The Value of a Financial Advisor

Financial advisors really earn their money when they steer clients away from “alternative investments” such as those mentioned in this article.  Important report about investor fraud.

Too many un-sophisticated investors are drawn in by sales people with promises of high returns “like Warren Buffet gets with no stock market risk” without realizing just how much risk they are actually taking.

Risk is like a three legged stool – break one leg and you come crashing down.  In order to determine how much risk (stocks vs. bonds) one should have in their portfolio of globally diversified low cost mutual funds prudent investors ask themselves these three questions:

  1. Do I have the need for risk in my portfolio?  If you have not saved enough or got a late start, you may consider adding more stocks to your portfolio to increase your upside potential for higher returns.
  2. Do I have the ability to have risk in my portfolio?  If you don’t have time to wait for the market to rebound after a decline, adding risk to your portfolio may not be prudent.  
  3. Do I have the willingness to have risk in my portfolio?  If your investor personality has you checking the market every day, or you can’t sleep at night knowing your portfolio is allocated aggressively, you are not likely willing to carry a lot of risk.

An important aspect of Wealth Management is helping a client answer these questions.  Once an adviser has gone through discovery with a client and completed a Monte Carlo Simulation he can illustrate the need for risk in the client’s investment portfolio.  The adviser and client can discuss all the parameters, explore all the options, and arrive at a portfolio that will give the client market returns based on their risk tolerance.

Assume for a moment that the investor/client is a dentist (like all my clients) and the Monte Carlo Simulation indicates too high a possibility that the dentist will outlive their money.  A dental specific CPA/Wealth Adviser (like me) can dig into the practice financial statements (& other reports) and look for opportunities to create the income necessary to fund the short fall revealed in the Monte Carlo Simulation.  If you liken your financial statements to a radiograph, a diagnostic tool, you should understand what I mean.  A Dental CPA/Adviser knows what a dentist’s (including any specialist’s) numbers should look like: Production, Collections, Adjustments, Accounts Receivable, all the expense percentages, and other Key Practice Indicators like the ratio of hygiene to total production in a general practice right down to the ratio of periodontal procedures to other hygiene procedures.  Sometimes bringing things to a dentist’s attention is all it takes to enable them to make their practice more profitable.  Often, a dental consultant can help a practice create greater efficiency and profitability.  Typically, however, to effect real change in a practice, the Dental CPA/Adviser will recommend a specific consultant who has expertise in whatever area of the practice might represent the greatest opportunity for improvement or be deficient in some way.  This collaboration of a dentist, the CPA, and consultant is a very powerful thing that can bring about incredible life and career changing results.

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  1. […] In contrast, those who have been careful to understand, minimize, and fully disclose plan fees are well-positioned to continue serving as responsible and appreciated retirement fund stewards. […]

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