According to Vanguard, the leader in do-it-yourself (DIY) investing, they believe a financial advisor can add approximately three percentage points to a client’s investment returns per year. The study found five separate ways advisors add value (alpha) in working with their clients. *
|Vanguard Advisor’s Alpha||Value-Add (approx. annual %)|
|Asset Location||0 to .75%|
|Spending Strategy (withdrawal order)||0 to .70%|
Behavioral Coaching (1.5%) – According to Vanguard the biggest deterrent to individual investor returns are, “the allure of market timing and temptation to chase performance.” Advisors help you stick to your investing plan in good times and in bad. This means not exiting the market during the credit crisis (Great Recession) or getting too excited during the tech bubble. Vanguard analyzed investor vs. fund returns and in every category the investor trailed the fund return due to poor market timing.
Asset Location (0 – .75%) – Did you know whether you place certain investments in taxable or tax-deferred accounts can have a material impact on your long-term after-tax returns? Optimal portfolio construction involves minimizing the impact of taxes by holding the right asset classes in taxable and tax-deferred accounts.
Spending Strategy (0 – .70%) – Do you have multiple tax-deferred (IRA, 401k, Roth IRA etc.) and taxable accounts? When you start withdrawing from these accounts the order and amount withdrawn from each account will have a significant impact on the total taxes paid during retirement. The wrong withdrawal strategy will reduce your wealth and the longevity of the portfolio.
Cost-Effective Implementation (.45%) – Studies have shown low-cost mutual funds outperform high-cost mutual funds over long time periods. By focusing on high quality, low-cost funds you increase your chance of success. This can be accomplished through low-cost active funds or index funds.
Rebalancing (.35%) – How often do you review your portfolio? To reduce risk, it is important to re-balance/review your entire portfolio on a regular basis. It will be painful as it will require you to sell your winners and buy the losers, but over time this adds incremental return to the portfolio.
One other area that Vanguard concluded advisors add value, though it is too difficult to quantify, is Asset Allocation. This is the percentage of stocks, bonds and cash an investor holds, and it has a substantial impact to long-term returns. Unfortunately, each individual risk level is too unique for Vanguard to quantify the benefit an Advisor can add by the correct asset allocation. Many may argue it may be the most important factor to future returns. **
These numbers only include investment performance and don’t include the other benefits advisors provide to clients including help with obtaining a mortgage, taxes, insurance, estate planning, etc. Morningstar did a separate study on “Gamma” that we have written about in the past. It also discussed the benefit and additional wealth of working with a financial advisor. ***
We believe that without consistent reviews, a disciplined strategy, diligent research and accountability, our instincts will pull us in the wrong direction at the wrong times resulting in under-performance. Our goal is to help clients be able to avoid these crippling mistakes. After all, wouldn’t you rather end up with a higher probability of accomplishing the things you want to do instead of having to cut out things in retirement because you wanted to avoid paying the cost of an advisor?
*- Putting a value on your value: Quantifying Vanguard Advisor’s Alpha Vanguard September 2016
**- Determinants of Portfolio Performance, The Financial Analysts Journal, July/August 1986.
***-The Value of the Gamma Portfolio Morningstar October 2017.
Fee-Based Planning offered through W3 Wealth Advisors, LLC – a State Registered Investment Advisor – Third Party Money Management offered through Valmark Advisers, Inc. a SEC Registered Investment Advisor – Securities offered through Valmark Securities, Inc. Member FINRA, SIPC – 130 Springside Drive, Suite 300 Akron, Ohio 44333-2431 * 1-800-765-5201– W3 Wealth Management, LLC and W3 Wealth Advisors, LLC are separate entities from Valmark Securities, Inc. and Valmark Advisers, Inc.