We’ve written before about the value of working with a financial advisor. In that post by James Lenhoff, he discussed how ‘the real value of a financial advisor is rooted in an abundance of experience that reveals time-honored truth.’ He concluded that working with a financial advisor brings confidence and clarity to life’s big transition points and better equips our clients for Living a Rich Life. Although this sense of confidence and clarity that a client enjoys when working with an experienced financial advisor does not easily lend itself to objective quantification, its presence is clearly felt.
In this post, we will tackle the more difficult task of examining the quantifiable aspects of value that advisors can bring to the table. While doing so, We’ll lean heavily on extensive research performed by Vanguard and which is summarized in this Vanguard study. Not all financial advisors offer the same services and so the results of Vanguard’s research won’t apply across the board. However, for the financial advisor who incorporates the following services (or more) in their practice, Vanguard concludes that financial advisors can add up to 3% in net returns over time.
Up to 1.2% in net returns
The first step to building a sound investment portfolio is to determine the risk tolerance and financial objectives for the investor. This allows for an appropriate portfolio to be built with the proper mix of equities and bonds. As Modern Portfolio Theory teaches us, it’s also important to further diversify across various asset classes, such as US Large Cap, US Mid Cap, US Small Cap, International, and Emerging Markets. Therefore, Advisors can add value by ensuring the client is in a well diversified portfolio with the appropriate weightings to each asset class. Advisors also have the potential to add value by leveraging their investment expertise to determine the appropriate individual positions to own in their portfolios. This value is generated both from the quality / performance of the investments, and also the advisor’s ability to build a portfolio with lower-cost mutual funds and exchange traded funds (ETFs). Lastly, financial advisors can add value through portfolio construction by choosing appropriate investment positions between taxable and tax-advantaged accounts. This takes the form of orienting growth and income investments differently in different types of accounts – such as IRA, Roth IRA, and taxable accounts.
Up to 1.5% in net returns
During periods of increased volatility or a prolonged bear market, a financial advisor who can help clients stay disciplined by adhering to a time-tested investment philosophy, will inevitably save the client from following their gut-reaction to “SELL EVERYTHING”. Studies continue to show that timing the market doesn’t work in the long run and that investors are better off if they stay disciplined and remain invested throughout the full market cycle. Pinpointing different investor biases and helping clients manage their emotions about money is extremely valuable. Therefore, a wise financial advisor adds value serving as the calm voice of reason for their clients during times of both market panic and euphoria.
Up to 1.05% in net returns
For the financial advisor whose services extend beyond investment management the value proposition grows even stronger. For example, by incorporating financial planning and tax planning services, an advisor can develop strategies such as tax-efficient withdrawals in retirement, tax-loss harvesting, and Roth conversions. These strategies, and others like them, add efficiency to a portfolio and can prolong the life of invested assets. Period re-balancing of portfolios is also a value add from advisors. As investment account values ebb and flow, financial advisors should re-balance the portfolio to ensure the integrity of the optimal asset allocation for their clients. Periodically re-balancing can reduce unwanted risk and locks in returns by selling assets that have appreciated and then buys positions that are under-priced.
Investing for your future under the direction of a trusted financial advisor can mean that you add up to 3% in net returns over time. This, coupled with the clarity and confidence that an advisor provides through life’s big transitions, plays an important role in helping you Build and Live a Rich Life.
David Kern is a Wealth Management Advisor at Wealthquest – a Cincinnati based financial planning and wealth management firm that offers a full range of financial services under one roof, for one simple fee.