You may balk at the fees charged by your financial advisor: paying up to 1.5% of your assets under management seems high, especially in a low-rate, high-volatility environment. If your advisor is doing nothing more than picking investments to try to “beat the market”, you probably are paying too much (and probably not beating the market!) The value of wealth management is the often overlooked guidance, combined with the customary professional portfolio management, which should provide benefits in excess of the fees.
Two industry studies estimate the tangible annual value of wealth management as being +1.59%1 and about +3%2. A highly-regarded financial planner suggests viewing the benefit through a different perspective but does not assign a tangible value. This article takes a high level look at each viewpoint.
The independent investment research group approached the topic by examining how an investor, during retirement, may increase his/her income by adopting a better informed approach using the best practices of wealth management. Adding to the existing lexicon of Greek letters in the August 2013 publication Alpha, Beta and Now…Gamma1, the Morningstar authors conclude that improved financial decision-making can increase overall returns by 22.6%. When combined with an optimized Social Security claiming strategy (of which some options have been recently legislated away), the total return could have been as high as 31%.
Morningstar essentially compared a naïve investor’s behavior with an outcome that could be achieved with professional guidance and found these benefits:
|Dynamic Withdrawal Strategy||9.9%||Using a variable spending strategy updated yearly to adjust for unanticipated changes|
|Total Wealth Asset Allocation||6.4%||Combining financial assets and human life assets|
|Tax Efficiency||3.2%||Locating and withdrawing assets in the most tax advantaged manner|
|Liability Relative Optimization||1.7%||Investing to address specific spending needs|
|Annuity Allocation||1.4%||Using guaranteed life income products to provide for unknown longevity|
If you were to annualize this 22.4% cumulative increase over a 30 year retirement (assuming a 4% annual distribution), the additional annual return is 1.59%3 – likely in excess of the fee your advisor is charging.
Couple this with an optimized Social Security strategy and you have a higher annual return (and this is just during an investor’s retirement period.)
Vanguard’s “Advisor Alpha” or Return on Investment (ROI)
In March 2014, Vanguard published a white paper expanding upon their 2001 phrase, ‘Advisor Alpha’3, examining the excess return produced by professionals that employed “cogent wealth management via financial planning, discipline, and guidance.” The report concluded that about 3% could be added in net annualized returns, albeit on an intermittent basis.
Where did that additional value come from? Under this approach, there are seven benefits that an advisor may provide with a range of results:
Vanguard Advisor Alpha
|Suitable asset allocation||> 0 bps||Choosing broadly diversified non-correlated investments|
|Cost-effective implementation||45 bps||Using low-cost vehicles|
|Rebalancing||35 bps||Maintaining targeted allocation|
|Behavioral coaching||150 bps||Providing support to stay the course during market stress|
|Asset location||0 to 75 bps||Proper placement in taxable and non-taxable accounts|
|Spending strategy||0 to 70 bps||Distributing assets on a tax advantaged basis|
|Return objective||> 0 bps||Focusing on “total return” and not “income investing”|
|Total||“About 3%”||Assuming 1% advisory fee|
100bps = 1%
Here’s an explanation: let’s say the overall market, a combination of stocks and bonds, had a return of 8% but the individual investor, due to poor trading decisions, taxes, fees and lack of diversification achieved a gain of only 4%. However, in this example, working with a capable advisor that helped provide guidance and support through market tumult would produce a gain of 7% after the advisor’s assumed 1% fees.
Reaping a 3% additional return on a 1% charge seems like a worthwhile benefit to me.
Mitch Anthony’s Return on Life (ROL) ™
A good financial advisor should do more than just manage investments – he or she should be a collaborative coach who helps to set goals, develop strategies and put into play all your available resources – not just your ‘financial assets’ but also your often overlooked ‘human value assets’.
Financial Planner Mitch Anthony developed a framework that moves the discussion from Vanguard’s “Return on Investment (ROI)” approach to a more inclusive “Return on Life (ROL)” discussion. This approach identifies a number of intangible benefits above and beyond the “about 3%” ROI identified by Vanguard.
Mitch Anthony’s “Return on Life” ™
|Organization||Assist in getting financial house in order – at both micro (cash-flow) and macro (investments, insurance, taxes, estate planning) levels|
|Accountability||Follow-through on setting, implementing and achieving goals|
|Objectivity||Provide research, information and guidance for key decision-making|
|Proactivity||Help anticipate and prepare for life events in advance|
|Education||Increase knowledge to better understand risks and make more informed decisions|
|Partnership||Maintain long-term relationship to help achieve best possible outcomes|
While these benefits can’t be measured, they are a value-add to the experience. Your financial advisor, if he or she is delivering this holistic service, is compensated very lightly, in my opinion, if it is only a customary advisory fee.
Can you quantify it?
These three perspectives, using different approaches and assumptions cannot conclusively quantify the value of wealth management, especially the intangible benefits, but do provide some guideposts. The coaching and advising aspects of helping you to make informed decisions, maintaining the course during uncertain markets and, most notably, knowing you have partnered with a financial professional helping you with other important aspects of money (such as your mortgage, insurance, taxes, credit and estate planning) should provide you with value well in excess of your advisor’s fees.
- “Alpha, Beta, and Now…Gamma” by David Blanchett, CFA, CFP® Head of Retirement Research Morningstar Investment Management and Paul Kaplan, Ph.D., CFA Director of Research Morningstar Canada, August 28, 2013.
- “Putting a value on your value: Quantifying Vanguard Advisor’s Alpha” by Francis M. Kinniry Jr., CFA, Colleen M. Jaconetti, CPA, CFP ®, Michael A. DiJoseph, CFA, and Yan Zilbering, Vanguard Research, March 2014.
- “The Value of Financial Advice” by Wade Pfau, Forbes Magazine, July 21, 2015.
This material is meant for general informational purposes only and is not to be construed as tax, legal, or investment advice. Although the information has been gathered from sources believed to be reliable, individual situations can vary. Therefore, the information should be relied upon only when coordinated with individual professional advice. Shore Point Advisors and its employees do not provide tax, legal, or accounting advice. Consult your tax, legal, or accounting professional regarding your individual situation.