When Is Good Financial Advice Most Important?

Jeremy Glaser: For Morningstar, I'm Jeremy Glaser. We often talk about the value of advice. I'm here today with David Blanchett, he is the head of retirement research at Morningstar Investment Management, for how to better quantify that.

David, thanks for joining me.

David Blanchett: Thanks for having me.

Glaser: In the past, we have talked about how investment selection is important, but there's also these other advice factors that play into your success. What are some of these factors that investors are also keeping in mind?

Blanchett: I think to your first point, building portfolios is critical to having better outcomes, right? But the problem is, is that I think too often investors, too often advisors focus too much on that one portfolio piece. Because in reality, achieving a goal takes a lot of important decisions. When I think about investors, for example, in a defined contribution plan, there's kind of two main things to think about. The first is, how much you are saving; the second is, how you invest your portfolio. I think that how much you save for retirement is critical but it's not necessarily a part of that overall decision of how you invest your portfolio. So, things like saving effectively, having correct insurance, emergency funds, these are all critical aspects of planning that aren't really a part of the portfolio construction process.

Glaser: Let's look at different life stages and what are going to be the most impactful places to get advice. The first would be for accumulators. What do you really need to be watching out for?

Blanchett: I think that in the scheme of things, accumulation is pretty easy. It's not as complex as, say, retirement or transition. Because the key there is, first, like I said before, saving for retirement, saving at least 10% of your pay every year for retirement. Also, ensure you've got adequate insurance coverage. Do you have life insurance, disability insurance and things like an emergency savings fund? And a lot of these things you can do, I think, on your own, because overall, it's relatively simple.It's as you kind of move forward in time that things become much more complex.

Glaser: So, let's look at little bit forward to pre-retirees, people getting ready for that transition. This sounds like it's going to be more complicated then?

Blanchett: I think that the transition period kind of just before retirement and right into it is by far the most complex time for retirees, because lots of choices you have to make, a lot of which are irrevocable--things like when do you claim Social Security, when do you retire, do you buy an annuity. All these things are choices you have to make, or that you can make right then and making the wrong decision can be very expensive.

Glaser: How can you quantify what that expense could be? Do you have a sense of the magnitude?

Blanchett: We do. Like so many things, it's really based upon your facts and circumstances. We can generalize for a given fact pattern. But we find that the value of all these things, I wrote a piece of Paul Kaplan about four years ago that was called "Alpha, Beta, and now … Gamma." We actually have a new piece coming out looking more in-depth at this idea. And we find this tremendous value, this kind of alpha-equivalent value of, say, a 3% a year plus of helping to one make the right choices. Now, a big part of that is, is what they would do when left to their own devices. And if you are someone who is watching these videos and kind of can build your plans, an advisor for you may not mean as much. But for the average American who doesn't have a lot of financial literacy or the desire or instincts to know what's right, that could truly benefit from working with someone to help them figure out what is the right strategy for them.

Glaser: In a low-return environment, that 3% could be the difference between meeting your goals or not?

Blanchett: Right. I think that more than ever advice is important because you can go to lots of places today and get great information on investing. I think that it's somewhat commoditized. I think it's the advice part that really help create better outcomes but you have to make sure that you are getting your money's worth. And it's hard to quantify this stuff. If you're working with an advisor, to know for sure that they are helping you is hard, but they should be. And so, the key is, understanding, first off, what is the advisor doing for you and how are they helping you create a better outcome.

Glaser: Those specific questions you might ask to kind of get at that, what would be the best way to try to figure that out for yourself?

Blanchett: Sure. I mean, what I would want to know as an investor working with an advisor is, walk me through all the things that you do to help me achieve a better outcome. And if they just say, I pick great funds and build portfolios, that's worth something but it's not worth much. If I'm looking for someone to work with me to help me create a better financial plan, I want someone who is a fiduciary, who has experience and education in financial planning. It really is going through a comprehensive process to figure out what I should be doing.

Glaser: David, as always, thank you for your insights.

Blanchett: Thanks for having me.

Glaser: For Morningstar, I'm Jeremy Glaser. Thanks for watching.