Can you afford not to have a good financial advisor?

Some people are hesitant to hire a financial advisor because they know the advisor will get paid and they aren’t sure what value they may receive.  A couple of major investment firms have done studies to try to quantify the value of a financial advisor and the results may surprise you.

Vanguard is a huge mutual fund firm famous for their low cost funds and their direct to consumer business model.  It’s pretty ironic that they put together a research study on what value a financial advisor can bring.  Their study looked at seven different areas in which advisors can add value:

  • Asset Allocation
  • Lowering Fund Costs
  • Rebalancing Portfolios
  • Behavioral Coaching
  • Asset Location (taxable vs. tax deferred accounts)
  • Retirement Spending Strategy
  • Total Return vs. Income Investing

The study attempted to quantify the value each area provided, but in some areas they only provided a range or a greater than zero figure.  Overall, they found that advisors could add about 3% per year in better net investment performance.  About half of the value came from Behavioral Coaching which involves counseling clients through the inevitable volatility of the investment markets along with other financial advice.  The study acknowledged that client results will vary from advisor to advisor and from year to year, but generally advisors that follow some best practices were quite valuable.

Another firm, Russell Investments, which manages over $250 billion in assets, did a similar study which came up with similar results.  They identified five value areas which totaled 3.75% per year in better performance.

That extra 3% or so in better investment results can make a dramatic difference over the years.  An investor that saves $20,000 per year for 30 years and earns an average 5% investment return would have a portfolio of about $1,395,000.  Earning an extra 3% per year would result in a portfolio of $2,447,000.  Based on the studies, a good financial advisor could be worth about $1,052,000 over the years for this hypothetical saver!

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