Financial markets have become increasingly complex, making it difficult for individual investors to navigate successfully on their own. Investors often face the question of whether hiring a financial advisor truly provides enough value to justify the fees.

Recent comprehensive research by Vanguard, DALBAR, and other industry experts provides compelling evidence that professional financial advice offers significant value beyond basic investment selection. 

A case for having a pro on your side

Skepticism toward the financial advice industry is understandable—bad experiences, opaque fee structures, or conflicts of interest have burned many investors. Stories of sales-driven advice and misaligned incentives have cast a long shadow. This article is not a defense of every advisor, but rather a case for how true fiduciary advice—delivered transparently and with accountability, can provide measurable value in an increasingly emotional and volatile investing environment.

This emotional volatility is not hypothetical. We live in an era of heightened uncertainty, with rapid market shifts and global instability testing investor patience. As Fisher (2025) highlights in The Psychology of Market Patience, staying invested through turbulence demands far more than logic—it requires resilience. In these moments, the steady presence of a fiduciary advisor can serve as both guide and guardrail, helping investors remain committed to their long-term goals.

Professional advisors serve not only as planners and portfolio managers but also as behavioral coaches and accountability partners. This role is becoming even more essential as emotional decision-making erodes individual investor returns. The following sections explore how advisors can help improve portfolio outcomes, increase the likelihood of meeting financial goals, and reduce the emotional cost of investing.

They help enhance your portfolio performance

One of the most critical aspects of working with a financial advisor is the potential for improved portfolio performance. Contrary to the popular belief that advisors primarily add value by outperforming the market, research indicates that the most meaningful advisor contributions come from disciplined investment strategies. Advisors employ practices such as improved diversification, regular portfolio rebalancing, and tax-efficient investing, each enhancing long-term returns (Pagliaro & Utkus, 2019).

Vanguard’s research quantifies this benefit, estimating that financial advisors may add about 3% per year in net returns compared to a typical self-directed investor (Kinniry et al., 2022). This incremental gain, compounded over years, translates into significantly greater wealth accumulation.  

They can walk with you through turbulent times

According to DALBAR’s 2024 Quantitative Analysis of Investor Behavior (QAIB) report, the average equity investor significantly underperformed the market. In 2023 alone, the typical equity investor earned 5.5% less than the S&P 500, marking the third-largest performance gap in the past decade (DALBAR, 2024). This underperformance primarily results from emotionally driven investment decisions, such as selling assets during downturns and missing subsequent rebounds.

DALBAR’s findings further illustrate this emotional cost during turbulent periods. For example, the average equity investor saw returns of -21.17% in 2022, compared to the S&P 500’s -18.11%. Even in the strong market rebound of 2023, investors again lagged the market substantially, achieving only 20.79% returns versus the S&P 500’s 26.29% (DALBAR, 2024). Such significant performance gaps highlight the crucial role of advisors in mitigating harmful investor behaviors.

they can lead you to your goals with precision

Beyond portfolio management, financial advisors significantly enhance investors' ability to achieve long-term financial goals such as retirement security. Vanguard’s study on Personal Advisor Services (PAS) reveals that advised investors have an 80% or higher chance of successfully meeting their retirement goals compared to investors without professional guidance (Pagliaro & Utkus, 2019).

The role of fiduciary advisors—professionals legally obligated to act in the best interests of their clients—is particularly critical. According to Sheldon Geller, fiduciary advisors are required to disclose and mitigate conflicts of interest, ensuring investment decisions prioritize client goals over personal or company gain. This fiduciary responsibility provides investors with assurance and confidence, contributing to better financial outcomes (Geller, 2017).

They provide emotional stability

One of the most valuable yet often overlooked benefits of financial advice is the emotional stability it provides. Behavioral finance studies show that individual investors frequently succumb to emotional biases such as overconfidence, excessive trading, and holding onto losing investments too long.

Maymin and Fisher (2011) emphasize the value financial advisors add through behavioral coaching, helping clients avoid impulsive decisions during market downturns. Vanguard's research quantifies this emotional benefit, attributing between 0 and 2% in additional annual returns to behavioral coaching alone (Kinniry et al., 2022). Trust and personal connection further account for nearly half of the perceived value in advisor-client relationships, empowering clients to stay committed to their investment strategies during volatile periods (Pagliaro & Utkus, 2019). 

They will help you stick to a long-term strategy

Investor discipline, encouraged by advisors, remains critical for achieving optimal returns. DALBAR’s findings underscore how investor behavior significantly impacts returns. The report indicates that investors who maintain long-term strategies, supported by professional guidance, substantially outperform those who make emotional decisions (DALBAR, 2024).

The historical evidence from DALBAR’s extensive research over the past 30 years consistently shows that emotional investment decisions are detrimental. Advisors counteract this by instilling discipline, maintaining structured investment strategies, and reinforcing long-term thinking, resulting in better investment outcomes.

find an advisor who helps you go further than you could alone

Despite substantial evidence supporting the value of financial advice, some investors remain skeptical, often due to isolated cases of underperformance by certain advisors. However, focusing solely on short-term investment returns can be misleading. The primary value of financial advice lies in comprehensive financial planning, disciplined behavioral coaching, and fiduciary oversight.

Investors should critically evaluate advisors based on their holistic service offerings, transparency, and fiduciary commitment rather than just short-term market performance. Effective advisors deliver measurable benefits through strategic planning, emotional guidance, and long-term investment discipline.  

being a FIDUCIARY matters

Understanding the differences among fiduciary, quasi-fiduciary, and non-fiduciary advice is essential. According to Fisher (2025), only about 4.92% of financial professionals in the U.S. operate as fee-only fiduciaries, legally obligated to place their clients' best interests above their own and disclose any potential conflicts of interest. Quasi-fiduciary advisors might follow fiduciary standards selectively or in certain situations but may still receive commissions or have other conflicts of interest. Non-fiduciary advisors, such as brokers, typically operate under suitability standards rather than fiduciary obligations, often leading to decisions that may not align with optimal client outcomes (Fisher, 2025).

The distinction between these advisory models is critical for investors. True fiduciary advisors provide greater transparency, reduce conflicts of interest, and often result in higher client satisfaction and better long-term financial outcomes. 

Invest wisely with professional guidance

Navigating today's financial landscape alone poses substantial risks, primarily due to emotional biases and complex market dynamics. Research from Vanguard, DALBAR, and leading financial experts clearly demonstrates the profound impact professional financial advisors have on investor outcomes. Advisors not only enhance portfolio returns but also significantly increase the likelihood of achieving critical financial goals and provide invaluable emotional reassurance.

Ultimately, investors who recognize and leverage the full spectrum of benefits offered by professional financial advice position themselves to achieve greater financial security, resilience, and long-term success.

References:

DALBAR. (2024). Quantitative Analysis of Investor Behavior (QAIB) Report. DALBAR, Inc. Retrieved from www.qaib.com

Fisher, P. (2025, April 6). The psychology of market patience. Human Investing. Human Investing. https://www.humaninvesting.com/450-journal/psychology-of-market-patience

Fisher, P. (2025, February 14). An analysis of investment advisor representatives and bureau of labor statistics data: Determining the percentage of financial advisors acting as true fiduciaries. https://www.humaninvesting.com/450-journal/only-5-percent-of-advisors-are-true-fiduciaries. Human Investing.

Geller, S. M. (2017). Retaining a fiduciary investment advisor. The CPA Journal, 72-73.

Kinniry, F. M. Jr., Jaconetti, C. M., DiJoseph, M. A., Walker, D. J., & Quinn, M. C. (2022). Putting a value on your value: Quantifying Vanguard Advisor’s Alpha. Vanguard Research.

Maymin, P. Z., & Fisher, G. S. (2011). Preventing emotional investing: An added value of an investment advisor. The Journal of Wealth Management, 13(4), 34-43. https://doi.org/10.3905/jwm.2011.13.4.034

Pagliaro, C. A., & Utkus, S. P. (2019).Assessing the value of advice. Vanguard Research.

---

A BOOK FOR THE SAVER IN ALL OF US

Becoming a 401(k) Millionaire isn’t your typical retirement guide. With 30 years in finance, Dr. Peter Fisher shares personal insights and real stories to help you plan with confidence.

Learn more

Disclosure: Human Investing is a registered investment adviser with the U.S. Securities and Exchange Commission (SEC). Registration with the SEC does not imply a certain level of skill or training. This article is provided for informational and educational purposes only and should not be construed as personalized investment advice. The information contained herein is believed to be accurate as of the publication date but is subject to change without notice. Past performance is not indicative of future results. Index performance is shown for illustrative purposes only and does not represent the performance of any specific investment. Investors cannot invest directly in an index, and index returns do not reflect fees, expenses, or taxes. The estimated value added by advisors is based on research and modeling assumptions that may not reflect actual investor experiences. Actual results will vary based on individual circumstances, market conditions, and advisor practices. Investing involves risk, including the potential loss of principal. Readers should consult with a qualified financial advisor to assess their individual circumstances before making any financial decisions.

---

Related Articles

A financial plan is a structured approach to managing one’s financial life. It is not merely a spreadsheet or a collection of investment products—it is a comprehensive framework that organizes income, expenses, savings, risk management, taxes, and long-term goals into a cohesive, actionable strategy. When constructed properly, a financial plan enhances decision-making, reduces uncertainty, and improves financial outcomes (Nissenbaum, Raasch, & Ratner, 2004).

Yet if financial planning is so powerful, why do so few follow through?

The answer often lies not in math, but in mindset. Research shows that even financially literate individuals struggle to plan for the future when they lack self-control, future orientation, or supportive social norms (Tomar, Baker, Kumar, & Hoffmann, 2021). A well-designed plan must account not just for assets and liabilities—but for human behavior. That’s why the best financial plans are often paired with an accredited fiduciary advisor, who offers a simple, visual, and tailored approach to help you make decisions.

At its core, a financial plan helps individuals clarify what matters most and align their resources accordingly. Whether navigating early adulthood, managing a growing family, or preparing for retirement, individuals benefit from a written plan that reflects financial priorities and personal values. In my work as a financial advisor and educator, I have seen that the most significant breakthroughs often come not from more money, but from more clarity.

the purpose of a financial plan

The purpose of a financial plan is twofold: to organize current financial resources and to make informed decisions about the future. This may sound straightforward, but the complexity of modern financial life often makes it difficult for individuals to answer even basic questions such as, "Can I afford this?" or "Am I on track?" A financial plan provides a framework to answer these questions thoughtfully and methodically.

More than a static document, a financial plan is a living tool. It should evolve alongside an individual's life stages, economic conditions, and shifting priorities. According to Nissenbaum, Raasch, and Ratner (2004), regularly reviewed and updated plans yield significantly better financial outcomes over time.

It starts with defining your goals

Goal-setting is the anchor of any financial plan. Without clear goals, even the most sophisticated strategies can lose direction. Goals give context to numbers and bring meaning to saving and investing. They can be short-term (saving for a vacation), mid-term (purchasing a home), or long-term (funding retirement or creating a legacy).

One of the most effective frameworks for goal setting is the SMART method—specific, Measurable, Achievable, Relevant, and Time-bound. Goals should inspire and direct behavior. In my experience, clients who articulate their goals clearly are far more likely to follow through on their plans.

components of a comprehensive plan

A thorough financial plan includes several interdependent elements, each of which contributes to the individual's or household's overall financial health. According to Ernst & Young’s Personal Financial Planning Guide (Nissenbaum et al., 2004), the five essential components are:

1. Cash Flow and Budgeting
   Understanding income and expenses is the foundation of any financial plan. A clear cash flow picture allows individuals to make informed decisions about saving, spending, and giving. Budgeting is not about restriction; it is about intentionality. When individuals budget effectively, they begin to control their money rather than letting money control them.

2. Risk Management and Insurance
   Life is unpredictable. A good financial plan includes appropriate insurance coverage to protect against major disruptions—including illness, disability, death, or property loss. While not exciting, insurance serves as a financial firewall. Emergency savings also fall into this category, with most professionals recommending a reserve of 3 to 6 months of essential expenses.

3. Tax Planning
   Tax efficiency is a core pillar of financial planning. Smart planning reduces unnecessary tax burdens and aligns financial decisions with long-term goals. This includes strategic use of tax-advantaged accounts, such as IRAs and 401(k)s, as well as decisions around capital gains, charitable giving, and income timing.

4. Investment Planning
   Investments must serve the plan—not the other way around. A financial plan defines the purpose, time horizon, and risk tolerance for each investment goal. This helps investors avoid emotional decisions and focus on long-term strategies. Diversification, asset allocation, and periodic rebalancing are all part of this disciplined approach.

5. Retirement and Estate Planning
   A financial plan must consider the future. This includes projecting future income needs, optimizing Social Security benefits, managing required minimum distributions (RMDs), and crafting an estate plan that reflects one’s legacy goals. Planning ahead ensures that wealth is transferred intentionally and tax-efficiently.

Building a financial plan: a step-by-step process

While the components of a financial plan are well-established, the process of creating one can be deeply personal. Below is a common approach used by both individuals and professionals:

1. Establish Goals and Priorities
   Start by asking what matters most. What do you want your money to do for you? What are your non-negotiables? Apply the SMART method in making them more attainable. Writing these goals down is a powerful first step.

2. Gather Data
   Collect all relevant financial information, including income, expenses, debts, assets, insurance policies, and legal documents. The accuracy of your plan depends on the quality of your data.

3. Analyze and Diagnose
   Identify gaps, inefficiencies, or risks. This includes assessing debt levels, reviewing savings rates, stress-testing for emergencies, and evaluating investment alignment.

4. Develop Strategies
   Design strategies that address the specific needs uncovered in your analysis. This might include refinancing high-interest debt, increasing retirement contributions, or adjusting your investment allocation.

5. Implement the Plan
   Execution is where many plans fall apart. Automate good behavior when possible—automated savings, investment contributions, and bill payments reduce reliance on willpower.

6. Monitor and Review
   Plans should be reviewed at least annually, and anytime there is a significant life event (e.g., marriage, new job, birth of a child). Adjustments should be proactive, not reactive.

Behavioral considerations in financial planning

Financial planning is as much about psychology as it is about math. Behavioral finance has shown that individuals often act irrationally with money due to cognitive biases, emotional reactions, and social pressures. A written financial plan serves as a behavioral anchor—a tool that reduces the likelihood of impulsive decisions.

Recent research reinforces the role of psychology in retirement financial planning. Tomar, Baker, Kumar, and Hoffmann (2021) identify several psychological determinants that significantly impact whether individuals engage in effective planning. These include future time perspective (the ability to think long-term), self-control, planning attitudes, and financial knowledge. In other words, it is not enough to know what to do; one must also be inclined to do it. Social norms and perceived behavioral control also play an influential role, suggesting that a supportive environment enhances financial planning behavior.

Research has shown that investors with written plans are more likely to stay invested during market volatility, rebalance their portfolios regularly, and avoid the pitfalls of market timing. A plan brings structure, and structure supports discipline.

common mistakes and how to avoid them

Even well-intentioned individuals fall prey to common planning mistakes. These include:

• Neglecting emergency savings

• Underestimating expenses in retirement

• Taking on too much investment risk

• Failing to review insurance coverage

• Overlooking tax implications of financial decisions

• Not discussing financial goals with a spouse or partner

Avoiding these mistakes begins with awareness and regularly revisiting the plan. A good advisor doesn’t just build a plan—they help you adapt it.

the value of working with an advisor

While many individuals can build a basic plan on their own, the guidance of a fiduciary financial advisor can add significant value. Advisors provide objectivity, technical expertise, and behavioral coaching. At Human Investing, we believe our highest calling is to serve as guides—helping clients navigate complexity with wisdom and clarity.

Importantly, not all financial advisors are held to the same standard. A fiduciary advisor is legally obligated to act in your best interest. Yet even among those who use the fiduciary label, fewer than five percent operate without receiving any form of commission (Fisher, 2025). That’s why the true fiduciary standard—free from all commissions—should be the baseline, not the exception.

turn intention into action

A financial plan is not just a document—it’s a decision. It reflects your willingness to take control of your future instead of drifting into it. The most successful outcomes aren’t reserved for the wealthiest or the most analytical—they’re earned by those who start, stay consistent, and make adjustments along the way.

If you’ve made it this far, you already care about your financial future. The next step is simple, but powerful: act. Whether it’s writing down your goals, scheduling time to review your budget, or meeting with a fiduciary advisor, do one thing today that your future self will thank you for.

Your money needs a plan. And now, you have the framework to build one that works.

References
Fisher, P. (2025, February 14). Only 4.92% of advisors are true fiduciaries. Is yours? Human Investing. https://www.humaninvesting.com/450-journal/only-5-percent-of-advisors-are-true-fiduciaries

Nissenbaum, M., Raasch, B. J., & Ratner, C. L. (2004). Ernst & Young's personal financial planning guide. John Wiley & Sons.

Tomar, S., Baker, H. K., Kumar, S., & Hoffmann, A. O. (2021). Psychological determinants of retirement financial planning behavior. Journal of Business Research, 133, 432–449.

---

Disclosures: Human Investing is a registered investment adviser with the U.S. Securities and Exchange Commission (SEC). Registration with the SEC does not imply a certain level of skill or training. This article is provided for informational and educational purposes only and should not be construed as personalized investment advice. The information contained herein is believed to be accurate as of the publication date but is subject to change without notice. Past performance is not indicative of future results. Investing involves risk, including the potential loss of principal. Readers should consult with a qualified financial advisor to assess their individual circumstances before making any financial decisions.

---

Related Articles

This article explores how financial headlines influence investor behavior, often exacerbating emotional decision-making and undermining long-term investment outcomes. Drawing from behavioral finance research and investor psychology, the article argues that investors should adhere to a written investment plan rather than respond impulsively in the face of uncertainty and sensational news. Selected headlines from Bloomberg and CNBC illustrate the impact of the modern media environment on perception and behavior. The insights of Peter Lynch, Jack Bogle, and Warren Buffett are used to contextualize the long-standing wisdom of patience and discipline in investing.

The rise of financial anxiety

Today’s investors are inundated with a 24/7 news cycle that thrives on urgency. While access to information has never been easier, clarity has never been harder to maintain. Financial headlines are designed to capture attention, often through alarming or emotionally charged language. This reality presents a challenge for investors: distinguishing between signal and noise and avoiding making decisions rooted in emotion rather than logic or planning.

The emotional power of headlines

A review of today’s (4/24/25) major financial media illustrates the challenge. From CNBC, headlines such as:

Bridgewater hedge fund warns Trump policies could induce a recession
The S&P 500 formed an ominous ‘death cross.’ What history says happens next

frame the economic outlook in dramatic, even catastrophic terms. Similarly, Bloomberg ran with:

Odd Lots: Why the Real Tariff Pain Hasn’t Even Begun
One of Wall Street’s Biggest Bulls Slashes View as Tariffs Bite

Despite these headlines, the S&P 500 rose nearly 2% today, and tech stocks surged on strong earnings reports. This disconnect between the emotional tone of news coverage and actual market behavior is a classic example of availability bias—a cognitive distortion where individuals give undue weight to recent, vivid, or emotionally charged information (Tversky & Kahneman, 1973).

This behavioral response, driven by the availability of alarming headlines, often leads investors to abandon sound strategies in favor of reactive decisions. Yet history and experience warn us against this trap. As the following insights from some of the most respected minds in investing make clear, enduring success comes not from responding to noise but from adhering to a disciplined, long-term approach.

Wisdom from the investment greats

The dangers of reactionary investing are not new. Legendary investor Peter Lynch warned:

“Far more money has been lost by investors trying to anticipate corrections than lost in the corrections themselves.”

Jack Bogle, the founder of Vanguard, put it more bluntly:

“The idea that a bell rings to signal when to get into or out of the stock market is simply not credible.”

And Warren Buffett offered perhaps the most elegant summation:

“The stock market is a device to transfer money from the impatient to the patient.”

These insights underscore the importance of focusing not on media narratives but on long-term goals and rational portfolio construction.

Recognizing the wisdom of these investment luminaries is a critical first step—but applying it consistently requires more than agreement; it requires structure. Investors need more than memorable quotes to overcome the behavioral impulses triggered by market volatility.

They need a written financial plan that serves as a behavioral compass, grounding decisions in clearly defined goals, timelines, and risk tolerance. Translating timeless investment principles into practical, repeatable actions makes the financial plan a vital tool for staying the course when emotions run high.

The role of a written financial plan

The antidote to reactionary behavior is a well-crafted financial plan that clearly articulates an investor’s purpose, time horizon, risk tolerance, and rebalancing strategy. Far from being a static worksheet, the plan functions as a behavioral anchor, offering clarity during periods of uncertainty and helping investors resist the temptation to respond emotionally to sensational headlines.

A thoughtfully structured financial plan does more than outline investment choices and target allocations. It proactively defines how to respond to market volatility, eliminating guesswork when clarity is most needed. Doing so transforms abstract wisdom into actionable discipline—bridging the gap between intention and execution.

Planning over panic

In a media landscape dominated by noise, fear, and speculation, the most effective investor response is not reaction—but preparation. Rather than chase headlines, successful investors rely on a carefully constructed financial plan and the discipline to follow it. Behavioral economics and decades of market data affirm that patience, consistency, and structure drive long-term success.

So, when the next wave of headlines warns of crisis or collapse, the wise investor doesn’t panic. They return to the plan—and stay the course.

For more information about our financial planning services, please call (503) 905-3100 or contact us.

References:

Tversky, A., & Kahneman, D. (1974). Judgment under uncertainty: Heuristics and biases. Science, 185(4157), 1124–1131.

---

A BOOK FOR THE SAVER IN ALL OF US

Becoming a 401(k) Millionaire isn’t your typical retirement guide. With 30 years in finance, Dr. Peter Fisher shares personal insights and real stories to help you plan with confidence.

Learn more

Disclosures: These market returns are based on past performance of an index for illustrative purposes only. Past performance does not guarantee future results. All investing involves risk, including the loss of principal.  Index performance is provided for illustrative purposes only and does not reflect the performance of an actual investment. Investors cannot invest directly in an index.

The information provided in this communication is for informational and educational purposes only and should not be construed as investment advice, a recommendation, or an offer to buy or sell any securities. Market conditions can change at any time, and there is no assurance that any investment strategy will be successful.

Diversification does not guarantee a profit or protect against a loss in declining markets. Asset allocation and portfolio strategies do not ensure a profit or guarantee against loss.

The opinions expressed in this communication reflect our best judgment at the time of publication and are subject to change without notice. Any references to specific securities, asset classes, or financial strategies are for illustrative purposes only and should not be considered individualized recommendations.

Human Investing is a SEC Registered Investment Adviser. Registration as an investment adviser does not imply any level of skill or training and does not constitute an endorsement by the Comission. Please consult with your financial advisor to determine the appropriateness of any investment strategy based on your individual circumstances.

---

Related Articles

We live in a world of complex economic forces, but at the heart of many of today’s big-picture challenges lies a simple truth: a country cannot indefinitely consume more than it produces. That is precisely what the United States has been doing for decades through the persistent and growing trade deficit.

This article is meant to educate, not alarm. To help all investors, professionals, and citizens better understand what is happening behind the scenes, why it matters to our long-term prosperity, and how thoughtful policy tools, including modernized tariffs, might help correct course.

Let us start with the core issue.

What is a trade deficit? 

A trade deficit occurs when a country imports more goods and services than it exports. Imagine your household spending more every month than it earns—you would need to make up the difference by drawing down savings or selling off parts of your home. That is essentially what the U.S. does year after year. We purchase foreign goods (such as cars, electronics, and clothing) in excess of what we sell abroad and must finance this gap by issuing debt or selling U.S. assets.

These assets include U.S. Treasury bonds, commercial real estate, stocks in American companies, and ownership stakes in U.S. businesses. That means other countries, such as China, Japan, Germany, and many others, are gradually gaining greater ownership of our economy.

 “Our net worth is being transferred abroad”

Legendary investor Warren Buffett put it bluntly over 20 years ago:

“Our country’s ‘net worth,’ so to speak, is now being transferred abroad at an alarming rate” (Fortune, 2003).

This quote deserves close attention.

Buffett does not talk about some abstract notion of wealth. He is referring to the tangible ownership of American assets—the land, companies, infrastructure, and financial instruments that make up our nation’s economic engine. When we finance our trade deficits, we are often doing so by selling these assets to foreigners or issuing IOUs (bonds) that must be repaid with interest over time.

Imagine a wealthy family that owns a large estate. Every year, to fund vacations and a high standard of living, they sell a few acres of land or take out a bigger mortgage. At first, it seems manageable. But over time, they no longer own the home outright. Their income now goes to paying interest, rent, or dividends to outsiders who bought what used to belong to them.

That is the picture Buffett (and others) paint of America’s trade behavior.

In real terms, this means future generations of Americans will be working to sustain themselves and sending investment returns overseas—to countries that now hold claims on our assets. As foreign ownership increases, so does the investment income flowing out of the U.S., thereby reducing our ability to reinvest in our own future.

The role of tariffs in correcting imbalances

This is where tariffs, when carefully designed and wisely implemented, can play a role—not as a weapon or political cudgel, but as a tool of balance.

Buffett originally proposed a market-based mechanism called Import Certificates, but the underlying principle is simple: If you want to buy more than you sell, you have to fund it—and at some point, that model breaks. A modest, broad-based tariff system could help bring trade into equilibrium, nudging us back toward producing more of what we consume and consuming more of what we produce.

This is not about isolating ourselves from the world. It is about aligning our consumption with our production, and ensuring that we do not gradually erode our national wealth through unchecked deficits.

Yes, tariffs raise prices—especially on imported goods. That is a cost worth recognizing. However, Buffett warns us not to be short-sighted:

“The pain of higher prices on goods imported today dims beside the pain we will eventually suffer if we drift along and trade away ever larger portions of our country’s net worth” (Fortune, 2003).

In other words, the bill comes due. The longer we delay, the more painful it will be to unwind the imbalance.

What does the modern data say?

Recent academic research offers critical insights into how tariffs function in today’s economy.

One study by Furceri, Hannan, Ostry, and Rose (2019) reminds us that, although economists overwhelmingly oppose protectionism, the public is less convinced, possibly because much research on tariffs is outdated or overly theoretical.

Their research examines the macroeconomic effects of tariffs using data from 151 countries over a 50-year period and finds that tariff increases reduce output, productivity, and consumption while increasing unemployment and inequality. These adverse effects are worse in advanced economies and during economic booms.

Tariffs have a limited impact on improving trade balances and can even lead to an appreciation of the exchange rate, offsetting their intended benefits. Overall, tariffs appear to be detrimental to economic welfare.

In another research article by Amiti, Redding, and Weinstein (2019), the authors conclude that in 2018, U.S. tariffs were almost entirely borne by American consumers and importers, rather than foreign exporters. Prices rose for many U.S.-made goods tied to these tariffs, and supply chains were disrupted. Consumers faced fewer product choices, and the overall economic cost was substantial, amounting to approximately $8.2 billion in lost efficiency and an additional $14 billion in costs passed on to consumers. These impacts aligned with basic supply and demand predictions.

The researchers believe their estimates are conservative, as they did not include other significant costs, such as lost product variety, companies reorganizing their supply chains, or the uncertainty caused by changing trade policies. Surprisingly, foreign exporters did not lower their prices to stay competitive, meaning Americans bore nearly all the costs of these tariffs. Why this happened remains a puzzle for future research.

So what do we make of this? Tariffs are not magic bullets. They are levers. Furthermore, like all levers, they require precise calibration. Used strategically and modestly—within a broader framework of trade policy—they may help correct imbalances, such as the persistent U.S. trade deficit. Used carelessly or punitively, they may do more harm than good.

Conclusion: Looking ahead

Warren Buffett’s warning in 2003 was not about politics—it was about sustainability. He argued that a nation cannot afford to consume more than it produces forever without losing control of its financial destiny. His solution was not isolationist, but strategic: to implement mechanisms, such as import certificates or well-designed tariffs, that could restore balance without undermining prosperity.

Today, academic research provides a clearer understanding of the costs and consequences of acting on that vision. Furceri et al. (2019) provide comprehensive macroeconomic evidence: tariffs tend to lower GDP, harm productivity, increase unemployment and inequality, and have little impact on improving trade balances. Amiti et al. (2019) demonstrate, in the U.S. context, that tariffs in 2018 were almost entirely borne by domestic consumers and importers, resulting in billions of dollars in lost efficiency and rising prices. Their conclusion? Tariffs reshaped supply chains and reduced product variety, ultimately burdening American consumers.

Together, these insights remind us that tariffs are not moral judgments—they are instruments. When used bluntly or reactively, they carry real costs. But used surgically, as part of a broader policy framework, they can still serve a purpose.

As we confront record trade deficits and rising foreign ownership of American assets, we are left with essential questions:

• Are we prepared to prioritize long-term national resilience over short-term consumer convenience?

• Can we modernize trade policy without repeating past mistakes?

• If not tariffs, what levers are we willing to pull to protect our economic independence?

Buffett’s voice echoes still: action is required. But today, that action must be informed by data, guided by principle, and measured by impact, not ideology.

References:

Amiti, M., Redding, S. J., & Weinstein, D. E. (2019). The impact of the 2018 tariffs on prices and welfare. Journal of Economic Perspectives, 33(4), 187–210.

Buffett, W. E. (2003, November 10). America's growing trade deficit is selling the nation out from under us. Fortune.

Furceri, D., Hannan, S. A., Ostry, J. D., & Rose, A. K. (2018). Macroeconomic consequences of tariffs (No. w25402). National Bureau of Economic Research.

---

A BOOK FOR THE SAVER IN ALL OF US

Becoming a 401(k) Millionaire isn’t your typical retirement guide. With 30 years in finance, Dr. Peter Fisher shares personal insights and real stories to help you plan with confidence.

Learn more

---

Related Articles

Volatile markets test more than portfolios—they test patience. It’s easy to feel unsettled when headlines scream, and market volatility ensues. But the most important thing you can do as an investor is also the simplest: don’t let emotions get the best of you. 

In my nearly 30 years of advising clients, I’ve seen over and over again: the clients who succeed are the ones who manage their emotions, not just their money. The smartest thing you can do right now is stay calm and stay the course. The plan is working—even when it doesn’t feel like it. My experience has been that history has a way of rewarding those who stay calm, stay invested, and stay focused on their well-crafted financial plan.

At Human Investing, we believe that behavior, not timing or speculation, is what separates long-term success from short-term regret. For clients who have been with us for over 20 years, you’ve seen firsthand how a steady, disciplined approach can weather storms and grow wealth through them. For those new to our firm, please know that trust is the foundation of everything we do. We don’t just manage portfolios, we help guide people through uncertainty with clarity, care, and confidence.

To better understand the importance of maintaining a disciplined investment approach, it is helpful to examine five common psychological biases that often lead investors to deviate from sound decision-making. Drawing on both empirical research and professional experience, this section explores how emotional responses can override strategic thinking—particularly during periods of heightened uncertainty and market volatility—and outlines methods used to help clients remain focused on long-term objectives.

1. Loss aversion: When pain is louder than logic 

Researchers Kahneman, Knetsch, and Thaler (1991) discuss the psychological factors that drive loss aversion. Loss aversion is not just an investing concept; it’s a fundamental part of human psychology. Research shows that losses are felt about twice as painful as equivalent gains are perceived as pleasurable. In the brain, a $100 loss doesn’t just “sting”—it screams. And when markets drop, that emotional volume can drown out logic, strategy, and even years of sound advice.

This isn’t just a theory. I've seen it firsthand for a few decades—watching clients grapple with fear during the dotcom bust, the 2008 financial crisis, the 2020 COVID crash, and more recent volatility. In each case, the market eventually recovered. But those who let fear dictate their choices often miss the recovery, lock in their losses, and derail their long-term plans.

Here’s what makes loss aversion so dangerous: it feels rational. When the market drops 20%, the brain doesn’t think, “This is temporary.” It thinks, “Get out before it gets worse.” That impulse can feel like wisdom. But in reality, it's a trap.

The dislocation occurs when investors stop viewing a dip as part of the journey and begin to see it as the destination. Their long-term goals fade from view. The carefully designed plan becomes irrelevant. All that matters is stopping the pain.

But that short-term relief often comes at a prohibitive cost. Investors who sell at the bottom lock in their losses and are frequently too emotionally exhausted—or too afraid—to re-enter the market in time for the rebound. And rebound it almost always does. History shows that the market has consistently rewarded those who stay invested through downturns, not those who try to time their exits and re-entries.

2. Herding: When “everyone’s doing it” feels safer than thinking 

There’s a reason why stampedes are dangerous—not everyone in the crowd is running toward opportunity. Some are running from fear. 

In investing, we refer to this behavior as herding—the instinct to follow the crowd, particularly during times of uncertainty. Scharfstein and Stein (1990) were among the earliest to formally investigate and publish on the concept of herd mentality. We are indeed social creatures, hardwired to look to others for cues when we’re unsure. But in the markets, that instinct can be costly.

When prices drop and headlines grow loud, it’s natural to wonder: “What does everyone else know that I don’t?” You see friends moving to cash, analysts shouting about doom, and articles predicting disaster. The pull to join the herd becomes magnetic. But the crowd is often most unified at the wrong time, buying high out of excitement or selling low out of fear.

Here’s the cognitive dislocation: when fear spreads, we confuse consensus with correctness. If enough people are panicking, their emotion starts to feel like evidence. But markets are not democratic. The loudest voices are not always the wisest, and just because many are moving in the same direction doesn’t mean it’s the right one.

3. Recency bias: When yesterday becomes forever 

Tversky and Kahneman (1974) laid the foundational research on recency bias. They determine that “…the impact of seeing a house burning on the subjective probability of such accidents is probably greater than reading about a fire in the local paper. Furthermore, recent occurrences are likely to be relatively more available than earlier occurrences (p. 1127).” 

Put differently, individuals often extrapolate recent market movements into the future, believing that a market decline will persist or that a rally will continue indefinitely. This cognitive distortion, known as recency bias, reflects the tendency to overweight recent experiences when forming expectations about future outcomes.

It’s a mental shortcut that makes sense on the surface. After all, if it’s been raining for three days, we naturally reach for an umbrella on day four. But in the markets, this shortcut becomes a trap.

The dislocation happens when investors confuse a recent event with a long-term trend. They think: “The market’s been down the last two months—maybe this time is different. Maybe it won’t recover.” Or: “Tech has been hot all year—maybe it always will be.” This kind of thinking leads to chasing what has already happened or fleeing from what is already priced in.

Here’s the problem: the market doesn’t move in straight lines. It zigs, zags, and surprises. The best days often follow the worst. Yet, when recency bias takes hold, investors tend to anchor on the latest data point and overlook the broader context.

I’ve witnessed this bias unfold in every major market event since 1996. This ‘cognitive dislocation’ was particularly acute during the downturn from 2000 to 2002, when markets declined by 10%, 10%, and then 20%. But those who were paralyzed by recency bias—those who assumed the storm would never end—missed the sunshine that followed.

4. Sentiment: When moods masquerade as markets

The market is often described as a voting machine in the short term and a weighing machine in the long term (Graham, 2006). That’s another way of saying: in the short term, emotion can drive price more than value. And that emotion, called market sentiment, can be just as contagious and unpredictable as the weather.

Sentiment isn’t about fundamentals. It’s about how investors feel about the future. When people feel optimistic, they see opportunity in every dip. When they feel anxious, even the strongest companies look shaky. This is where the dislocation happens: investors begin to substitute their mood for actual analysis.

In times of high sentiment, people often buy more than they should, take on more risk than they realize, or ignore warning signs. During low sentiment, they often underinvest, sell too soon, or abandon long-term strategies altogether—not because the plan changed, but because their feelings did.

I’ve witnessed this in action many times since 1996, particularly in 2008, when panic dominated sentiment, and many investors fled the market near the bottom. The truth is, markets don’t care how we feel. But our feelings often shape how we interpret the market. That’s why at Human Investing, we spend as much time helping clients manage their emotions as we do managing their investments. We help you separate how you feel from what’s actually happening.

Your plan is designed to withstand emotional swings. It assumes there will be times when the market is overconfident, and times when it’s too afraid. That’s why we don’t react to moods. We respond to goals. Because when you confuse sentiment for truth, your portfolio becomes a mirror of your emotions. But when you trust your plan, your portfolio becomes a reflection of your purpose.

5. Emotional echo chambers: When biases team up to derail you

If loss aversion, herding, recency bias, and sentiment were minor on their own, we might be able to brush them off. But they don’t stay in their lanes. These biases often compound, amplifying each other until an investor is no longer thinking clearly. That’s what we call an emotional echo chamber—a space where your own fears are repeated and reinforced until they sound like facts.

Here’s how it plays out:

• The market dips, triggering loss aversion—“I can’t afford to lose more.”

• You see others selling, which activates herding—“Everyone’s getting out. Maybe I should, too.”

• You assume the recent downturn is the new normal—recency bias—“It’s just going to get worse.”

• Your confidence drops, and negative sentiment clouds your judgment—“I don’t feel safe, so maybe I’m not.” 

Suddenly, your investment decisions are no longer tied to your long-term goals—a chorus of emotional responses drives them, each one echoing the others. This is the moment investors often make their biggest mistakes: abandoning well-designed plans, selling at market lows, or shifting strategies midstream out of fear.

I’ve seen this cycle emerge during every major downturn. What I’ve learned is this: when fear gets loud, clarity gets quiet. Investors don’t just lose money in these moments—they lose confidence, perspective, and peace of mind.

At Human Investing, our job is to help you break out of that echo chamber. We’re here to re-center you when everything feels off-balance, to remind you of the purpose of your financial plan, and to bring you back to your long-term vision when the short-term noise becomes deafening.

We believe that staying invested is not just a financial decision, it’s an emotional discipline. That’s why we design portfolios that align with your comfort zone and why we lead with planning. Because a sound financial plan doesn’t just grow your wealth, it protects your thinking.

When emotional noise is high, we help you find quiet confidence. When biases clash in your head, we help you hear your goals again. And most importantly, when you start to feel like you’re the only one holding steady, we’re here to remind you—you’re not.

Empirical evidence

If the five behavioral prompts are not enough to encourage you to focus on your plan, a 40-year perspective on market ups and downs can provide an essential viewpoint. 

Please see Figure 1 at the end of this document. In it, you’ll see the average intra-year drop for the S&P 500 is approximately 14%, based on historical data going back several decades.

This means that in a typical year, the market will experience a peak-to-trough decline of around 14%—even in years that end up positive overall.

Here’s a quick breakdown:

From 1980 through 2023, the S&P 500 had: 

• Positive returns in about 75% of those years

• But it still experienced an average intra-year decline of ~14%

Why it matters:

Many investors panic during temporary drops, thinking something abnormal is happening. In reality, a 10–15% drop in a given year is a feature, not a flaw, of long-term investing. It’s part of the process, not a sign to change course.

References:

Graham, B. (2006). The intelligent investor: The definitive book on value investing (Rev. ed., J. Zweig, Commentary). Harper-Business. (Original work published 1949)

Kahneman, D., Knetsch, J. L., & Thaler, R. H. (1991). Anomalies: The endowment effect, loss aversion, and status quo bias. Journal of Economic perspectives, 5(1), 193-206.

Scharfstein, D. S., & Stein, J. C. (1990). Herd behavior and investment. The American economic review, 465-479.

Tversky, A., & Kahneman, D. (1974). Judgment under Uncertainty: Heuristics and Biases: Biases in judgments reveal some heuristics of thinking under uncertainty. science, 185(4157), 1124-1131.

---

Disclosures: These market returns are based on past performance of an index for illustrative purposes only. Past performance does not guarantee future results. All investing involves risk, including the loss of principal.  Index performance is provided for illustrative purposes only and does not reflect the performance of an actual investment. Investors cannot invest directly in an index.

The information provided in this communication is for informational and educational purposes only and should not be construed as investment advice, a recommendation, or an offer to buy or sell any securities. Market conditions can change at any time, and there is no assurance that any investment strategy will be successful.

Diversification does not guarantee a profit or protect against a loss in declining markets. Asset allocation and portfolio strategies do not ensure a profit or guarantee against loss.

The opinions expressed in this communication reflect our best judgment at the time of publication and are subject to change without notice. Any references to specific securities, asset classes, or financial strategies are for illustrative purposes only and should not be considered individualized recommendations.

Human Investing is a SEC Registered Investment Adviser. Registration as an investment adviser does not imply any level of skill or training and does not constitute an endorsement by the Comission. Please consult with your financial advisor to determine the appropriateness of any investment strategy based on your individual circumstances.

---

A BOOK FOR THE SAVER IN ALL OF US

Becoming a 401(k) Millionaire isn’t your typical retirement guide. With 30 years in finance, Dr. Peter Fisher shares personal insights and real stories to help you plan with confidence.

Learn more

---

Related Articles

An Analysis of Investment Advisor Representatives and Bureau of Labor Statistics Data: Determining the Percentage of Financial Advisors Acting as “True Fiduciaries”

In the financial services industry, the concept of acting as a fiduciary—putting the client’s best interests ahead of all else—has become a litmus test for ethical practice. However, determining how many financial professionals truly operate under a fee-only fiduciary model reveals a significant gap between perception and reality.

Industry Snapshot: Financial Professionals in the U.S.

According to the Bureau of Labor Statistics (2023), the financial services landscape in the United States includes:

• 513,000 financial services sales agents, encompassing roles such as stockbrokers and commodities traders.

• 321,000 personal financial advisors, offering financial planning and investment guidance to individuals.

Together, these figures total 834,000 professionals engaged in roles that directly or indirectly affect individuals' financial outcomes.

Investment Advisor Representatives: A Subset

Among these professionals, 77,468 individuals are registered as Investment Advisor Representatives (IARs), according to the Financial Industry Regulatory Authority (FINRA, 2022). IARs are often seen as closer to the fiduciary standard due to their regulatory obligations. However, even within this group, a significant portion still earns commissions.

• A recent analysis by Welsh (2024) indicates that 47% of IARs receive commissions, leaving only 53% as truly fee-only fiduciaries.

• Applying this percentage, the total number of fee-only IARs is approximately 41,958 individuals.

The True Percentage of Fee-Only Fiduciaries

To contextualize this figure, let’s consider the broader pool of financial professionals (advisors and brokers). Dividing the number of fee-only IARs (41,958) by the total number of financial professionals (834,800) yields a striking conclusion:

Only 4.92% of financial professionals operate as fee-only fiduciaries.

This percentage has seen growth from an estimated 2% in 2018 (Mantell, 2018), reflecting progress but also underscoring the rarity of this practice in an industry dominated by commission-based models.

References:

Bureau of Labor Statistics. (2023). Occupational Outlook Handbook. U.S. Department of Labor: Securities, Commodities, and Financial Services Sales Agents.

Bureau of Labor Statistics. (2023). Occupational Outlook Handbook. U.S. Department of Labor: Personal Financial Advisors.

Financial Industry Regulatory Authority. (2022). 2022 FINRA industry snapshot. Financial Industry Regulatory Authority.

Mantell, R. (2018, March 19). Is it time to adopt a uniform fee-only standard for financial advice? The Wall Street Journal.

Welsh, J. (2024, October 31). What role do commissions now play for advisors? Investment News.

---

---

Related Articles

Not sure what questions to ask when you meet with an advisor?

Here are six questions we commonly get asked with some advice from our team.

1. I want to support my child through college. When should I start saving?

The earlier you save, the more time your money has to grow.

The benefits of saving early are dramatic, but there's still value in starting now—even if your child is in high school. The dollars you save will not have as much time to grow, but they are dollars you will not be borrowing. You’ll also be in a better situation if you choose an account that gives you tax benefits, such as immediate tax deductions or tax-free withdrawals.

Still not sure if saving for college is right for you? Check out this article by Peter Fisher, co-founder and managing partner of Human Investing.

2. Should I spend my cash paying off high interest loans, or invest it?

Historically, the average rate of return for stock market investments is approximately 10%, while on average, the APR on credit cards has been hovering just above 20%. So, if you are investing when you have credit card debt, you are likely paying a higher interest rate on your debt than you are earning via your investments. Unless you have a huge amount in investments, you end up losing money overall.

View fullsize

3. When do I start saving for retirement?

Again, start saving as early as possible to give your money maximum time to grow. Depending on your employer, you may already have some form of retirement benefits accruing. There are various ways of saving for retirement, including employer sponsored plans like 401(k) and 457b plans, or personal retirement savings like Roth and Traditional IRA’s. A mix of the two is the best way to ensure ample savings for retirement, but deciding which is best for you requires some analysis of your current and expected employment and income status.

4. Is my investment portfolio right for me?

As you age and get closer to retirement, you want to make sure the risk level of your investment portfolio is balanced to match your growth and maintenance needs. While having all of your investments allocated in the stock market may result in a high return on investment, it can also result in high losses. This can be catastrophic for a person planning on retiring soon. On the other hand, if a young person has a few decades before they are planning to retire, but they are only investing their money in bonds, they are losing out on the potential growth of higher risk investment options.

 Investment in both bonds and stocks allows for a mix of potential income and growth, and the best fitting ratio is different for everyone. Reach out to us to speak with our retirement planning team to discuss your current allocations. We care here to help better prepare you for a comfortable retirement.

5. What should my emergency savings look like?

The most common numbers suggested for an emergency fund is 3-6 months’ worth of your current living expenses. These include expenses such as housing, food, healthcare, debts, and so on. You do not need to include things like entertainment, nonessential shopping, or vacation expenses. If you are, you have too much going into your emergency savings fund that could be invested elsewhere. Below is a chart showing example savings amounts and how they compound over the course of two years.  

6. When should I begin utilizing expert tax services?

You may be at a point where using your preferred e-file service to do your taxes is still getting the job done just fine, but at what point do they get too complicated for you to be doing them on your own? Once you begin to deal with things like property taxes, retirement plans, and investments, it may be best to have an expert handle the numbers for you.

Luke Schultz, the Director of Tax at Human Investing, has over 12 years of experience in the areas of tax compliance and planning. With a heavy focus on planning, he spends much of his time working closely with individuals, putting emphasis on proactive planning to help clients make the best decisions for them and their families.

Want to get started?

Schedule an appointment with an advisor here or feel free to call us at 503-905-3108.

Sources:
Vanguard, When should you start saving for college?
The Balance, Rule of Thumb: Should I Pay Off Debt or Invest?
Money Under 30, Should You Pay Off Student Loans Early?

---

Related Articles

A fiduciary is defined as an individual or a legal entity, such as a financial advisor. The fiduciary takes on the responsibility and has the power to act in the interest of another. This other person is called a beneficiary or principal—we call them member, human, or client.

A fiduciary financial advisor (which is all we have at Human Investing) cannot sell products that charge or pay commissions.

When a member works with a Human Investing financial advisor, the client gives the advisor their trust and expects recommendations to be made with honesty and good faith in keeping with their best interests. This may not always be the case with a non-fiduciary advisor.

The Fiduciary Standard

All Human Investing employees are required to abide by the fiduciary standard. When a financial advisor has a fiduciary duty, they must always act in the beneficiary's best interest.

Financial advisors fall into two buckets: fiduciaries and non-fiduciaries. Surprisingly, not all financial advisors have a requirement to put member's interests first. Worse yet, some advisors and their firms can be dually registered, swapping back and forth between fiduciary and non-fiduciary roles.

Suitability Standard vs. Fiduciary Standard

Financial professionals who are not fiduciaries are held to a lesser standard known as the "suitability standard." What this means is that the recommendation from a non-fiduciary only needs to be adequate.

Other Watch Outs When selecting an Advisor

If an advisor states that they have FINRA Series 7, 6, or 63, that means they are licensed to sell products for commissions. An advisor would only have those licenses for two reasons: 1) to sell commission products or 2) collect commissions from products they (or someone else) have sold.

There are many individuals and firms that say they are financial planners and do financial planning. But did you know that many of the people that say they are financial planners are not trained in the process and profession of being a financial planner? Individuals responsible for member financial planning are CERTIFIED FINANCIAL PLANNERS™. A CERTIFIED FINANCIAL PLANNER™ certification is “the standard of excellence in financial planning. CFP® professionals meet rigorous education, training and ethical standards, and are committed to serving their clients' best interests today to prepare them for a more secure tomorrow.”

---

Related Articles

Benjamin Franklin’s quote applies to many choices we make – including personal finances. If we don’t take his message to heart, then a lack of planning can be costly.

There are traditionally two paths one will take when purchasing a large expense. They will either build a plan ahead of time to achieve a financial goal, or—the more popular path—worry about it when the expense arises. It is important to consider the hidden cost when financing a large future expense.

NOT PLANNING AHEAD MAY cost you more than YOU THINK.

Let’s take the example of a future expense of $25,000 for any situation*.

*Fill in the blank: year of college for a child 👩‍🎓, down payment for a home🏠, wedding 👰🏻, car purchase 🚘, vacation 🌞, etc.

How do you pay for the $25,000 future expense?

In this hypothetical, an individual can choose to (A) make a monthly investment over the next 10 years or (B) borrow the $25,000 and make monthly payments to pay off debt for the next 10 years. See the cost break down here:

Note: This is for illustrative purposes only. Investment returns, interest rates, and loan periods will vary.

SO WHAT ARE YOU PLANNING FOR TOMORROW?

Building a savings plan and starting early provides 27% in savings over 10 years, with a total cost of only $18,240. Conversely, the cost of convenience by borrowing adds to the overall cost by more than 33%, raising the cost to $33,360. This example is at a 6% interest rate, but unfortunately, much consumer debt is often financed on a credit card with an average APR now above 16%. A 16% interest rate on a one-time expense would more than double the cost over 10 years.

This simple illustration provides a two-sided application. As illustrated above, building a financial plan can save someone thousands of dollars. Procrastinating and not building a plan can in turn cost someone thousands. Either way you look at it, it is important to consider the real cost of any financial endeavor in order to make a well-informed decision.

Our team at Human Investing is available if you have questions or would like help building a financial plan.

---

---

Related Articles

@jens_johnsson

In our last post, we addressed the most significant anchor that is working against the financial planning industry, how it’s kept from adapting within changing market expectations, and that we need to move towards something better for clients. This anchor is the “Assets Under Management” business model that is the dominant form of revenue generation for financial advisory and wealth management firms. 

In this piece, we will highlight a related aspect of compensation but look at it from the planner/advisor perspective. In other words, our focus will be on compensation structures for planners and the role of incentives. To be sure, these two topics are interrelated and often confounded. These real and heavy anchors are keeping us from a state of optimal outcomes. Charlie Munger could not have been any more right when he said, “Show me the incentive and I’ll show you the outcome.” Let’s take a look. 

An “Agency Problem”

Before we get into compensation models, it is imperative that we identify and define a concept called an agency problem. In its simplest form, an agency problem is one that contains a conflict of interest. It is a situation when someone (called an “agent”) is entrusted to act in the best interest of another party (called a “principal”) but has interests that are different (and often competing). 

Remember that term “fiduciary?” A fiduciary standard is imposed and regulated due to the inherent agency problem that exists between the client and the financial services professional (and/or industry). To review, the CFP Board defines fiduciary through the lens of the interaction between a financial planner and a client. Its fiduciary standard of care “requires that a financial advisor act solely in the client’s best interest when offering personalized financial advice.” 

Think about that for a second

Who else’s interest would they be serving when they offer advice? The very fact that a fiduciary standard is required reveals the problematic state of the industry. It is worth repeating…we can and simply must do better! However, the business models of financial planning firms and the compensation of financial advisors are anchors that necessitate considerable and seemingly insurmountable effort to move beyond the current climate. 

So how are advisors paid? 

In a commission and fee firm (often termed a “hybrid model”), advisors are often paid based on the commissions generated on the products sold. More directly, commissions are charged to buy and/or sell a mutual fund and when selling an insurance product such as a cash-value life insurance policy or an annuity. These commissions are called gross dealer concessions (GDCs) to the brokerage firm and the advisor receives a percentage of the GDC. The percentage that the advisor receives is most often determined by their relative tier based on the volume of sales dollars, meaning that the more products sold, the higher the percentage of GDC received.

In a fee-only firm, it is common for advisors to receive a salary as well as bonuses based on a percentage of their book. That means that the more assets they manage, the greater their additional compensation. More money can be made by bringing in new clients.

So what is the dominant incentive? It is quite clear that the incentive in the former is to sell investment and insurance products, and the incentive in the latter is to build and protect their book of business. But what about the amount and quality of financial advice? What about the degree of service and attention? What about providing an unbiased perspective? These are the conflicts that exist.

Citing these conflicts is not intended to suggest that a particular individual within any of the systems above is not providing high quality financial advice and excellent client service. It is meant to clearly call out the inherent conflict of interests that exists within these compensation models. 

Conflicts everywhere

And since Charlie Munger’s quote has been proven true for decades, we would be wise to pay attention. Truly, it is the case…find the incentive and you will likely find the outcome. So what outcomes are naturally linked to these incentives? At worst, if the incentives are large bonuses that are paid for selling products that generate a (very large!) commission, the interest of the advisor is to sell as many of these products as possible. 

Selling = more $$. The interest of the client is sound, comprehensive, and objective advice and purchasing only products that best meet their needs. If the incentive is bonuses that are paid based on the volume of assets managed, the interest of the advisor is to provide advice that results in more managed assets and allocate time on only activities that build and retain assets.

More assets managed = more $$. The interest of the client is sound, comprehensive, and objective advice and purchasing only products that best meet their needs. This is not about the character or the quality of the advisor. It is simply about incentives. Incentives lead to behaviors, and behaviors lead to outcomes. Or as Peter Drucker once said, “What gets measured gets managed, and what gets managed gets done.” 

The conflicts of interest in a fee and commission model have been highlighted and bantered about for a long time. In fact, the strong movement towards a fee-only business model has been fueled by the increasing visibility of these challenges. So we would like to devote most of our time to the primary fee-only advisor compensation model which is salary plus a bonus paid on the advisor’s book of business (amount of assets managed). 

Even a fee-only structure has its limitations

This might look harmless, but there are conflicts that remain. If a large portion of compensation is determined through a percentage of the assets you manage (“your book”), the incentive is to protect the book. This means employing a time allocation method that first considers the question, “Does this activity help me build and/or maintain my book of business?” Activities that result in a “yes” response to that question are prioritized while the incentive is to minimize or eliminate activities that result in a “no” response to that question. The big problem is that many of the important services that clients are looking for do not involve activities that yield bigger books. For example, conversations around topics like financial literacy education, budgeting, debt management, benefit planning, educational funding strategies, talking through goals and values, and charitable giving rarely lead to more assets under management. So conversations are primarily directed at wealth management, retirement funding, and risk management/insurance needs at the expense of ignoring or minimizing these other vital topics. Why? Because they do not align with the incentive.

Look for comprehensive planning vs. product-focused planning

Further, for some clients the best thing they could do is to pay down debt, invest through their company’s 401(k) plan, invest in real estate, and/or engage in charitable giving. However, none of these activities builds assets under management and all of them could potentially subtract from managed assets. Again, the incentive is aligned toward advisor behaviors/advice that is contrary to the best interests of the client. Anything that takes away from the percentage bonus for the advisor is incentivized to be avoided. This dynamic is what has predominantly contributed to the difference between product-focused financial planning and truly comprehensive financial planning that we discussed several months ago and is reflected again in the graphic at the end of this post.

Truly comprehensive financial planning is such a small portion of overall financial planning due to the inherent compensation incentives. 

Finally, the fee-only compensation model helps illuminate why many individuals and families do not have access to financial planning assistance. Simply and crudely put, they are not worth the time because they do not have enough assets for the planner/advisor to manage. This client may be willing and able to pay for services, but the current compensation method does not incentivize the advisor for spending time with this client. 

Compensation methods need to change. It is not only a matter of preference. Real outcomes are at stake. We can and simply must do better! 

Check out the rest of the series with Ryan and Marc:

1. Financial Planning: A New Mindset

2. Bracing Ourselves For Rough Seas Ahead

3. Isn’t Financial Planning a Dying Profession?

4. What Financial Planning Should Look Like

5. How Product Sales Is Ruining Financial Planning

6. How Business Models Created the Culture of Financial Advisory Firms

Ryan Halley, Ph.D., CFP® is Director of Planning Practices and Research at Human Investing. He holds a doctorate in Personal Financial Planning from Texas Tech University and an MBA with a concentration in Finance from The Ohio State University. Ryan has his CERTIFIED FINANCIAL PLANNER™ certification. Dr. Halley is also a Professor of Finance and Financial Planning at George Fox University, where he directs a CFP® Registered Program located near Portland, Oregon. He has co-authored a book and has numerous peer-reviewed journal articles. Additionally, he has been an invited professor and lecturer at various universities in the United States, Canada and China. 

---

---

Related Articles

Why not just make the necessary changes to correct what’s broken? 

At this point in our blog series, you might be asking yourself the question, “If things are so bad with the current state of financial planning, why not just make the necessary changes to correct what’s broken?” That is a logical conclusion, but while the problems are obvious, the solutions are challenging (possibly a little like some of the political debate topics you will be hearing for the next few months!). 

There are two real challenges here

One that we have already mentioned: nothing big is wrong. It is a host of smaller pieces that are broken, and those small pieces accumulate into a perception of confusion and mistrust and suboptimal financial planning outcomes.

A second challenge is that the core problems are so deeply rooted in the culture and systems that make up the industry that even obvious needed changes are difficult to address. It is the proverbial turning of the Titanic, if you will. So, a better place to begin might be defining the culture through the lens of how we arrived at where we are currently and identifying some of the elements of the culture that make it so sticky and unwieldy. 

As forecasted last time, there are many weighty systemic issues woven into the culture of financial services that make this move to a better model extremely difficult. These are true anchors working against a migration to something better. In this piece, we are going to start at the top and take a look at the business model of most financial planning firms and set the stage for why things are as they are. 

How financial services make money

As we have discussed, the financial planning profession has its roots in investment services and the insurance industry. Firms make money largely be selling either investment products (stocks, bonds, mutual funds, real estate trusts, options, etc.) or insurance products (whole life, variable life, annuities, etc.). 

Each of these products are sold with a commission and the firm makes money with each product sold. It is quite possible that a firm gets paid $10,000, $15,000 or even $20,000 or more for selling one variable annuity product. So, as you can imagine, this system is full of agency problems or conflicts of interest and has brought about many pieces of regulation to try to control these built-in conflicts. Selling products often comes at the expense of offering services. 

It is for this reason that we ended our last post talking about “fiduciary.” Fiduciary is a legal requirement imposed to make sure that planners/advisors are acting in a way that is in the client’s best interest. And, as we asked last time, who else’s interest would they be serving when they offer advice?

The very fact that a fiduciary standard is required reveals the problematic state of the industry 

This problem and others have led to a slow migration to other business models. Improvement. The commission-only paradigm began to change into a business model that is comprised of both fees for service and commission on products. This has further extended into a model where revenue comes exclusively from fees, with no commissioned products being sold. In fact, the CFP Board recognizes three different categories of compensation for planners:

• Commission only

• Commission and fee

• Fee only

In order to be considered a fee-only advisor (or firm), no commissioned products can be sold. The CFP Board has defined the term “fee only” in the following way: “A certificant may describe his or her practice as “fee-only” if, and only if, all of the certificant’s compensation from all of his or her client work comes exclusively from the clients in the form of fixed, flat, hourly, percentage or performance-based fees.” 

While the definition might seem to align with what you would expect of a fee-for-service relationship, the dominate model looks much different. Instead of being paid to produce a financial plan or paid on an hourly basis, the vast majority of financial planning firms generate most of their revenue through what is called an “assets under management” (AUM) model.

WHAT THE ASSETS-UNDER-MANAGEMENT model MISSES

There are planners who do hourly work or charge by the plan, but that is the extreme minority of revenue dollars produced. The assets under management model assigns a percentage fee to the client assets that are managed by the firm. The more assets managed, the more money made. It is typical for the amount charged to be on a sliding scale so that the percentage applied to assets goes down if you hit certain targets. For example, if a firm charges 1.25% of AUM for assets under $1 million and 1.00% of AUM for assets over $1 million, a client with $500,000 invested would pay $6,250 for the year. A similar fee structure would be used to calculate annual fees during each future year. If the client had $3,000,000 invested, that client would pay $30,000 annually. 

There is nothing inherently wrong with this model, but it does explain why most financial planning firms look like investment service firm silos, or what we have termed “product-focused financial planning.” Other services can be offered and truly comprehensive financial planning can be conducted, but it is most often done without direct compensation. In other words, you are not paid for it. This is the largest and heaviest anchor working against a change from a culture of product-focused financial planning to truly comprehensive financial planning. 

The incentives are stacked too heavily towards products and wealth management. In order to change the incentive, the entire business model would need to change. And as you can imagine, that is a big ask. The more hidden cost is one of being stuck—of knowing what would and could be better, but experiencing the seemingly impossible task of getting there. In life, the one thing more frustrating than not knowing or being able to figure something out is the ability to observe, understand and know what needs to happen but not being able to do anything about it.

Associated costs are a continued and mired state of public distrust, a ridiculous amount of regulation and required disclosure, an opaque world in which terms like “advisor” and “planner” are almost impossible to decipher, and ultimately failing to offer the community the entirety of what they need… truly comprehensive financial planning. 

Check out the rest of the series with Ryan and Marc:

1. Financial Planning: A New Mindset

2. Bracing Ourselves For Rough Seas Ahead

3. Isn’t Financial Planning a Dying Profession?

4. What Financial Planning Should Look Like

5. How Product Sales Is Ruining Financial Planning

---

Want to talk about your financial plan?
Want to learn more?
Come talk to us or e-mail Jill at jill@humaninvesting.com.

Ryan Halley, Ph.D., CFP® is Director of Planning Practices and Research at Human Investing. He holds a doctorate in Personal Financial Planning from Texas Tech University and an MBA with a concentration in Finance from The Ohio State University. Ryan has his CERTIFIED FINANCIAL PLANNER™ certification. Dr. Halley is also a Professor of Finance and Financial Planning at George Fox University, where he directs a CFP® Registered Program located near Portland, Oregon. He has co-authored a book and has numerous peer-reviewed journal articles. Additionally, he has been an invited professor and lecturer at various universities in the United States, Canada and China. 

---

Related Articles

In our last several posts, we have been highlighting the necessary distinction between truly comprehensive financial planning and product-focused financial planning. We deem it necessary because the term financial planning is often wrongly used, which comes at the client’s expense. The term financial planning is regularly used to represent what is solely product-focused financial planning. We proposed that we are largely stuck in an industry of confusion, and we are having a difficult time moving on from this place. There are apparent yet opaque reasons as to why this is the case. These are contained within an earlier list of systemic factors we cited which have impaired financial planning outcomes and distorted the way in which financial planning is done. 

Let’s return to the medical analogy. Imagine being a patient with an illness

A patient would never want to go to a doctor who has a drug or pill already identified and evaluates the condition of the patient by searching for ways to use that drug or pill to treat the patient. Instead, a patient would want a doctor who evaluates the medical situation with an unbiased lens and only uses a drug or pill if it is the most effective way to treat the identified condition. Isn’t that the way you would want your financial life approached as well – to have someone look over your entire financial picture (including your values, goals, dreams, concerns, fears, etc.) and advise from that perspective instead of looking for a way to sell a financial product?

Within the medical context, think about what may be missed and how often the product (drug) would be the wrong form of treatment! The patient is seeking a service, not a product. The product is a potential outcome of the service, but it is not what the patient or client pursues. If so clearly a problem within a medical context (or almost any other professional context), why does this phenomenon of product sales disguised as financial planning remain so apparent within the financial services industry? Sure, financial products (insurance and investments) will be part of most financial plans; however, they should only be used when designed to meet a specific need identified through a comprehensive and unbiased financial planning process. If the product (drug) comes at the expense of a comprehensive evaluation, it compromises the best interest of the patient…or, in this case, the client. 

Why is this happening?

It is the tethering of product sales and commissions to a "financial plan" which is at the core of the challenge. This persistent culture of product sales paraded around as financial planning is a systemic issue. The prevailing practice and system around “financial planning” has weakened the full potential of the financial planning profession. Tragically, for clients, this dislocation has weakened outcomes for the humans we are attempting to serve humanely. The focus needs to be directed squarely on service, not products. While this right move seems obvious, there are many weighty systemic issues woven into the culture of financial services that make this move extremely difficult. The list below identifies the most significant anchors working against a migration to something better, and we are going to use upcoming posts to focus specifically on each of these: 

• Business models of financial planning firms 

• Compensation structure for planners 

• Role of incentives 

• Career status and prestige based solely on sales achievements 

• Measures of success and effectiveness tied to a book of business 

• Conflicts of interest that are not transparent 

• Academic preparation, credentialing, and pathway to a profession in financial planning 

There is much talk in the financial services industry about the term and concept of “fiduciary.” Besides being an odd word and slightly fun to say, what is it? The CFP Board defines fiduciary through the lens of the interaction between a financial planner and a client. Its fiduciary standard of care “requires that a financial adviser act solely in the client’s best interest when offering personalized financial advice.” Think about that for a second. Who else’s interest would they be serving when they offer advice? The very fact that a fiduciary standard is required reveals the problematic state of the industry. We can and simply must do better. 

Ryan Halley, Ph.D., CFP® is Director of Planning Practices and Research at Human Investing. He holds a doctorate in Personal Financial Planning from Texas Tech University and an MBA with a concentration in Finance from The Ohio State University. Ryan has his CERTIFIED FINANCIAL PLANNER™ certification. Dr. Halley is also a Professor of Finance and Financial Planning at George Fox University, where he directs a CFP® Registered Program located near Portland, Oregon. He has co-authored a book and has numerous peer-reviewed journal articles. Additionally, he has been an invited professor and lecturer at various universities in the United States, Canada and China. 

---

---

Related Articles