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Here's what a successful financial adviser does

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Successful people like to think they have the best professionals working for them. This is an understandable point of pride for those who've worked hard to get to where they are in life. Just as they like to think they have the best doctor and lawyer, they also like to think they have the best financial adviser.

Too often, these people confuse the skill level of financial advisers with the performance of their investments. But, because attempting to outperform markets is a losers' game, gross investment returns tend to be more the result of asset allocation and market forces than which adviser you use.

So if you don't hire an adviser to outperform markets, why use one? Here are the reasons why good advisers can earn their fees multiple times over:

• Developing a comprehensive customized financial plan. This is critical, and few people can do it without professional help. A sound financial plan is like a well-designed blueprint for a house. Without it, your financial house will end up being full of clutter, a hodge-podge of different investments without well-thought-out diversification. A good adviser won't allow you to build without first assisting you as your financial architect.

• Tax planning. An old adage about taxes: "It's not what you earn; it's what you keep." Smart tax planning and ongoing tax management can make a huge difference in your net investment returns each year. A skilled adviser, working together with your tax adviser, can manage your assets in ways that keep Uncle Sam from getting too much of your money.

• Containing fees and expenses. High fees from investments can significantly reduce net returns. A good adviser helps you choose low-cost solutions — often one-fifth the cost of investment vehicles commonly available in the market.

• Managing risk. The best way to address this is to build and maintain a portfolio that is thoroughly diversified and guided by prudent asset allocation — by not having too much of your portfolio in any asset class or specific security. After establishing your asset allocation, a good adviser monitors it carefully, rebalancing when needed.

For example, if your allocation to large-cap stocks drifts too far above your set allocation, creating too much risk, the adviser then rebalances your portfolio by selling some large cap stocks and buying other investments that have become proportionately underweighted in your portfolio. This helps manage risk incurred by regularly "buying low and selling high."

• Encouraging you to confront eventualities. These might include how you're going to pay for your children's college educations, how you'll care for your elderly parents and what you'd do if you lost your job. These are things that many people put off thinking about. A good adviser won't let you procrastinate.

• Reassuring you during tough markets. When the market plummets or roller-coasters, you understandably get nervous. During such times, many investors act irrationally, needlessly selling at a loss instead of using temporary declines to their advantage by scooping up more of what's temporarily down.

A good adviser not only assists you in building a proper, goal-based asset allocation but also reminds you periodically that the whole point of doing this is to gird your portfolio against substantial loss when the going gets tough. This assistance alone is worth an adviser's fees many times over. Remember 2007-09?

• Taking the emotion out of the process. This, along with a solid asset allocation and periodic rebalancing, enables you to capture the returns of the markets. Unfortunately, most investors don't, so there's a key difference between the returns of certain investments and the returns investors actually get. Studies show a sharp contrast between investment returns and investor returns. Specific investments' returns for set periods are touted based on the presumption that investors bought in at the right time and remained invested for the duration of a given successful period.

But what counts are the returns that investors actually receive. These numbers are determined less by financial markets than by investors' behavior — whether they can establish and stick to a disciplined process. A skilled adviser can be invaluable in this regard.

Warren Buffett says that investing is like dieting: It's simple to understand but difficult to execute. In other words, discipline is paramount.

The disconnection between planning and execution is a major factor that limits real-life returns. By imposing discipline, a good adviser doesn't just provide sound advice and planning but also assures successful execution.

Tim Decker, a fee-only financial planner, is president of ISI Financial Group in Lancaster. He is the author of "The Sleep-Well-At-Night Investor" and host of the radio program "Financial Freedom," which airs at noon Saturdays on WHP-AM 580. Contact him at www.isifinancialgroup.com.

This content is based upon information believed to be accurate by ISI Financial Group Inc. However, it should not be relied upon for legal or accounting purposes. Past performance is not indicative of future performance. Investments involve risk, including the possible loss of principal. Always seek professional advice before making any financial or legal decisions.

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