No matter where investors get their financial advice, they usually invest in similar ways before turning to an advisor.
In May, SmartAsset conducted a survey among 159 advisors and published
Among some clients, the errors they make are pretty simple. “A lack of attention can lead to money leaking in various ways that investors are not aware of,” says advisor Anna N'Jie-Konte of Dare to Dream Financial Planning, based in Silver Spring, Maryland.
Roughly 42% of surveyed advisors say that among prospective and new clients, trying to time the market is the most prevalent mistake they see, and 52% say it is the most detrimental mistake, making it both the most common and worst mistake among prospective and new clients according to surveyed advisors.
A Merrill Lynch
Other than trying to time the market, advisors listed lack of diversification and ignoring tax implications as common and egregious errors among prospective and new clients.
Advisor Samuel Deane of Deane Wealth Management, based in Atlanta, Georgia, works “exclusively with millennials in the tech industry” whose most common mistake is “making investment decisions without understanding the tax implications.”
Nearly 72% of surveyed advisors say that before working with them, prospective and new clients were predominantly using self-directed retirement accounts like an IRA or a 401(k) to invest. Less than 9% of advisors report that clients were mainly investing through self-directed taxable brokerage accounts.
About half of the advisors say that new and prospective clients tend to be overinvested in stocks and equities. However, 44% of the advisors report that new and prospective clients are underinvested in this asset class. Advisors also say that prospective and new clients tend to underinvest in bonds and overinvest in cash.
“I find that people are overly allocated in the pre-tax bucket, which means they won’t have a lot of flexibility with their finances,” N'Jie-Konte says.
Fueled remote work and worries over tax hikes, financial advisors who live in expensive cities are trimming their personal tax bills by moving to low-tax and no-tax states.
A significant percentage of surveyed advisors report that their tax planning services are underutilized. While not all financial advisors offer tax planning advice to their clients, taxes can have a huge impact on accumulating wealth long-term. More than 35% of advisors indicated that tax planning is the most underutilized service they offer, more than both estate and retirement planning. Roughly 24% of advisors say that retirement planning is the most underutilized service, and about 17% say that estate planning is the most underutilized.
In Deane’s practice, clients should be using his estate planning services more than they do, he says. “I think that probably has to do with the demographic. A lot of my clients are in their early thirties, and some don’t have children,” Deane says. “They’re more focused on maximizing other areas of their life like their investments and cash flow.”
Misconceptions about advisor fees are prevalent among potential clients. Almost 57% of surveyed advisors say that fees were the most common concern for prospective and new clients. Many advisors report that consumers typically believe advisors are “‘too expensive.’” Many advisor firms charge fees based upon a percentage of assets under management (AUM), and the average fee for these firms is roughly 1% of AUM; others, which are part of broker-dealers, charge commissions on securities transactions.
Other than fees, advisor track record and communication frequency are top client concerns. While it was not listed as an option on the survey, many surveyed advisors wrote that trust was a chief concern among prospective clients. Clients want to feel that they can have confidence in the person curating their financial plans.
Nearly 55% of surveyed advisors say that prospective and new clients have impractical return expectations. Advisors report that their value is more than improving clients’ investment returns. More than four out of five financial advisors say the chief benefit advisors offer to clients is helping them create a holistic, personal financial plan. The second most cited benefit is having routine meetings to check on progress towards one’s financial goals.
Although less than 3% of surveyed advisors rank improving investment returns as the top benefit for clients, about one-third list it as a top-three benefit for clients. Minimizing their clients’ tax burden is also not a top benefit, though a notable percentage of advisors rank it as a top-three benefit as well.
