When thinking about investment advice, many people have asset allocation and investment strategies on their minds. But holistic financial advice is much more than that. In this post, we discuss the various facets of investment advice and what an investment adviser can do for you.
The Circle of Financial Advice
From the 10,000 ft perspective, we distinguish two types of financial advice which should always go hand-in-hand:
- Financial planning
- Wealth management
Together, these two services build a circle: We start by developing a plan for your financial future. Next, we follow this financial plan for a while and focus on wealth management. If circumstances changed, or enough time has passed to revisit the plan, your financial planner amends or updates the plan.
This circular structure makes it clear that investment advice is neither one-size-fits-all nor a one-time-event. Instead, it is a continuously ongoing process, adapting and evolving with every change to your situation and fluctuation of external circumstances.
How Are Investment Advisors Compensated?
Through working with a financial advisor, reviewing your financial health will become your new good habit. But this ongoing nature also raises a concern for many: how much does this service cost and is it worth it?
Investment advisers are fiduciaries, legally bound to act in their clients' best interests. To avoid conflicts of interest, most investment advisors are compensated on a fee-only basis with a single fee covering all services provided by the advisor. Most often, this fee is calculated as a percentage of the client's assets under management and charged monthly in arrears. As a rule of thumb, you should expect the advisory fee to range between 1% and 1.5% per year.
It is important to point out that, with only a few exceptions:
- investment advice is not paid on an hourly basis
- investment advisors are not paid per trade
- investment advisors do not receive commissions or kickbacks
As a result of this fee structure, you know beforehand how much the services will cost. And that amount won't change, even if your needs turn out to be more frequent or more complicated than anticipated. In return, you have a partner who will continuously act in your best interest on optimizing your financial health.
Financial planning is the foundation of everything your financial advisor does. Before we can provide sound financial advice, we need to assess your current situation, define your objective, and explore the various options to get there. The result is a financial plan, which serves as a roadmap to achieving your financial goals. This financial plan is a living document: as we are planning for an uncertain future, your financial plan may change based on shifting goals or a change in circumstances.
There are many financial goals, with varying priorities and time horizons. The big goals most people are concerned about include paying off their mortgage, putting their children through college, and saving for retirement. Retirement is such a universal goal, that financial planning is often also referred to as retirement planning.
However, your financial plan can and should include more than just the most significant and most obvious goals. Instead, we encourage our clients to also think about the smaller and optional or even luxurious goals. These may include a new car, traveling the world, buying fine art, or donating to your favorite charity. Your financial planner will help to prioritize these goals and assess the likelihood of achieving them.
Creating a financial plan is a complex task, as we attempt to capture future outcomes based on today's circumstances and historical data. To support this effort, we use dedicated financial planning software. This software uses sophisticated quantitative methods to model future cash flows, including price inflation and the variability of asset returns. This allows us to create complex models with high confidence.
Your individual financial plan is an indispensable tool to make sure you are on track to reach your financial goals and retire comfortably. To learn more about the process of financial planning, please read our detailed walk-through of a financial planning session.
With a comprehensive financial plan in place, we can proceed to wealth management. Under this umbrella, we invest your capital to maximize the likelihood of reaching your financial goals. Wealth management starts with creating your individual investment policy. This policy defines which assets mix to invest in, the investment time horizon, and how we are planning to tilt the asset allocation when economic circumstances change.
We distinguish two main styles of asset allocation. Strategic asset allocation describes a manner where we define a static asset allocation, which we then maintain, regardless of economic sentiment. This style is based on Modern Portfolio Theory and the Efficient Market Hypothesis. There are many successful portfolios available, which provide stable returns across a wide array of economic seasons.
In contrast, tactical asset allocation takes a more active approach. Based on technical or macro-economic indicators, we adjust the asset allocation intending to avoid deep drawdowns and reduce volatility. We have many years of experience in developing quantitative models for tactical asset allocation and firmly believe that we can add tremendous value through active asset management.
As part of our wealth management services, we will help you decide and define an investment policy that matches your goals, personality, and core beliefs. Once we have established your investment policy, we proceed to the day-to-day asset management. This is the part where we monitor your portfolio daily, check it against the rules defined in your investment policy, and rebalance the portfolio as required. At Bertram Solutions, we have created a unique and proprietary infrastructure, which allows us to maintain a large number of highly individualized separately managed accounts.
Our reliable wealth management services make sure that your portfolio is always in good shape, and frequently rebalanced to match your investment policy.
We hope this post provided you a helpful overview of the services we offer and how we can help smoothen your path to reaching your financial goals. Please contact us to learn more.