How Working With an Advisor Pays Off
Financial advisors can provide peace of mind. But do they deliver a demonstrable, dollars-and-cents advantage to their clients?
Two studies show that the answer is yes—if the advisor is diligent in providing several key services. Let’s start with research from Morningstar, the big Chicago-based investment research firm. A 2012 Morningstar study found that advisors who use an “efficient financial planning strategy” can help clients increase their retirement assets significantly.
By making better decisions in five areas, the study found, advisors can help their clients earn an extra 1.82% a year—or about 30% more for their retirement.
- Goals-based investing. Investors gain the greatest advantage when they invest to achieve specific goals within specific time frames.
- Asset allocation. Proper asset allocation counterbalances different asset types within a portfolio to create the highest potential returns for a given level of risk.
- Tax-efficiency. Taxes can create a serious drag on performance; the best advisors invest with an eye toward minimizing them.
- Product allocation. Certain investment products are simply more effective than others.
- Withdrawal strategy. The order in which you take distributions from different account types impacts your asset growth and tax liabilities.
Separately, Vanguard, the mutual fund and exchange-traded-fund giant, found that effective advisors can add up to 3% in net return. Vanguard’s report, from 2014, quantified the value of specific services, such as:
- Behavioral coaching. Advisors who help clients remain disciplined and focused on their long-term goals—rather than reacting to short-term conditions—can add as much as 1.5% to their clients’ portfolio returns, Vanguard found.
- Asset location. Not to be confused with asset allocation, asset location places different kinds of assets in taxable or tax-advantaged accounts to minimize overall tax liabilities. Doing it well can add as much as .75% to returns.
- Using cost-effective investments. This is a simple one: The higher an investment’s fees, the lower its net return. Good advisors choose effective investments with competitive fees, adding as much as .45% in net return.
- Rebalancing. As certain investments appreciate and others decline, a portfolio’s target asset allocation becomes skewed. Rebalancing as needed restores the proper allocation, and can add up to .35% in extra return, according to Vanguard.
- Implementing a spending strategy. Vanguard found that sound decisions about how to spend from retirement portfolios can add up to .70% in extra return.
The idea of saving money by handling your own investing and financial planning can be attractive. And online technology has certainly made the mechanics of DIY wealth management more easily available. But wealth is complex. Emotions can lead to poor decisions, particularly during periods of market volatility. And without expertise and experience, investors may be overwhelmed.
So while a financial advisor can provide confidence, the best can also provide you with a significant advantage in achieving financial security and realizing your goals.