plan, only to find out the individual waited months to implement it, or worse, never fully followed through. It is like a doctor diagnosing a patient and writing a prescription that is never filled.
• Your time is an investment: You have only so many hours in a day. Do you have the available time to execute your investment plan--recognizing that some effort is usually necessary during normal working hours? Whether it is work, play, education, service, or spending time with family, most of us have high value activities we would rather invest our time in. Because we recognize the value of our time, we routinely pay others to do tasks we could do ourselves (e.g. housekeeping, lawn care, and cooking to name a few). I could have built my fence recently, but chose instead to delegate that work to a qualified contractor. This freed up my time to work at my profession and mountain bike.
• Interest and capability: Do you have a reasonable level of interest in working on your investments? Do you feel confident you can implement the plan without significant errors or stress? Some people do feel empowered and capable implementing their investment strategy. It is OK if aren't one of them. However, if you lack the interest or confidence to do the job, it is time to consider delegating the responsibility to a capable investment manager.
• Emotional endurance: Market volatility can take its toll on our emotions. It takes resolve to stay with an investment strategy, and one of the key roles of an advisor is to maintain a clear head and steady hand. You are paying the advisor to follow the plan--to keep his wits when all around seem to be losing theirs. Without the advisor in the driver's seat, will you be tempted to deviate from your investment strategy? Will you sell out after market drops, or chase the latest investing fad? Will you have the steadfastness to rebalance your portfolio--selling high and buying low? Investor discipline and behavior are critical to long term portfolio performance. Many people behave much better, not to mention sleep much better, when they delegate the day-to-day management of their investments.

Financial planners are always encouraging our clients to be informed, disciplined consumers. The question isn't whether investment management will cost you more in annual fees. The question is whether you will be better off, financially and emotionally, if you delegate the day-to-day management of your portfolio. As noted behavioral finance professor Meir Statman said, "Paying someone 1% a year to keep you from making 1.5% worth of mistakes can make a lot of sense." Truth is you shouldn't have to pay 1% per year to manage even a moderately sized portfolio, and the opportunity for the DIY investor to underperform is very high.

You decide--will investment management provide a good value for you?