One of many ongoing discussions in my line of work has to do with understanding the value of financial advice and working with a financial adviser. If you’ve never worked with an adviser, it may even be a question you’ve asked yourself. After all, it seems counterintuitive to pay someone to help you make more money, especially when no one can guarantee investment growth, or even that you’ll see a positive return.
Over the years, several companies have tried to quantify the value that financial advisers provide through research, estimating that working with an adviser can increase returns by up to 3.75 percent vs. self-directed investing. But what about other intangible benefits, such as financial education, behavioral coaching, legacy planning and more? Measuring that value is more difficult, in part, because not every financial adviser delivers the same services to clients and as consumers, we attach differing value to those services.
In the United States, “financial advisers” and “financial advice” come in many different flavors because we don’t have a generally agreed-upon definition of what these terms represent. Some who call themselves financial advisers sell financial products, such as stocks or mutual funds, and the “advice” they provide is focused on determining which allocation to use, not which products to choose. Depending on how these advisers are paid, the advice you receive may be conflicted. (For example, if two products are suitable for you, but one pays the adviser a higher commission, which product will the adviser likely recommend?) When you work with this type of adviser, usually a securities or insurance broker, has no regulatory obligation to serve your best interests. Instead, he or she must only provide recommendations that are suitable for your situation.
“Fee only” firms, such as AMDG Financial, don’t sell products at all. Instead, we help you identify products that support your long-term goals and recommend an investment strategy to help you achieve them. You pay us directly for financial and investment advice, and we act as a fiduciary, meaning the recommendations we make must reflect your best interests at all times. We legally owe you a duty of loyalty. Our advice goes beyond investment selection and asset allocation to include comprehensive wealth management. Our services include integrating tax, financial and investment strategies to provide you with a holistic picture of your financial well-being — now and in the future.
Jobs to Be Done
While the way financial advisers differentiate their services helps describe how they work with clients, it still doesn’t answer the question of value. That’s because our industry assumes that people hire all financial advisers for the same reason — to help them make more money. In fact, it’s more complicated than that. People hire financial advisers for a variety of “jobs,” and the job descriptions go well beyond providing greater investment returns.
The late author and Harvard University professor, Clayton Christensen, along with his colleagues, explored the theory of “jobs to be done” in a 2016 book, entitled Competing Against Luck. The book offers a different take on why people “hire” a product or a service to do a job. As the theory goes, people don’t simply buy products or services — instead, they hire them to make progress in specific circumstances. The book cites, as an example, a fast-food company that wanted to improve milkshake sales. It conducted extensive market research, asking customers what they liked or didn’t like about the company’s milkshakes. But the research wasn’t successful in helping to increase sales.
Applying the theory of jobs to be done, an outside consulting team learned that the company sold a lot of milkshakes in the morning. When the team asked customers why they bought milkshakes in the morning, they learned that customers found milkshakes to be an easily consumable breakfast on their long commutes to work. Customers were “hiring” milkshakes, as opposed to other breakfast options, like bananas or bagels, because they were filling, easy to consume while driving, and lasted longer, helping to make the commute less boring. Once the company understood how milkshakes aligned with what customers wanted to accomplish, it had a much better perspective on how to compete in the marketplace. Competition wasn’t just other milkshakes — it was any product that could be consumed easily, that would last the length of the commute, and that would keep the customer full until lunch.
Applied to financial advice, what is the job clients hire us to do? The answer depends on problem our clients want to solve, or on the goals they want to accomplish. Let’s say an individual wants to achieve financial well-being. She could do this in a variety of ways — by “hiring” books on investing, an educational course or degree, a savings or brokerage account, or a financial adviser. Among the clients who hire us, the “job” takes on an even narrower focus. For example, some clients may lack a financial background and want guidance from an adviser with experience and expertise. Others may need an accountability coach who can keep them from making emotional decisions that may hinder their investing success. Some may need assistance in helping family members understand their financial decisions and encouraging their participation in achieving their goals, and still others may have no interest in the nuts and bolts of achieving financial well-being — they just want an adviser to take care of it for them.
In our firm, we realize that we don’t just compete against other wealth management firms for your business; we also compete against software, books, education, the advice of family and friends, and financial products, among others. To help our clients accomplish the jobs they hire us to do, we focus on maintaining competence, through specialized certification programs and/or degrees; acting as coaches by interpreting information and guiding our clients to solutions in their best interests; providing convenience by placing trades and monitoring client investments, rebalancing, managing tax implications and communicating changes; and supporting client efforts at achieving continuity for spouses, children and other family members, as well as for their charities.
What Job Are You Hiring For?
Whether you’ve worked with other financial advisers or are considering starting an advisory relationship for the first time, it’s important to understand the job you’re hiring for, as well as the best “candidate” for the position. While fees are an important consideration, they are only one factor in your decision-making process. Quality of service, the experience and expertise of the provider, the range of services, and a trustworthy relationship also contribute to the value of advice. If you’re hiring for financial peace of mind, determining a formula or a magic number to justify the fees you pay may not help you find the value you seek. Because your financial journey is unique to you, you may find that other factors weigh more heavily in achieving your goal because they speak directly to your ideal job “description.” In the end, the choice is deeply personal, and the value is in the eye of the beholder.