Value Provided by Financial Advisor Can Exceed Fee
Many things can trigger the decision to hire a financial planner. You may need some direction on how to prioritize your spending and saving to better prepare for the future. You may be too busy or uninterested in managing your own finances. You may experience a sudden life change such as a marriage, divorce, inheritance or retirement. Your situation may be getting complicated and you want a professional opinion or you lack the technical expertise to continue managing things on your own.
Although, you may need a financial planner you may be hesitant to pay the fee. Fee-only planners can be compensated using a flat fee, a percentage of assets or an hourly rate. The fee will typically be around 1% of assets for on-ongoing advice. A recent Vanguard study may help put your mind at ease. The study found that the added value provided by a fee-only planner can far exceed the cost.
In 2014 Vanguard published the results of a study they conducted on the value added by advisors. The study found that financial advisors can add up to about 3% in net returns for their clients by focusing on a wealth management framework they refer to as Advisor’s Alpha©. The study found that an advisor can add to a client’s net returns if their approach includes the following five principles: being an effective behavioral coach, applying an asset location strategy, employing cost effective investments, maintaining the proper allocation through rebalancing and implementing a spending strategy. These are just a few of the practices and principles followed by most comprehensive fee-only planners.
The exact amount of added return will vary based on client circumstances and implementation. It should not be viewed as an annual return but as an average over time. The opportunity for the greatest value comes during periods of extreme market duress or euphoria. Additionally, Vanguard found that paying a fee for advice using this framework can add significant value in comparison to what the investor had previously experienced with or without an advisor.
Vanguard’s framework places emphasis on relationship oriented services that encourage discipline and reason, in working with clients who may otherwise be undisciplined and reactionary. Rather than focusing on short term performance there is a focus on sticking to the plan and avoiding emotional overreaction. Advisors, acting as behavior coaches, can help discourage clients from chasing returns and focus instead on asset allocation, rebalancing, cash flow management and tax-efficient investment strategies.
The study found that when advisors place emphasis on stewardship and a strong relationship with the client, investors were less likely to make decisions that hurt their returns and negatively impacted their ability to reach long term financial goals. According to Vanguard “Although this wealth creation will not show up on any client statement, it is real and represents the difference in clients’ performance if they stay invested according to their plan as opposed to abandoning it.”