What is a relationship with a financial advisor worth to an investor? A 2019 study by Vanguard, one of the world’s largest money managers, attempts to answer that question.
Vanguard’s whitepaper concludes that when an investor works with an advisor and receives professional investment advice, they may see a net portfolio return about 3 percent higher over time.
How did this study arrive at that conclusion? By comparing self-directed investor accounts to an advisor model, Vanguard found that the potential return relative to the average investor experience was higher for individuals who had financial advisors.
Vanguard analyzed three key services that an advisor may provide: portfolio construction, wealth management, and behavioral coaching. It estimated that portfolio construction advice (e.g., asset allocation, asset location) could add up to 1.2 percent in additional return, while wealth management (e.g., rebalancing, drawdown strategies) may contribute over 1 percent in additional return.
The biggest opportunity to add value was in behavioral coaching, which was estimated to be worth about 1.5 percent in additional return. Financial advisors can use their insight to guide clients away from poor decisions, such as panic selling or accepting excessive risk in a portfolio. Indeed, the greatest value of a financial advisor may be in helping individuals adhere to an agreed-upon financial and investment strategy.
Of course, financial advisors can account for additional value not studied by Vanguard, such as helping clients implement wealth protection strategies, which protect against the financial consequences of loss of income and coordinating with other financial professionals on tax management and estate planning.
You could argue that a financial advisor’s independence adds qualitative value. It should be noted that not all financial advisors are independent. Some are basically employees of brokerages, and they may be encouraged to promote and recommend certain investments of those brokerages to their clients.
Both types of financial advisors may receive their compensation in two ways: through transaction fees and through ongoing fees. Financial advisory firms are required to disclose how their professionals are compensated with the Securities and Exchange Commission (SEC).2
After years of working with a financial advisor, the value of a relationship may be measured in both tangible and intangible ways. Many such investors are grateful they are not “going it alone.”
Richard H Mootz, CFP® CERTIFIED FINANCIAL PLANNER™ professional, is a Registered Representative of and offers securities through Securities America, Inc., a Registered Broker/Dealer, member FINRA/SIPC., Advisory Services offered through Securities America Advisors, Inc., A SEC Registered Investment Advisory firm. Mootz Financial Solutions and Securities America Companies are not affiliated. Richard H Mootz, CFP® CERTIFIED FINANCIAL PLANNER™ professional can be reached at (530) 877-7007 – by e-mail [email protected] or visit the website at www.mootzfinancialsolutions.com Securities America and its advisors do not provide tax or legal advice. Please consult with your tax or legal professional regarding your individual situation. CA Insurance Number 0C75924. This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.
