In the current volatile economy, many Americans are hesitant to work with financial advisors due to financial constraints. However, a recent study reveals why it's crucial for them to reconsider their decision.
Russell Investments, an international investment firm headquartered in Seattle, has conducted an extensive analysis of the past decade, including the challenging markets of 2022. The study emphasizes the increasing importance of sound financial advice.
The economic landscape of the 2020s has proven to be challenging to navigate independently. In 2022, major stock market indices like the S&P 500, Nasdaq, and Dow Jones experienced their worst performances since 20081, with the S&P 500 down by 19.4%. Simultaneously, bond markets also suffered, with the Barclay's U.S. Aggregate Bond Index registering a record 13% decline2 by the end of 2022.
Furthermore, inflation and interest rates have soared, with the consumer price index experiencing a 9.1% increase3 in the first half of 2022—the highest in four decades. To counteract this, the Federal Reserve raised the federal funds rate to over 5%4, the highest level since 2007.
Despite these significant challenges, only 35% of U.S. adults sought assistance from wealth managers in 20225.
Russell Investments advocates for the remaining 65% to reconsider their decision and highlights three key benefits of working with a financial advisor, as outlined in their study:
Rebalancing portfolios: In an ever-changing economy, it's not feasible to adopt a "set it and forget it" approach. While investors may carefully allocate their assets initially, without periodic adjustments, the portfolio's asset allocation can deviate over time. Russell Investments demonstrates the significance of rebalancing portfolios by illustrating the impact on a traditional 60/40 portfolio (60% stocks, 40% bonds) from 2009 to 2022. Without rebalancing, the portfolio would shift to 82% stocks and 18% bonds due to the prolonged bull market of the 2010s. This imbalance increases the overall risk for risk-averse investors. Rebalancing requires expertise and guidance from professionals, as it can be challenging both financially and emotionally.
Behavioral coaching: Investing can be an emotional endeavor, particularly during times of market volatility. One of the essential roles of a financial advisor, according to Downing, is to persuade investors to stay committed to their investment strategies despite turbulent market conditions. The study attempts to quantify the cost of succumbing to emotions by comparing the performance of a portfolio invested in the S&P 500. It reveals that an investor who stayed invested from 2012 to 2022 would have a portfolio worth $326,540, whereas missing the best market days would drastically reduce the value to $178,702 (missing the top 10 days) or $99,815 (missing the top 30 days). Financial advisors play a crucial role in helping clients avoid such costly mistakes by creating and maintaining a solid investment plan that remains unaffected by short-term market fluctuations.
Tax planning: Wealth managers can significantly assist clients with tax-related matters. They collaborate with certified public accountants to ensure accurate and timely tax filings. For older clients, especially, this assistance becomes increasingly valuable as they age and face challenges related to organizing their tax documents. By selecting tax-efficient investment options, financial advisors can help clients reduce their tax liabilities in the long run. For instance, Russell Investments demonstrates that a $500,000 portfolio at the end of 2022, consisting of specific mutual funds and exchange-traded funds, would result in a capital gains tax of around $7,000. However, by investing in tax-managed mutual funds, the investor could have completely avoided capital gains distributions, resulting in zero capital gains tax.
Downing emphasizes that financial advisors provide substantial value to their clients in this area, even though it is sometimes overlooked. It's not solely about the investment returns but also about maximizing the retained earnings.
In summary, despite the perception that financial advisors may be unaffordable in today's volatile economy, a new study by Russell Investments highlights why it's essential not to overlook their services.
Rebalancing portfolios, behavioral coaching, and tax planning are key areas where Flagship Financial Advisors can help individuals navigate the challenges of the economy, maximize returns, and achieve their financial goals.
Investment advice offered through Stratos Wealth Advisors, LLC, a registered investment advisor. Stratos Wealth Advisors, LLC and Flagship Financial Advisors are separate entities. This content is developed from sources believed to be providing accurate information and provided by Flagship Financial Advisors. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. Stratos Wealth Partners and its affiliates do not provide tax, legal or accounting advice.