Quantifying the Value of Financial Advisors

Several years ago, the results of a study conducted by Vanguard1 indicated that when advisors offer relationship-oriented services, such as wealth management and behavioral coaching, those services add about three percent to net return (after taxes and fees).  This return is not added over a specific time frame, but varies each year and according to client circumstances.

Within the past year Russell Investments updated one of its studies2 on this same topic.  The Russell study concluded that an advisor offering relationship-oriented services adds 4.4 percent to a client’s net return over their lifetime.

Both studies emphasized “relationship-oriented services” as opposed to “investment-only advising.”

The Vanguard study looked at three categories of relationship-oriented services:  wealth management, behavioral coaching, and portfolio construction (or rebalancing).

The Russell study considered wealth management services, annual portfolio rebalancing, behavioral coaching, and tax planning.

A look at the comments offered by the two studies shows a strong similarity in many areas.  For example, a concluding comment in the Vanguard study notes “the difference may seem small, but the simple act of rebalancing can help capture gains, reduce volatility, and help your asset allocation remain in the range you initially determined was right for your desired outcome.”

A comment in the Russell study reads:  “Left to their own devices, individuals tend to let portfolios drift and, as a result, portfolios can look vastly different from their initial state over time.”  A financial advisor would impose the discipline to continually evaluate and rebalance a portfolio as warranted by conditions.

We have essentially enjoyed a 10-year bull market, and we haven’t seen a market correction for 11 years.   This recent history can lead to complacency -- and perhaps even make investing look easy.  But I suggest this might be exactly the right time to review one’s asset allocation and do any necessary rebalancing.   One who hasn’t been rebalancing over the past few years might well be oriented toward growth stocks and US stocks, while being under represented in international and value-oriented stocks.

Historically, a diversified, balanced portfolio tends to weather downturns better.  A portfolio that has become over-weighted in certain areas could be exposed to greater volatility if the market experiences a downturn.

The Vanguard study also uncovered “over 200 types of unconscious biases in humans,” biases that could jeopardize one’s wealth if left unchecked.  “Most people act like humans, not investors.  People tend to let their emotions and other human tendencies influence their decision-making.  In many parts of life, that’s perfectly reasonable.  But when it comes to investing, acting like a human may actually cost you money.”

A recent example of human bias is people reacting to headline news.  There are concerns today regarding monetary policies, global trade wars, Brexit uncertainty, political uncertainty, and so forth.  These factors may tend to make people change portfolio structures for emotional reasons rather than looking at the longer term and quantitative data. 

Humans also tend to go along with others – “group think” – which doesn’t always play out well.  We also tend to overestimate our ability to forecast the future, and many people have a built-in “home bias,” meaning they put too much emphasis on home country stocks rather than looking at a larger picture.

Dealing with these biases is where behavioral coaching comes into play, and both studies showed this service to be a major factor in the value of a financial advisor.

1 Francis M. Kinniry, Jr., Colleen M. Jaconetti, Michel A. DiJoseph, Yan Zilbering, and Donald G. Bennyhoff 2016.  Putting a value on your value:  Quantifying Vanguard Advisor’s Alpha.  Valley Forge, PA.:  The Vanguard Group.

2 Firstlinks – Advisors must step up and articulate their value.  Jodie Hampshire, Managing Director, Australia for Russell Investments (https://russellinvestments.come/au).  Value – Why work with a financial advisor? russellinvestments.com.