Does an advisor really add enough value to justify the fees? What if you could double your standard of living in just 25 years? Can an advisor really deliver a higher net percentage than a self-managed portfolio? Thanks to studies independently performed by Vanguard and Aon Hewitt, we are able to see clear answers.

According to an article, written by Vanguard, there are many ways in which a financial advisor can add value. In fact, they created the Vanguard Advisor’s Alpha® concept to show how “advisors could add value, or alpha, through relationship-oriented services such as providing wealth management through financial planning, discipline, and guidance, rather than by trying to outperform the market.”[1] The article further discusses the significance of the client-advisor relationship and how that relationship can dramatically improve a portfolio. Vanguard also points out that although benefits are hard to quantify, evidence shows that an advisor’s guidance directly correlates to a positive quantitative outcome. How so?

For example, an advisor may guide a client to stay the course, as opposed to making a major change during a period of market turbulence. Why would such advice be practical? Most of us would be willing to agree that money is an emotional topic. Typically, two major emotions negatively affected by money are fear and greed. Let’s face it, bad financial decisions are usually made when a person ignores logic and succumbs to the fear of losing money, or to greed, in wanting more[2]. As a result, during a turbulent market fluctuation, a client could find himself feeling nervous and experience a ‘knee-jerk-response’, or a sudden impulse to make a portfolio change. In such a situation, having a professional guide to bring peace of mind to his uncertainty would be invaluable. In addition to the advisor providing a qualitative improvement, the client would be able to track the results over time and compare for himself.

Now that we understand the logic behind professional financial advice let’s talk numbers. Vanguard states that the potential value added to a professionally managed portfolio is “3% in net returns”[3]. Of course, this is not an exact figure because this can vary depending on the client’s circumstances and the investment strategy used. However, this 3% in net returns is more likely to be achieved if the advisor is using time tested strategies. Additionally, Investopedia published an article that expounded on the data from the Vanguard Study by stating that this increase in value to client portfolios “does not come in a linear, orderly fashion.” The article further stated, “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.”[4]

A 2013  Morningstar study[5] computed the actual amount of improvement in investment returns at 1.82% per year for those who use professional advice when making financial decisions. In this study the concept of Gamma and Gamma Factors are  introduced. Technical jargon aside, Gamma is defined as the measurement of “potential [monetary] value”, and the Factors are the main ways Gamma can be affected by making “intelligent” decisions [6]. These Gamma Factors center around all the services a good financial advisor provides in addition to asset management.

Morningstar’s Five Gamma Factors:

  1. a total wealth framework to determine the optimal asset allocation
  2. a dynamic withdrawal strategy
  3. incorporating guaranteed income products (i.e., annuities)
  4. tax-efficient decisions
  5. liability-relative asset allocation optimization

Their research shows that retirement plans that include these Gamma Factors can generate an income level more than 20% higher than a retirement plan that does not integrate them. Another study by Aon Hewitt states that investors enjoyed annual returns that were 1.86% higher on average net of fees than their do-it-yourself counterparts. The Hewitt study also had the same findings as the Vanguard Alpha study, concluding that those who sought professional assistance in their decision-making reaped annual returns that were nearly 3% higher compared to those who invested alone.

Aon Hewitt completed another study which explores how investors who had investment help fared versus investors who didn’t. They stated that those who had help outperformed those who did not by a 2.92% median annual return average over a five year period. Then they gave context to this over time stating, “the magnitude of the 2.92% median annual return advantage that investors with help received. Over 5 years, the length of time of the study, an investor with help would have 14% more wealth than a Non-Help investor. Over 10 years, that number grows to a 30% advantage, and over 20 years it is a 70% advantage.”[7]

Other areas a financial advisor adds value in addition to monetary and quantitative results are the qualitative elements.

1. Creating better habits

In addition to the typical financial benefit when a portfolio is managed using a well-known time tested strategy and using best practices for wealth management advisors serve as coaches and help clients make better decisions and habits. An advisor is similar to a life coach – helping clients make good behavioral decisions that align with their dreams and goals. These behavioral changes can be very significant. Check out our blog on how Financial Advisor’s are like White Water Rafting Guides to get a unique perspective on the role of a wealth advisor.

2. Time

An advisor can also add the value of time. If you were self managing before and now you have an advisor you can trust, they can do it for you. Time is a precious commodity and hiring an expert frees you up to use your time doing something you love.

3. Emotional benefits

There are the emotional benefits to hiring a professional, such as reduced stress and anxiety.

4. Help with the complexities that more money brings

You pay more taxes as you have more money. So it becomes more complicated the more money you have. Hiring a professional to navigate the complexities and changing tax landscape is very valuable in helping to ease your tax burden. The more money you make the more you risk losing as well. Having an advisor to help you make changes quickly when the market suddenly fluctuates helps you to minimize losses, allows someone else to pay attention for you, and provides you with clear communication through these decisions so that you never feel alone. Finally, by helping with estate planning and curating your Legacy Plan an advisor can help you make decisions that will benefit the causes closest to your heart as well as future generations.

In conclusion, when you believe an expert can add value for you, you begin to see value. As suggested in the studies above, financial advisors clearly deliver monetarily. But by taking time to understand you and your family’s unique goals, objectives, and needs, a good financial advisor can also deliver emotionally. This gives you peace of mind. At Goodwin Investment Advisory, we take the weight of wealth management off of your shoulders and put it into our hands. With a 99% satisfaction rating[8], it’s clear clients trust our hands to build confidence in their legacy lasting for generations.

Disclosure: GIA did not independently verify the results of any study referenced above. This article is intended to provide examples of how working with a professional investment manager can add value. Results will vary and past performance is not indicative of future results.

[1] Kinniry Jr, Francis M., CFA; Jaconetti, Colleen M., CFA, CFP ® ; DiJoseph, Michael A., CFA; Zilbering, Yan; Bennyhoff, Donald G.,CFA. “Putting a Value on Your Value: Quantifying Vanguard Advisor’s Alpha”. Whitepaper, Feb. 2019, https://advisors.vanguard.com/iwe/pdf/ISGQVAA.pdf.

[2] Hayes, Adam. “Financial Markets: When Fear and Greed Take Over.” Markets, 21 Mar. 2021, https://www.investopedia.com/articles/01/030701.asp

[3] Kinniry Jr, Francis M., CFA; Jaconetti, Colleen M., CFA, CFP ® ; DiJoseph, Michael A., CFA; Zilbering, Yan; Bennyhoff, Donald G.,CFA. “Putting a Value on Your Value: Quantifying Vanguard Advisor’s Alpha”. Whitepaper, Feb. 2019, https://advisors.vanguard.com/iwe/pdf/ISGQVAA.pdf.

[4] Peters, Katelyn. “How Financial Advice Can Boost Your Returns.” Practice Management, 19 May. 2021, https://www.investopedia.com/articles/personal-finance/102616/how-much-can-advisor-help-your-returns-how-about-3-worth.asp

[5] Blanchett, David, CFA, CFP®., Kaplan, Paul. Ph.D, CFA. “Alpha, Beta, and Now…Gamma.” Morningstar, 28 Aug. 2013.  https://www.morningstar.com/content/dam/marketing/shared/research/foundational/677796-AlphaBetaGamma.pdf

[6] Chen, James. “Gamma Definition.” Advanced Options Trading Concepts, 28 Dec. 2020. https://www.investopedia.com/terms/g/gamma.asp

[7] Aon Hewitt. “Help In Defined Contribution Plans: 2006-2010”, Sep. 2011. https://corp.financialengines.com/employers/2011HelpReport.pdf

[8] 99% of clients who responded in January 2021 to a GIA-conducted survey.