The financial advisory community is acutely aware of the value that it can provide to clients with proper investment and 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 they can access with a smartphone.
However, hard data from research done on the industry seems to side solidly with the advisors in this matter. Here is some data to back that up.
The Vanguard Study
Vanguard Funds, a stalwart low-cost investment management company, released a study titled Advisor’s Alpha. This study estimates that clients who work with a good financial advisor will receive on average a 3% increase in the value of their portfolios each year. 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. Morningstar has echoed the sentiment in Vanguard’s study in the release of a recent whitepaper, Alpha, Beta, and Now…Gamma. Morningstar’s definition of gamma is “the extra income an investor can earn by making better financial decisions.” It computes the actual amount of improvement in investment returns at 1.82% per year for those who use professional advice to make their financial decisions.
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 from 2006 through 2008. The data that they obtained compared the returns of investors who sought advice from online sources or the use of target-date funds or managed accounts to those who did it all by themselves. The study concluded that the former group of investors enjoyed annual returns that were 1.86% higher on average net of fees than their do-it-yourself counterparts. The research also included comparisons of investment returns in the uncertain years of 2009 and 2010, and the study again concluded that the group that sought professional assistance in their decision making reaped annual returns that were nearly 3% higher compared to those who invested alone.
The data clearly indicates that 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. And 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 back in 2012 titled the Value of Advice Report, and this report revealed that clients who paid for financial advice have a 1.5 times higher probability to stick with their long-term financial plan than those who didn’t. This shows that 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 Canadian study also shows that those who pay for financial advice also often enjoy a higher quality of life, as they can rest secure in the knowledge that their advisor is taking care of them.
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.