It’s not uncommon for successful individuals to call on Shakespeare looking for help with their financial plan, while specifically indicating they don’t need help with their investment portfolio.  They feel comfortable with their array of mutual funds and other investments and can point to the success they have achieved in accumulating and growing assets.  So, do high net-worth clients need an Investment Plan?  To say it differently, can a competent financial advisor truly add value to an Investment Plan that has been working?

Let’s look at various considerations that successful Do-It-Yourself (DIY) investors should consider.

Diversification of Funds

Most of the time, the DIY investor has a smorgasbord of mutual funds and other investments; and believe they are diversified.  It’s typical to find that several of their funds are highly similar (correlated) and therefore are not providing the level of diversification they believe they have. In addition, we’ll typically see a handful of holdings that dominate a portfolio, encompassing 25% or even 50% of a portfolio. Lastly, we find deficiencies in several areas of their asset allocation, including a limited amount in international, small-cap, value and other asset classes. Almost every DIY has at least one of the above deficiencies and frequently two, which allows us to quickly add value to their situation.

Cost vs. Value

Sometimes we’ll find investors with high cost securities who are simply paying too much. In many instances we can greatly reduce the internal costs of a portfolio (and justify our management fee) by owning more completive funds.  Most of the time however, investors will have ultra-low cost mutual funds (Vanguard, etc.) in their portfolio.  Although keeping costs low is important, finding funds that provide the most value (relative to their cost) is preferred. Most low-cost index funds are cap-weighted mutual funds and own more overvalued securities and underweight the undervalued securities that will drive future performance. Paying a few extra basis points in management fees to own more sophisticated funds can provide downside protection and upside opportunity.  Just as you may be willing to pay a little bit extra for a nicer car with various safety features (airbags, anti-lock brakes, AWD, GPS, blind spot alert, etc), the same applies when selecting investments.

Avoiding Tax Traps

The adage that ‘it’s not what you make that matters, but rather what you keep that counts’ speaks to the importance of coordinating your investment plan with your tax plan.  Most DIY investors fall into several tax traps, including owning mutual funds instead of tax efficient Exchange Traded Funds (ETFs), failing to sell securities that are at a loss to write off on taxes, realizing short term capital gains which are taxed at less favorable ordinary income tax rates, and owning less tax efficient asset classes (bonds) in taxable accounts when they could be owned in tax deferred accounts (IRAs).  Of course, understanding the tax code is no small feat, and coordinating those nuances into your investment plan is difficult.

Estate Planning

Frequently, prospective clients will have sophisticated estate planning documents, but will have significant gaps in implementing those plans into their investment plan. If you have a revocable trust, it’s important to re-title brokerage and bank accounts into the trust.  The estate plan will be the driving force in determining the proper beneficiary designations to retirement accounts (IRAs and 401ks) and insurance policies, but frequently there are shortfalls in this area as well.  When gifting to children or charities, it makes sense to gift appreciated securities from an investment portfolio, but this strategy can be frequently overlooked or unknown. Without an advisor implementing your investment plan, these shortfalls typically persist.

Income Planning

Managing assets during the accumulation phase of life, although not easy, is not nearly as difficult as managing assets during the distribution phase of retirement.  Where will income come from in your portfolio?  What is your ideal asset allocation? Which securities should you sell to generate needed proceeds?  Which accounts (IRA vs Brokerage) should you withdraw from?  If you have an annuity or pension income, how should you adjust your investments to account for these realities?

Implementation

The true value that a financial advisor provides is in implementing recommended strategies.  Implementation takes time and expertise.  Whether that relates to tax loss harvesting, rebalancing in a tax efficient manner, maximizing the benefits of householding, facilitating a Roth Conversion, gifting appreciated securities to kids or charities, etc.

Market Corrections

With the last significant market decline ending in early 2009, DIY investors need to consider what they would do if the markets are down 30, 40, or even 50%.  Do you want to assume that level of risk and responsibility or would you rather shift it to a seasoned professional?

Contingency Plan

Every self-directed portfolio has a shortfall when it comes to providing for your family in the event you suffer an unexpected health event, or even death.  Having a financial adviser manage your assets puts in place a plan for the inevitable.  Consider your financial adviser an insurance policy that you’re guaranteed to use.

Fee

In a way, when a client chooses to self-direct their investments they are making a statement that a financial adviser can’t add value.  Frequently a client will say the adviser’s fee (1%) is too high.  The reality is that the full time professional only needs to be 1% better than the DIY client to add value, which is relatively easy in most cases.

The reality is that high net-worth clients can benefit the most from working with a financial adviser; and a skilled adviser adds value in numerous ways.  A DIY investor can often satisfy their investment itch by maintaining a small account to make desired investments, but allowing the investment pros to handle the serious money.