Key takeaways

• Industry studies estimate that professional financial advice can add between 1.5% and 4% to portfolio returns over the long term, depending on the time period and how returns are calculated.¹
• A 1-on-1 relationship with an advisor is not just about money management. A financial advisor can help you with your financial planning so you can have peace of mind while pursuing your life goals.
• The financial planning process includes defining your goals, understanding your current situation, and identifying the key steps to move forward.
• Beyond long-term goals like retirement, and shorter-term ones like buying a house, education, or travel, holistic financial planning can also include estate planning, family support, health care, insurance, and charitable giving.

When we make big decisions in life, most of us look for a source of expertise and guidance to help us make thoughtful choices to meet our individual goals and needs.

That's what professional financial advice is all about. Industry studies estimate that financial advice can add between 1.5% and 4% to account growth over extended periods.¹

Of course, the value of advice varies greatly. For one thing, financial advice can mean very different things to different people. For some investors, online financial planning tools or a single investment solution may meet their needs. For others, including people with more wealth, complex situations, or those who put more value on having a personal advisor, a 1-on-1 relationship with a financial advisor may be a better fit. In addition, the value of financial advice will vary over different time periods, depending on the personal circumstances, market conditions, and more.

For most investors who choose to work with an advisor, advice is not just about investments. It's also about helping you build a personalized plan around your full financial picture designed to help you pursue multiple goals, grow your wealth, and take care of the people who matter most to you.

In this special report, we bring some aspects of an ongoing relationship with a financial advisor to life through Sally and Ben, a hypothetical couple.

Sally & Ben Age: 55  Savings and investments: $1,000,000  Income: $250,000 per year (total) Goals: Support their son, maintain lifestyle during retirement, leave a legacy to a local charity

Plan

Everyone has goals and an advisor can work with you to understand those goals, model and quantify your options, confirm the steps you are taking and illustrate alternative plans to get you there. Over time, your advisor can help you with holistic planning including retirement, housing, education, travel, family support, charity, and more.

Sally and Ben's financial planning

When Sally and Ben first met with their advisor, he got to know them and their priorities and coached them to focus their attention on their major goals—and where they stood on the road to realizing them. Sally and Ben were considering how to help their 24-year-old son, create income in retirement, and manage the impact of taxes. Their advisor worked with Sally and Ben to create a picture of their current financial situation, helping them pull together all needed documents and develop a balance sheet. Sally and Ben and their advisor agreed to an agenda of items they would tackle as next steps.

At the next meeting they reviewed their balance sheet, beneficiary designations, asset allocation, and progress toward their goals. Their advisor used financial assumptions and the details of their situation to illustrate their current cash flow and get a sense of their retirement planning.

During their initial conversation, they were surprised to discover that Sally wanted to retire with Ben at age 62 while Ben was expecting both to work until age 67. Ben and Sally learned, according to the hypothetical projections, that by retiring at age 62 there was about a 10% probability they could run out of money when they are 89 years old. While that level of risk might have been acceptable to some, both Sally and Ben have a family history of long lives, and the couple wasn't comfortable with this risk that they would outlive their savings.

Instead, by waiting until age 67 to retire, they’d have more years of savings and compounded earnings, fewer years in retirement, and a higher Social Security benefit so the probability was higher that they could maintain their lifestyle, and have money left over.² Also, their hypothetical surplus meant their savings had the potential to last throughout their lives and also provide an inheritance for their son and a donation to Ben's favorite charity.

Implement

Financial planning is beneficial only if you implement your plan. A good coach can help you put your planning into action, trying to help you avoid costly investing mistakes along the way. A financial advisor can help you choose an appropriate mix of investments, adjust your portfolio over time, and withdraw your savings in a tax-efficient way to help realize your goals.

Implementing Sally and Ben's financial plan

Sally and Ben already had a portfolio that made sense for their goals, risk tolerance, and situation. But where they save—and how they are charged and taxed—also matters. Working with their advisor, Sally and Ben looked at the benefits of a Roth IRA and health savings accounts (HSAs), and also wanted to understand the benefits of charitable planning. Based on that discussion, they decided to:

• Convert some of their IRA savings to a Roth IRA. They will need to pay taxes on the IRA conversion, but potentially reduce taxes on withdrawals in retirement.
• Try to make the most of their HSAs as a way to save by paying any medical costs out-of-pocket and investing the HSA money for growth.
• Donate appreciated securities for charitable donations. By making a direct donation of $50,000 worth of stock that has appreciated $30,000, they could potentially avoid capital gains taxes—and increase the value of their federal income tax deduction from $15,858 to $18,500 (see chart).³

Manage

Working with an advisor can provide a disciplined process for your financial planning, regular check-ins, portfolio reviews, and progress reports. An advisor can also evolve your plan as you prioritize new goals or manage life events, and help you manage risk and seize opportunities as markets or tax laws change.

A financial advisor can work for you through market ups and downs—and provide the guidance and encouragement you may need to stay on track to avoid the sometimes costly mistakes investors make during volatile markets.

Market moves also create tax planning opportunities. Consider the potential of tax-loss harvesting to help lower capital gains taxes. The rules can be complex. But you can use realized capital losses to offset realized capital gains and, potentially, a small portion of ordinary income. Plus, unused losses can be “carried forward” and used in future years.

Here's how tax-loss harvesting could work for Sally and Ben. Say Sally is subject to a 20% long-term capital gains rate, so she would owe $2,000 in taxes on a $10,000 long-term capital gain this year. But what if she had sold $6,000 worth of stocks at a loss during the same year? Those losses could offset $6,000 worth of capital gains this year, leaving a $4,000 taxable capital gain, and only an $800 tax bill. That’s a tax savings of $1,200 this year, increasing her after-tax gain by 15%.⁵

Of course, you never want tax considerations alone to drive your investment decisions. But if sale of both securities were in sync with your investment objectives, the tax savings would provide a boost to your after-tax return.

Managing Sally and Ben's plan

Each year, Sally and Ben plan to have 2 check-ins with their advisor. During those sessions they'll review any major changes to their goals or life. So, for example, if Sally has to stop working early due to health issues, or Ben’s mother leaves them an inheritance, their advisor can help them incorporate those changes into their plan. During their check-ins, they'll review their portfolio to help ensure it’s still in line with their goals and discuss opportunities for tax-loss harvesting and other tax-smart strategies.*

Currently, they are wondering if they need to make changes to their portfolio or incorporate different income solutions as they near retirement, including whether to annuitize a portion of their retirement savings.

To help them decide, their advisor provides a hypothetical example, assuming Sally and Ben are now 67 years old and about to retire with $1 million in investments. Going forward, they will be living off their nest egg, and no longer saving. They are looking to their advisor to help them evaluate their retirement expenses and income sources, identify any gaps, and potentially save taxes along the way.

The advisor lays out 2 scenarios. In one, Sally and Ben shift all of their savings to a more conservative mix of 50% equity, 40% bonds, and 10% cash—a common asset mix for retirees—and use withdrawals to cover essential and discretionary expenses in retirement. In the other, they put 20% of their savings in a guaranteed income annuity that along with Social Security will cover their essential expenses, and the rest in that 50-40-10 asset mix. Because they will be able to cover essential expenses with Social Security and the annuity, they can invest the rest of their portfolio for a longer period. Also, the annuity provides some longevity protection for Sally and Ben. Of course, they will want to pick their annuity provider carefully as guarantees are subject to the claims-paying ability of the issuing insurance company.

If they live until age 93, the second strategy could hypothetically produce more lifetime income, with little concern about running out of money because their essential expenses are covered by Social Security and the annuity.⁶

There are also tax-smart strategies for withdrawing money in retirement that could potentially help reduce Sally and Ben's taxes and extend the life of their retirement savings. Some people believe that taxable assets should be spent first, then tax-deferred savings in traditional IRA and 401(k) accounts, and finally tax-free assets in any Roth or HSA accounts. But that is not always the best approach when it comes to your federal income taxes throughout retirement.

In general, for some people without relatively large taxable capital gains, a more tax-efficient strategy may be taking assets from all their account types each year, in proportion to their overall retirement savings. Let's assume that by retirement at age 67 Sally and Ben have $400,000 in tax-deferred IRA assets, $300,000 in a tax-free Roth account, and $300,000 in a taxable brokerage account. Taking a proportional approach to withdrawals during retirement could potentially reduce the taxes they pay on that money by an estimated $30,038 or 33%.⁷

The bottom line

Financial advice is more than just numbers and investments. It's a process that can help you make a plan, chart your progress, and hopefully achieve your personal and financial goals—while feeling more confident along the way.