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What Fiduciary Advice Is Worth to Your Portfolio

The Vanguard Group recently tried to quantify the value of professional financial advice. They determined that even the most basic financial advice is significant.

According to Vanguard, an average financial advisor may be able to boost a client’s portfolio by as much as 3.75% per year over time. They call it Advisor Alpha. In layman’s terms, this means “the value of an advisor to your bottom line.”  While 3.75% may sound like a huge estimate of value, Vanguard’s estimates only take into account the simple day-to-day activities of a basic investment manager, rather than the holistic guidance of a real financial planner. (For related reading, see: Should You Choose a Fee-Only Financial Advisor?)

5 Ways an Advisor May Add Value

These are the five areas Vanguard has identified where a financial advisor may add value:

  1. Behavioral coaching to help investors stick to a disciplined approach. Or put another way, helping people avoid the big mistakes that can really cost tons of money. (Estimated value 1.5% of the portfolio.)
  2. Asset allocation to divvy the investments wisely between retirement accounts and taxable accounts. (Estimated value 0.0% to 0.75% of the portfolio.)
  3. Cost-effective investment because mutual funds aren’t run for free. Even the cheapest from Vanguard has fees, trading costs, cash drag or varying tax efficiencies. And for those rare birds who are ambitious enough to dig through a full prospectus, good luck finding all the hidden fees. (Estimated value 0.45% of the portfolio.)
  4. Account rebalancing helps keep the risk/return consistent with the client’s specific situation since over time any diverse portfolio will move away from the optimal target allocation. (Estimated value added 0.35% of the portfolio.)
  5. Retiree spending strategies to help guide people on how best to spend their accumulated assets. This should include not only dollar amounts but indicate from which accounts and/or investments. (Estimated value added 0.70% of the portfolio.)

If Vanguard’s five basic principles sound good, that’s because they are. But in reality, they represent the bare minimum that any financial professional should be doing for their clients. You deserve more and you deserve better. True, comprehensive fiduciary financial planning advice may be worth more, way more. (For more, see: Choosing a Financial Advisor: Suitability as. Fiduciary Standards.)

Investment Versus Investor Return

Entrusting a fiduciary Certified Financial Planner™ and/or Accredited Investment Fiduciary™ professional who is legally bound to put their clients’ best interests ahead of their own is the best way to secure financial advice that meets your specific needs and goals. As sound as they are, the gist of Vanguard’s point concentrates on “investment return” versus “investor return” that also includes:   

  1. Holding you accountable to get on track for your financial goals.
  2. Congratulating you when something great happens.
  3. Helping you save more towards your goals.
  4. Helping you buy the right house at the right price (or staying put in a great apartment).
  5. Maximizing employee benefits like stock options, health insurance and even 401(k) plans.
  6. Minimizing the drag of taxes on your life through tax harvesting and other strategies.
  7. Imparting peace of mind and reducing stress.
  8. Being the go to person for anything financial.
  9. Taking the emotions out of tough life decisions.

What’s the big deal about 3.75%? Doing the math, a 3.75% increase in return is enourmous and could mean the difference between the financial freedom of a retirement chilling on the golf course versus the servitude of working at the Golden Arches for the entirety of your golden years.

An Example

Here's an illustration:

  • You started saving $100 per month at age 30 and kept it up until the full retirement age of 67 years young. If you were able to earn 6.25% on your money that would grow to around $173,000. Not too shabby. 
  • Increase that return by an additional 3.75%, bringing the total up to 10%. That $100 per month for 37 years turns into about $461,000. So, you’re putting in exactly the same amount but are ending up with 250% more wealth.

Now of course, I hope than you’re saving more than $100 per month at this juncture no matter what your age or income. But you can see that through the magic of compounding, the money grows bigger the longer you have the money invested. But unless you are an experienced financial professional or possess astute financial savvy, it’s difficult to get this kind of return on your own.

You deserve to maximize the value of your hard work. Whether you are getting average advice, or the best advice, your financial situation will improve, and this means you are moving closer to your financial goals and financial freedom.

The right advice from the right financial professionals will improve your finances and also help improve your quality of life. In my opinion, that's priceless. (For more from this author, see: Should My Financial Advisor Be a Fiduciary?)


Disclosure: All information herein has been prepared solely for informational purposes, and it is not an offer to buy or sell, or a solicitation of an offer to buy or sell any security investment or instrument or to participate in any particular trading strategy.