Hearn: Here’s how to design your ideal retirement

Joe Hearn


Mark Twain once said: “It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so.”

If there’s one thing that many investors “know for sure,” it’s that the need for financial advisers went out the window with the advent of online trading and index mutual funds.

Is that true? Are advisers the 21st century equivalent of the buggy whip?

Not according to a recent research report by Vanguard called “Advisor’s Alpha.” Wait, what? Vanguard? Champion of the do-it-yourself investor? Purveyor of passive index investing? That Vanguard? Yes, that Vanguard.

In the report, Vanguard reiterates its long-held position that “over longer time horizons, active management often fails to outperform market benchmarks.” In other words, it’s tough to beat Mr. Market, especially after expenses.

So, according to Vanguard, if a client-adviser relationship is based solely on the adviser delivering market-beating performance, the client is unlikely to get what he’s paying for. But what if the adviser works to add value in other ways?

Rather than focusing on doing “better than the market,” Vanguard suggests that a more practical gauge of relative performance might be “better than investors would most likely do if they didn’t work with a professional advisor.”

They explain: “Left alone, investors often make choices that impair their returns and jeopardize their ability to fund their long-term objectives.” This type of behavior often leads to “wealth destruction.”

Vanguard suggests that advisers can help add value if they “act as wealth managers and behavioral coaches, providing discipline and experience to investors who need it.”

To be sure, not everyone needs it. But if you think you might benefit from a little help, however, here are three areas where Vanguard suggests advisers can add value.

The Vanguard report said: “The greatest obstacle to clients’ long-term investment success is likely themselves.”

Vanguard suggests that advisers may be able to help clients overcome their negative behaviors: “Advisers, as behavioral coaches, can act as emotional circuit breakers in bull or bear markets by circumventing their clients’ tendencies to chase returns or run for cover in emotionally charged markets.”

Asset allocation is a critical element of portfolio return. Some studies conclude that as much as 90 percent of portfolio return can be attributed to asset allocation. While many advisers realize the importance of finding a suitable asset allocation strategy for their clients, Vanguard notes that many investors “neglect it on their own.”

Having a suitable asset allocation can not only bolster returns, but it can have an important psychological effect as well. Vanguard suggests that knowing the allocation “was arrived at after careful consideration, rather than as a happenstance of buying funds with attractive returns … can serve as an important emotional anchor during those all-too-frequent uprisings of panic or greed in the markets.”

Taxes can have a significant effect on portfolio return. This is especially true during retirement. “On their own, investors often spend first from their tax-advantaged accounts,” said Vanguard, even though “it is generally more advantageous to spend from taxable accounts first.”

A competent adviser can help clients design a distribution strategy that takes taxes and other important considerations into account.

According to Vanguard: “A well-thought-out drawdown strategy can improve the likelihood that the client’s assets will be able to support his or her financial goals through retirement and beyond.”

Joe Hearn is an Omaha financial planner. He can be reached at 402-331-8600 or by email at joe@intentionalretirement.com.

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