How Much Is an Investment Advisor Worth?

According to Vanguard, as much as three percentage points.

You know you incur fees to buy and own investments. You also know you’ll pay a separate fee when you hire an investment advisor to help you.

But is the investment advisor’s fee worthwhile? Or, stated differently, will the advisor’s services enable you to earn more (net of all fees) than if you avoided the advisor and invested on your own?

Yes, according to Vanguard, whose mutual funds manage $2.5 trillion for investors worldwide. Even though the company is well-known for catering to “do-it-yourself” investors, its study has concluded that financial advisors can increase their clients' investment returns by about 3 percentage points.

How an Investment Advisor Can Help Produce Better Returns

Vanguard says there are actually five ways an investment advisor produces extra returns for their clients. The first and most significant pertains to behavioral finance: Keeping clients focused on the long term and urging them to stick to a regular investing plan can add up to 1.5%, the report says.

Indeed, two key behavioral factors that often hurt DIY investors’ performance are “the allure of market timing and the temptation to chase performance,” Vanguard says. “Advisors as behavioral coaches can act as emotional circuit-breakers by circumventing clients’ tendencies to chase returns or run for cover in emotionally charged markets.”

This reminds me of the coaching — I might call it hand-holding — that many people received from their financial planners during the 2008 Credit Crisis. When some clients grew upset, they didn’t panic and sell. Instead, they panicked and called, giving their planners the opportunity to reassure them that their investment strategy would get them through the crisis. Over long periods, Vanguard says, this is worth as much as 1.5% in extra returns.

Advisors also increase returns by up to 0.75% by providing “thoughtful allocation of assets.” That refers to diversification — advising clients on how much to invest in stocks vs. bonds, gold, real estate, oil and gas, foreign securities and other assets. The right asset allocation can increase returns, and Vanguard says professional investment advisors are better at this than consumers.

Another 0.40% can be generated in returns when advisors help clients keep fees low.

Rebalancing adds another 0.35% to 0.40% of performance value. We know very well how valuable rebalancing can be in portfolio management. Unfortunately, few investors rebalance regularly — if at all — on their own.

Finally, advisors can add another 0.70% in returns when it comes time for clients to spend their assets in retirement. By carefully evaluating their mix of tax-free, tax-deferred and taxable accounts, advisors can help clients minimize the total taxes they pay over the course of their retirement, thereby increasing their wealth and the longevity of their investments.

All told, that's how financial advisors can add about 3% to investment returns, according to Vanguard. We have three observations about the study.

The Hidden Value of an Investment Advisor

First, those three percentage points are worth even more than they seem. After all, if your account rises 7%, and the services of an investment advisor increase that to 10%, your advisor is increasing your returns by 43%!

Second, Vanguard’s study was limited to investment results. It did not consider the additional services and advice that we offer. How much additional value do we generate for our clients through the advice we provide regarding their mortgages, employee benefits, credit and debt, taxes, insurance, and estate planning?

How much time do we save our clients thanks to the recordkeeping and tax reporting chores we perform so that they don’t have to? If these benefits were to be translated into “returns,” it’s quite likely that clients reap more than three percentage points.

Stated another way, might it be said that the advice pays for itself? You’ll decide, of course. But if this wasn’t the case, few people would hire financial advisors.

If you’ve been uncertain about the value of an investment advisor, Vanguard has just quantified it for you.

Investing strategies, such as asset allocation, diversification, or rebalancing, do not assure or guarantee better performance and cannot eliminate the risk of investment losses. There are no guarantees that a portfolio employing these or any other strategy will outperform a portfolio that does not engage in such strategies. Funds and ETFs are subject to risk, including loss of principal. All investments have inherent risks. There can be no assurance that the investment strategy proposed will obtain its goal. Past performance does not guarantee future results.  

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