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Measuring the Value of a Financial Advisor

Measuring the Value of a Financial Advisor

| March 13, 2020

Our constantly evolving world means that behind every new challenge lies an opportunity; behind every new opportunity lies a challenge. For example when we read in a CNBC article that 75 percent of Americans choose to manage their money with no help from a professional or even an online service, and that just 17 percent use a financial advisor, that represents real opportunity for independent financial advisors. The challenge is communicating your value in order to convince those who go it alone that they would be better off utilizing the services of a financial professional. 

A 2019 study by Vanguard, one of the world’s largest money managers, offers some help. Vanguard’s whitepaper concludes that when an investor worked with an advisor and received professional investment advice, they saw a net portfolio return about 3 percent higher over time. 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. 

What is a relationship with a financial advisor worth to an investor?

Vanguard analyzed several key services that an advisor may provide, including behavioral coaching, asset location, and withdrawal order from client spending portfolios. The research estimated behavioral coaching could add one to two percent in net return by providing guidance and discipline and “could be the largest potential value-add of the tools available to advisors.” The report said asset location (the breakdown of assets between taxable and tax-advantaged accounts) has the potential of adding 75 basis points in value each year. Withdrawal order can potentially add another 110 basis points a year, depending on the investor’s portfolio size and asset mix. 

Financial advisors offer additional value by staying current with constantly evolving laws and regulations. Prospective, and even current clients may not be aware advisors deal with rule changes regarding Medicare, Social Security, and the tax code. In addition, there is a steady stream of new product offerings that advisors review and evaluate. There are frequently various forms of the same product - for example mutual funds versus exchange traded funds versus index funds. Go-it-alone investors may never know about these products, let acquire it for the lowest cost or whether the product is appropriate for their circumstances.   

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.  

Past performance does not guarantee future results. The Vanguard study provided feedback and estimates based on customer experience. The value of advice is not a guarantee of performance. Actual returns will fluctuate.  

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 strategies.  

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.”