The financial advisory community is acutely aware of the value that it can provide to clients, including proper investment planning, retirement planning, and general financial counseling that can keep customers from going off the rails with their financial plans. But the public often has a very different perception of the value that advisors can provide, especially in an age of low-cost brokerage services, robo-advisors, and the complete range of financial services that consumers can access with a smartphone.

However, hard data from research done on the industry seems to side solidly with the advisors in this matter.

Key Takeaways

  • The financial advisory community is acutely aware of the value that it can provide to clients.
  • The public often has a very different perception of the value that advisors can provide, especially in an age of low-cost brokerage services and robo-advisors.
  • During periods of heightened greed and fear in the markets, advisors can step in and help their clients maintain an even keel and keep their long-term objectives in sight.

The Vanguard Study

In February 2019, Vanguard published research that attempted to quantify the benefits that advisors can add by providing cogent wealth management through financial planning, discipline, and guidance. According to Vanguard's report, "Putting a value on your value: Quantifying Vanguard Advisor's Alpha," this framework can add about 3% in net returns for clients.

Of course, this increase does not come in a linear, orderly fashion. The majority of this increase will come during periods of heightened greed and fear in the markets when advisors can step in and help their clients maintain an even keel and keep their long-term objectives in sight.

By implementing the Vanguard Advisor's Alpha framework, Vanguard claims that advisors can distinguish their skills and practice, in addition to adding about 3% for their clients through relationship-oriented services such as wealth management and behavioral coaching.

Additional Research Findings

A research paper, entitled "Alpha, Beta, and Now...Gamma," by David Blanchett and Paul Kaplan of Morningstar, also attempted to quantify how much economically better off clients are after engaging in financial planning strategies. For this study, Blanchett and Kaplan evaluated how the financial outcomes of retirees are improved by engaging in five financial planning strategies, including more effective asset allocation, dynamic withdrawal rate spending approaches, and proper asset location decisions.

Blanchett and Kaplan quantified the difference between the baseline and financial-planning-optimal strategies as "Gamma," and, according to their research, good financial planning decisions increase retirement income by 29%, which is the equivalent of generating 1.82% per year of higher returns. 

Both of these studies ultimately show that financial advisors truly earn their fees by acting as behavioral coaches rather than money managers. This notion is further buttressed by research from Aon Hewitt and managed accounts provider Financial Engines, which found that 401(k) participants who use professional help are better off than those who do not.

This study, "Help in Defined Contribution Plans: 2006 through 2012," by Financial Engines and Aon Hewitt revealed that 401(k) participants who got professional investment help—in the form of managed accounts, target-date funds, or online advice—earned higher median annual returns than those who do not. After examining the 401(k) investing behavior of 723,000 workers at 14 large U.S. employers, the researchers found that on average, employees using professional help had median annual returns that were 3.32% higher (net of fees) than participants managing their own portfolios.

Financial advisors can provide the most valuable assistance during periods of high market volatility when investors are most likely to react with their emotions instead of logic.

Additional research suggests that advisors can have a positive impact on their clients’ financial plans in other ways as well. The Investment Funds Institute of Canada released a report in 2012, called "The Value of Advice Report," which revealed that clients who pay for financial advice have a 1.5 times higher probability of sticking with their long-term financial plan than those who don't pay for financial advice.

While good financial advice can be beneficial in the short run, it can be exponentially more profitable for investors over longer periods of time.

The Bottom Line

Numerous studies are showing that financial advisors usually earn their keep by functioning as behavioral coaches for their clients rather than from active asset management. Advisors need to keep this in mind as they prospect for new business—and as they pitch to provide their clients with peace of mind and a steady presence to rely on during turbulent markets.