Are Financial Advisors Worth the Investment? Exploring the Value of Financial Advice

In most Caribbean households, having a financial advisor is taboo. In developed markets, having a financial advisor is ubiquitous, with individuals comparing advice on a day to day basis as part of friendly conversation. What makes us in the Caribbean different? I am not here to answer that question because my opinion will fill up way too much of this blog post. Rather I want to shed light on why Caribbean people (and Trinidadians in particular) need financial advisors and the value that they can bring.

Yes, I am wealth manager and so that entails being primarily an investment expert but also entails taking an holistic approach to a client's financial life. These blogs and Learning Centre (on this website) are a mechanism for me to reach a wider audience, to spread knowledge and tools on the best way to organize your finances, no matter your level of assets or net worth. Let's dive straight in:-

Higher growth and better outcomes

The average mid-career professional has way too much cash sitting in the bank. Lets take an example of a fictional 35 year old engineer, John. In scenario one, he does not meet with a financial advisor. His gross salary is TTD 30K monthly (he did a specialist masters recently), he has a car loan for 150K with monthly payments of $2,650 over 7 years at a 12% interest rate at a credit union his parents were part of since their youth. He works on 1 year contracts and so does not have a pension plan with his employer but gets a healthy gratuity at the end of the contract then is rehired for another year. He built up a nest egg of TT$250K from these gratuities and savings over the years as he lives a modest lifestyle (apart from the 'expensive' car). He rents a humble apartment, is single and has multiple credit cards with high limits, but seldom uses them- he prefers to spend from his chequings account, putting excess funds in a savings account at a local bank his aunt suggested. John thinks he is on the right path but often questions if he is making smart money choices.

On the surface, John seems to be doing very well and does not need a financial advisor. He may still do very well over his lifetime, but is he leaving money on the table?

Lets take a scenario where John sees a financial advisor. After a series of one on one meetings, John and his advisor comes up with the following plan- 1) John places 6 months of core living expense in a high interest savings account representing his emergency fund. These core expenses are any expenses John would have to pay if he loses his job tomorrow. He adds up rent, utilities, food & pharmaceuticals , gas, health & critical illness insurance & car insurance. His advisor also insisted on including entertainment expenses in the emergency fund- networking is the best way to find a job, after all. This adds up to 65K for John. He is left with 185K unallocated (250K less 65K).

Better outcome:- John can sleep at night knowing that things are in place to live a normal life even if he loses his job. His emergency fund earns a modest interest rate and so keeps up pace with inflation. His advisor also reviewed his insurance coverage to ensure it is sufficient.

2) The advisor asks if John has ever filed taxes; John is surprised at the question because his employer deducts all his necessary taxes. What John did not know was that he can apply to deduct the cost of his masters programme from this tax bill. John also did not know that there are other methods of reducing this tax bill like buying into registered pension products or buying a first home.

Better outcome: John is in a position to 1) receive a tax refund and 2) now that he understands the tax system, reduce his tax bill for many years to come. Because of John's high cost of tuition and high tax bill, he was able to get a refund of ~TTD67K. He now has 252K unallocated (185K + 67K) + 65K allocated to his emergency fund.

3) His advisor notices John's interest rate on the car loan and John proudly replies, I got a special from my credit union for 1% interest. His advisor then explains that the interest rate special is 1% per month and that equates to a little more than 12% per year. He goes on to explain that smaller credit unions may not be able to afford to charge lower interest rates like large banks do and so the format of advertising allows them to lure in clients, whereas banks usually follow an 'APR' format or annual percentage rate that are standardized so customers can compare and contrast.

The advisor suggests paying off the loan in full since his resources allow him to do so. This is because the cash at the bank or most investment options would not yield better than 12% and so he is better off financially by paying it off (or even changing loan providers to benefit from a lower rate).

Better outcome: John now understands how to interpret interest rates and so can make better choices over his lifetime. He also now has a framework to answer the question of whether to use cash to pay off a loan or place into an investment. He has saved paying 12% interest over 7 years! He is now left with 102K unallocated, 65K in an emergency fund and a fully paid off car.

4) John is excited about being debt-free after paying off his car loan and asks his advisor about how to structure his credit card debt. He has 2K in debt split over 5 credit cards. While this is not a lot of debt in John's context, his advisor teaches him about how to use credit cards to build a good credit score. For John, this involved paying off and cancelling 3 of the highest interest rate credit cards. He is now left with 2 cards- one with a cash back benefit and the other with an attractive rewards programme- both of these cards have low limits, relatively lower interest rates and a low annual fee.

Better Outcome: John now understands how to build a better credit score and contrary to his previous belief that many credit cards did this for him, he now understands that fewer credit cards and lower limits such that he uses at least 30% of the limit each month then pays it off in full (instead of the minimum payment) before the deadline, builds a healthy credit profile. John now saves on credit card interest because he paid off the 2K and would not pay credit card interest for the rest of his life, because he plans on paying on time and in full. John now has 100K unallocated, 65K in an emergency fund and a fully paid off car and 0 debt!

5) In a subsequent session, the advisor asked John to list his top 3 financial goals. After some thinking John thought of 1) having a comfortable retirement 2) owning his own home and 3) planning for marriage. John and his advisor works together a plan on how much he needs to save/invest for each goal, dependent on his timeline and risk tolerance and products available in the market.

Better outcomes: John now has a framework in place to save and invest towards 3 important goals. He learns that budgeting is a key component to reaching his financial goals. Of his 22K after tax salary, he now follows a format of spending

250% or 11K	in core expenses such as rent, food and utilities, etc.
20% or 4.4K	in wants such as dining out, etc.
30% or 6.6K	in saving & investing towards his 3 goals

John now has ~33K assigned to each of his three goals in appropriate investment vehicles, contributing to them every month, 65K in an emergency fund, a fully paid off car and 0 debt. He is motivated to stick to his budget and looks forward to watching his investments grow. In addition to his salary, he uses his tax rebates to top up an account designated towards the deposit for his first home.

Recap: A bigger table

John might have been fine without an advisor but we learned he left a LOT of MONEY on the table by simply not knowing how to use the systems and services available to him. Over John's lifetime, he would now be able to accumulate wealth at a faster rate, define his goals and thus reach his goals faster. With just a few sessions with an advisor John was able to understand how much he needs for his emergency fund, insurance coverage, how to budget, understand debt offerings, define goals and invest towards them. He now has a bigger table with more money on it!

He would hopefully spread the knowledge he learned to his family and friends, and hopefully you will too!