I know there is a lot of value in good retirement planning and investment management services. However, I also know that this value is impossible to quantify. It’s disingenuous to pretend to be able to measure the value of what we all do. Which also means it’s disingenuous to tell prospects or clients that a certain amount of value can or will be delivered from financial advisory services.
But that doesn’t stop some advisors from doing this.
In the last few months, I’ve seen lots of claims from advisors who assert they can deliver value that’s at least twice their annual AUM fee, or that the value of a financial plan they do will exceed the value of a plan done by other advisors (Yes, this was a literal challenge that one advisor put forth to the world on LinkedIn). I’ve also seen advisors claim that fees should be value-based, thus implying value is measurable.
All advisors should be confident in their abilities and proudly communicate this. However, advisors should also be honest with themselves and consumers about the inability to actually measure the value of their services.
The value of financial advisory services can be broken up into three categories:
- Value that can be measured.
- Value that can potentially be measured, but only in hindsight.
- Value that can’t be measured.
For better or worse, the majority of the value provided from advisory services falls mainly into the second and third categories. I’m going to focus this analysis on the services provided to clients in or near retirement, as those are the clients with whom I work and know best. However, the gist and outcome will be largely the same even if you work with younger clients and/or clients with different planning needs.
Value that can be measured
There are some things we can do as advisors that do indeed provide clearly quantifiable value. Finding errors in clients’ tax returns is one example.
I recently received a tax return for a client who had a fairly large amount of municipal bond interest income for the year. His tax-return preparer properly reflected that interest as tax-exempt on the client’s federal return. However, the preparer mistakenly included all of that interest as taxable on the client’s state return.
After looking into the client’s specific municipal bond holdings, I realized all the securities were issued by municipalities within his state. As such, all of the interest income from those bonds should have been tax-exempt at the state level.
I brought that to the client’s attention and recommended he point it out to his tax-return preparer and amend the state return. The incorrect return meant the client overpaid about $600 in state income tax for the year. The preparer subsequently amended the return (at no cost, as the misclassified income was the preparer’s error) and the client received a refund for the overpayment. All said and done, this was $600 of clearly identifiable and quantifiable value that I provided.
Value that can potentially be measured, but only in hindsight
This second category is one where the value could theoretically be measured, but not until years (or perhaps decades) into the relationship — such as with investment management.
It’s impossible to measure the value investment management delivers year by year, unless the advisor and client agree to a formally defined measure of outperformance or “alpha” relative to a benchmark. Measuring value here would also require careful record keeping of a) the realized financial outcome of the portfolio under the advisor’s recommendations versus b) the hypothetically realized financial outcome that would have happened had the client not implemented any of the advisor’s recommendations.
For example, we all know that it’s generally prudent to recommend well-diversified portfolios instead of heavily concentrated portfolios that have only one or two securities. We also know that part of an advisor’s job and value is to help clients avoid emotional or behavioral mistakes, such as trying to time the markets, selling based on fear, buying based on greed or fear of missing out, etc.
However, it’s quite possible that the client’s heavily concentrated portfolio would have ended up producing a much better financial outcome than the advisor’s well-diversified portfolio. And it’s also possible that the client selling out of fear and sitting on the market sidelines for a while could avoid additional portfolio losses before deciding to get back in and catch the eventual rebound.
Don’t get me wrong: I fully believe in the research and potential benefits that support recommending portfolios that are low-cost, diversified, properly allocated, etc. And I know there is value in implementing such portfolios. But I also know it’s impossible for me to attempt to quantify that value. And I also know it’s possible that the portfolios I recommend may not ultimately result in better outcomes than whatever alternatives the client could use instead.
Where hindsight also comes into play
There are numerous other large, important and impactful areas of advisory services where getting good advices brings significant value, but it’s impossible to measure that value without the benefit of hindsight.
For example, recommending that a single person with favorable family longevity delay starting Social Security as long as possible is generally a prudent and valuable recommendation. But what if the client dies unexpectedly at age 69, just months before when she would have started her benefits? In hindsight, not starting benefits sooner would have cost the client (or her heirs) tens of thousands of dollars. However, that’s not to say the original recommendation wasn’t still in the client’s best interest and wasn’t valuable.
Another example is around Roth conversions. In the right set of circumstances, it could make sense for clients to convert money from tax-deferred accounts to Roth accounts. The conversion process means paying more tax now with the intended benefit of saving more than this amount in future taxes. However, without a working crystal ball that can accurately predict decades of future tax legislation, financial market returns, client longevity, etc., it’s impossible to quantify the tax savings (if any) of doing Roth conversions. (For more insight on this topic, check out my previous article, Why Trying to Quantify the Value of Roth Conversions is Futile.)
Value that can’t be measured
This last category contains many areas of value that are intangible, emotional and often wildly different from client to client. For many clients, much of the value they ultimately get from working with an advisor is subjective and can’t be quantifiably measured. But that doesn’t mean value isn’t there and isn’t important.
For example, the advisory relationship may lead to relief of a major financial pain point the client had. This relief could be invaluable to that client. But another client with the same financial issue may not really care about it so they might not really ascribe any value to the advisor’s assistance with it.
It’s also impossible to put a value on something as simple — and important — as the client sleeping well at night.
For example, some clients may prioritize entering retirement without a mortgage. Even if the pure dollars and cents of the analysis are such that the client will almost certainly be better off by not paying off the mortgage and instead doing other things with their money, it’s ultimately much more valuable to that client to pay off the mortgage and sleep better knowing they are debt-free.
On the other hand, other clients may not care at all about the thought of having debt in retirement and would derive much more value from the advice of doing something else with the money instead of paying off their mortgage. In either case, it will always be impossible to say how much value the advisor delivers from his or her guidance.
How to deliver value to clients
Just because the majority of the value in financial advisory services can’t be measured doesn’t mean there isn’t indeed value in them. With that said, there are lots of ways to attempt to provide more value to clients.
For example, advisors who have historically focused on offering just investment management services have been increasingly adding broader financial planning to their offering by assisting clients with things such as budgeting, Social Security claiming strategies, insurance needs analysis, education funding, workplace benefit review, retirement distribution planning, tax planning, etc. All of these offerings obviously add additional value to client.
Also, value can be added by having a robust network of outside professionals in which to refer clients when necessary. After all, as fiduciaries, we shouldn’t attempt to be all things to all people; we need to rely on others in the industry when our knowledge or abilities can’t best address clients’ needs. As such, building out a referrable network of estate planning attorneys, insurance professionals, reverse mortgage specialists, college funding experts, behavioral therapists, etc. can be of tremendous value to clients.
Value can also be added in relatively small yet important ways such as responding more quickly to client inquiries, streamlining and improving the readability of tangible deliverables, and offering a virtual meeting option for clients who prefer that over physical meetings.
How to communicate value to clients
As advisors, we should definitely try our best to convey to prospects and clients the potential benefits of working with us, what exactly our services entail, how and why we’re different from other advisors, etc. However, we need to be forthcoming and honest with ourselves and consumers alike in realizing the majority of the value of financial advisory services is nebulous, intangible and not measurable.
“We need to be forthcoming and honest with ourselves and consumers alike in realizing the majority of the value of financial advisory services is nebulous, intangible and not measurable.”
For example, I thoroughly explain to prospects and clients what my service does and doesn’t include. I also detail what my expertise and specialization is, and explain what differentiates me from other advisors. And when talking with prospects, after finding out more about them, I also express whether I feel we will or won’t be a mutually good fit for each other.
“Additionally, I’m very upfront and frank about the fact that I can’t guarantee clients will get a certain amount of value from my services every year.”
Additionally, I’m very upfront and frank about the fact that I can’t guarantee clients will get a certain amount of value from my services every year. I basically summarize for them the same things I summarized in this article with regards to why it’s impossible to measure the value of advisory services.
I tell them I know there is value in what I provide, and that different people will feel they get different amounts of value from the relationship. Some of the differences will be because of the different planning opportunities that exist across clients. But a lot of the differences will be attributable to the truly intangible and unmeasurable things like peace of mind and the ability to sleep better knowing there is a knowledgeable professional to help make important financial decisions as they arise.
Ultimately, if the client feels they are not getting enough value, they can always choose to terminate the relationship. In such cases, maybe it’s the advisor’s fault for not doing enough during the relationship, or maybe it’s nobody’s fault; perhaps there simply wasn’t a lot of value to be had given the client’s circumstances. Or maybe that particular person simply doesn’t value financial guidance as much as other people do.
How not to communicate value to clients
What should be avoided is dishonest statements that insinuate value can be measured and/or that a certain amount of value will be provided. For example, don’t say something like, “I bet I can find at least double my AUM fee in quantifiable value in your financial situation.”
As proven in this article, the value of what we do can’t be measured; neither by advisors nor by clients. Yet, it’s ultimately up to clients to decide if our services provide enough value to justify or costs. With that said, we shouldn’t attempt to influence or bias how clients choose to measure our value by giving them false and disingenuous measures of what we think our value is.
Making statements that (pretend to) quantify our value misleads prospects and clients by planting in their heads a baseline anchor of what our value is. In an industry that has a long history of needing more transparency, humility and integrity, we owe it to consumers and ourselves alike to be more humble and honest about the value in what we do.
Andy Panko, CFP, RICP, EA, is the owner of Tenon Financial, a fee-only firm in Metuchen, N.J., that provides tax-efficient retirement planning and investment management. He’s also the founder and moderator of the Facebook group Taxes in Retirement, creator of the YouTube channel Retirement Planning Demystified and host of the podcast Retirement Planning Education.