The benefits of having both a Financial Planner and Stockbroker as part of your team

A common myth in financial circles is that financial planning firms are a “one stop shop” for all your investing needs. Usually set on the advice “it’s time in the market, not timing the market” many investors are ploughed into index ETF’s as a blunt tool to represent the equities part of the portfolio. This attitude is akin to going to an architect and expecting them to lay the bricks for your house, it can be done, its just unlikely that it will yield the best result for your new home.

The best way to start is by defining what each do

The difference between a Financial Planner and Stockbroker

Financial advisors extend a wide array of services that typically cover financial planning, retirement advice, tax planning, estate planning and more. Their role is comprehensive and they offer insight into various financial aspects. They serve individuals who desire a holistic approach to financial management with an emphasis on long-term strategy. Imagine, for instance, receiving a substantial inheritance and seeking guidance on effectively managing these funds to enhance growth. In such cases, a financial advisor’s expertise proves indispensable. They can curate a strategic plan accounting for your financial goals, current financial situation and risk tolerance. A novice or someone preferring a hands-off approach can find the full range of a financial advisor’s services highly beneficial.

Stockbrokers primarily manage the buying/selling and advising on specific securities on behalf of clients. Unlike financial advisors, their role hinges on specific investments rather than creating or updating an encompassing financial plan. Stockbrokers serve individuals who actively participate in the stock market and aim to capitalize on current and emerging market trends. Consider someone striving for active involvement in buying and selling stocks to leverage market trends. This person might find a stockbroker’s timely advice on when to buy or sell, based on expert comprehension of market movements, incredibly advantageous.

Specialists for Specialist Jobs

As in our example at the beginning of the article, its not impossible for an architect to lay the bricks for your house, it will likely stand and provide you shelter, but it wont be the best possible house you can live in.

Individuals seeking advice from a financial planner are usually given their broad financial plan, then when the equities portion is discussed, they are presented with a long-term chart of the stock market and the “Time in the market, not timing the market” adage is usually rolled out with an accompanying Index ETF strategy. This is a favourite of planners because its the simple, low cost, low maintenance way to invest. Couple it with a forecasted 10 year return, based on the markets averages, it all sounds pretty great right? That is until you factor in fees and the potential opportunity cost of not using a specialist.

It never sounds like much, 1% maybe 2% but if you compound those small returns you are giving up over 20 years, it makes a difference, a big difference.

The Power of Compound Interest

Using the example from moneysmart.gov.au (financial advice costs) where an investor has $400,000 to invest and the fees of a planner at 2%pa. We have used the average brokerage rate of a full service stockbroker of 1% per transaction and 10% turnover per month of the portfolio value which works out at 1.12%. That is a 0.88% difference, it doesn’t sound like much, especially given there is more work in managing your own portfolio.

But the compounding effect of that difference) amounts to $60,806.93 over 10 years and $163,439.20 over 20 years, with the same investment performance

That example doesn’t even include assigning a value to a specialist stockbrokers skillset. With the assistance of timely advice on when to buy or sell, based on expert comprehension of market movements, its reasonable to assume that using a specialist stockbroker would yield a better performance. This isn’t always the case and you need to be careful of stockbroking firms with “high turnover” models and high pressure sales people, but there are plenty of good stockbrokers out there and the same tactics exist in the financial planning world.

So lets assume that using those skills yielded a mere 1% extra performance a year. Based on the same example of $400k starting point, you would be $133,952.78 better off over 10 years and a whopping $456,867.06 better off over 20-years. As we mentioned, there is a bit more effort involved in managing a portfolio with a broker, but for more than double the cumulative return, its fair to say its worth it

So, should you choose a financial advisor, a stockbroker or perhaps both? Of course this decision is contingent on your unique financial goals and needs, but like the relationship between an architect, builder and tradesmen, the roles can be very complimentary, and the best result for you and your family is likely to make them work together on YOUR GOAL, not the goal of the receiver of the fees.