The short answer is, “it depends”. The “financial advisor” that sells you an expensive annuity with an undisclosed $20,000 front end commission and then has
a hard time returning your phone calls is clearly not worth what you unknowingly paid him or her. But according to multiple studies, most financial advisors are worth multiple times what you pay them.
In early 2019, Vanguard published an analysis of the value that advisors may provide to their clients. Vanguard looked at a few areas that advisors can add value including asset allocation, using low-cost investments, rebalancing, spending strategies and more. Overall, they estimated that advisors could add about 3% more in net investment returns to clients in a given year, though the figure would vary from year to year and client to client. Notably, about half of the excess returns
comes from behavioral coaching, that is, helping clients avoid the emotional and irrational decisions to buy high and sell low that is baked into our human DNA.
Another study recently done by Russell Investments took a similar approach and looked at four areas that advisors could add value. Their conclusion was that Active Rebalancing added 0.11%, Behavioral Coaching added 2.37%, Customized Planning added 1.21%, and Tax Smart Planning another 1.22% for a total annual increase in investment returns of 4.91%.
Another annual study has been done by Dalbar. Their Quantitative Analysis of Investor Behavior study has repeatedly shown that average investor returns aren’t near the market averages. The results in their recent 2022 study indicated that stock fund investors earned an average of over 3.5% less than the S&P 500 index over the 30 years through 2021. While most financial advisors can’t help you beat the S&P 500 every year, especially in a bull market, there is plenty of room to narrow the gap.
If you have a portfolio of at least $500,000, there are many fee only advisors available that may charge you 1% or less each year to handle the many facets of your wealth management. Most are focused mainly on investments, but some have tax expertise to add that additional value along with financial planning to keep you on track to your goals.
Adding a couple percent to your net investment return may not seem that much but it can add up to $1 million or more for many investors. See our November blog post for more.
