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How Much is a Financial Advisor Really Worth?

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And … Can it be Quantified?

Doctors and FAs

[By Staff Reporters]

How much of a boost in net returns can financial advisors add to client portfolios? According to Vanguard Brokerage Services®; maybe as much as 3%?

The Study

In a recent paper from the Valley Forge, PA based mutual fund and ETF giant, Vanguard said financial advisors can generate returns through a framework focused on five wealth management principles:

Being an effective behavioral coach: Helping clients maintain a long-term perspective and a disciplined approach is arguably one of the most important elements of financial advice. (Potential value added: up to 1.50%).

Applying an asset location strategy: The allocation of assets between taxable and tax-advantaged accounts is one tool an advisor can employ that can add value each year. (Potential value added: from 0% to 0.75%).

Employing cost-effective investments: This component of every advisor’s tool kit is based on simple math: Gross return less costs equals net return. (Potential value added: up to 0.45%).

Maintaining the proper allocation through rebalancing: Over time, as investments produce various returns, a portfolio will likely drift from its target allocation. An advisor can add value by ensuring the portfolio’s risk/return characteristics stay consistent with a client’s preferences. (Potential value added: up to 0.35%).

Implementing a spending strategy: As the retiree population grows, an advisor can help clients make important decisions about how to spend from their portfolios. (Potential value added: up to 0.70%).

Source: Financial Advisor Magazine, page 20, April 2014.

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The Fine-Print

But, Vanguard notes that while it’s possible all of these principles could add up to 3% in net returns for clients, it’s more likely to be an intermittent number than an annual one because some of the best opportunities to add value happen during extreme market lows and highs when angst or giddiness [fear and greed] can cause investors to bail on their well-thought-out investment plans.

More: http://www.CertifiedMedicalPlanner.org


Most retail financial services products are designed to enhance the well-being of the Financial Advisor and/or vendor at the expense of clients. The clients get only the leftovers. Of course, no one tells them that secret. They have to figure it out for themselves. As the old line goes, “Where are the customers’ boats?”

Source: Rowland, M: Planning Periscope [Where Advisors are the Clients]. Financial Advisors Magazine; page 36, April 2014


Are doctors different than the average investors noted in this essay?

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4 Responses

  1. More on Financial Advisors

    Is your financial advisor biased? To find out, just check two things: Is the advisor human? Is he or she breathing? If so, the advisor is biased.

    Even if someone created a supposedly objective robotic financial planner — let’s call it CFP 3.O — it would carry its programmer’s biases. Any providers of financial services have opinions and biases. A host of factors such as their personal backgrounds, professional training, and experience in the industry shape their investment philosophies. Their compensation model also influences their financial advice.

    What you can do as a potential client is evaluate the factors that might affect an advisor’s biases. Then you can decide whether their biases will work in your favor.

    After 40 years of experience in various sectors of financial services—from real estate to all types of insurance and securities—I know how these industries work. That experience as a financial services insider has given me plenty of opinions, which often show up in my weekly columns.

    As a columnist, I am an advocate for my profession, advice-only financial planning. One of my strong biases is a belief that the closest thing to objective financial advice comes from a fee-for-service financial planner who has a fiduciary responsibility to represent your best interests.

    My strongest bias as a financial columnist, however, is to be an advocate for my ME-P readers. My goal is to help you make sound financial decisions. Sometimes I write about strategies that have worked for me or for others. I also share my mistakes and those of others, with the hope that you will save a lot of money by not repeating those mistakes.

    One of the rewards of writing a semi-regular column is getting comments from readers. Most of these are positive, and many, even if they are critical, are educational. I appreciate the insights and new information I often receive. Some of the most negative responses come from financial services people who strongly disagree with me, often because they sell a product that I may criticize for its high fees or hidden costs. Unfortunately, many of these comments take the form of professional and personal attacks.

    The question such attacks always raises for me is: “Why so defensive?” Those who are comfortable with the merits of the financial products they sell shouldn’t need to attack someone who points out factual information about those products. Although they would say what I consider factual information is a misguided opinion, which is exactly my point. Few of us can escape our tightly-held view of reality.

    As a consumer or potential consumer of financial services, it’s best never to assume a given piece of financial advice is right for you. Instead, ask, “Where’s the bias?” Is this person representing a particular industry? Does his or her income mostly depend on selling a product? Does he or she appear to hold a prejudice for or against a particular type of investment? If so, what’s the likely reason?

    Once you answer those questions, you are better able to decide whether the advice will serve your needs. For example, since one of my admitted biases is toward low-cost investments with no guarantees, obviously my financial advice will reflect that opinion. Any potential client who wants guarantees and is willing to pay the associated costs that come with them is probably not a good fit for my particular brand of financial planning.

    As a consumer, you’re wise to hold onto one strong opinion of your own: to be biased in favor of your own best interests. That means taking any financial advisor’s recommendations with a bit of healthy skepticism. Including mine.

    Rick Kahler MS CFP®


  2. So the question is, what is the quantifiable value of a financial advisor for the Knowledgeable investor?

    More thoughts on “Do Knowledgeable Investors Need A Financial Advisor? [A Mathematical Approach]”




  3. Market Underperformance

    As I commented on the original ME-P above, research shows that most investors and investment advisors woefully underperform the markets. How woeful is woeful?

    Over the past 30 years, it meant leaving an average of $7,100 per year on the table for every $100,000 invested. For a 401(k) that grows to $1 million at retirement age, this means $71,000 less in retirement income to spend every year. That’s a really big deal.

    The reason: when it comes to investing our brains are wired for failure, and that includes the brains of investment advisors. You need a system that will make it difficult to give in to your brain’s tendency to panic and sabotage your investment strategy.

    Research shows one system that works is to invest a specific percentage of your portfolio in several asset classes and then readjust (by buying or selling gains or losses) each asset class back to the original target allocation at least once a year. This is called a static buy-and-hold strategy with periodic rebalancing.

    Creating such a diversified portfolio is simple enough. The hard part is to keep following the strategy during market ups and downs. The easiest way I know of doing this is to give the maintenance of your asset allocation and rebalancing over to someone else with the disciplines and processes in place to follow the strategy, come hell or high water.

    Many 401(k) plans will do this for you if you set them up correctly. First, you will do best not to use the asset allocation fund provided on the 401(k) platform. The recent 21st annual Quantitative Analysis of Investor Behavior by Dalbar found the asset allocation fund’s overall performance is even worse than that of investors and their advisors.

    To do this yourself, determine the asset allocation that makes sense for your age, income needs at retirement, and risk tolerance. If you’re in your 20’s, this may be an allocation of 90% in equity and alternative investments and 10% in bonds. If you’re in your 60’s, this may be 60% in equity and alternative investments and 40% in bonds. If you’re retired, with a low risk tolerance, plenty of pension income, and no apparent need to ever tap your portfolio, you might allocate 30% to equities and alternatives and 70% to bonds.

    Next, from the available mutual funds in your plan, select the funds in each asset class that index their market or that have the lowest expense ratios.

    For example, let’s assume you are 55 years old. Your employer’s 401(k) plan has a global equity index fund, a REIT (real estate) Index fund, a commodity index fund, and a total bond market index fund. A possible allocation would be 30% in global equity, 15% in REITS, 15% in commodities, and 40% in the total bond market fund. Set your periodic contributions to go into these same funds at the same percentages.

    Finally, pick a firm annual date to rebalance the portfolio yourself. Schedule it as an important appointment and do it without fail, excuse, or hesitation. This step is imperative to long-term success.

    Even better, an increasing number of 401(k) plans will do this automatically and allow you to choose a periodic (quarterly or annual) rebalance option. Set your allocation, choose the automatic rebalance option, and you are now on autopilot.

    Another solution is to find an investment advisor who employs a static buy-and-hold strategy with periodic rebalancing. Of course, there will be an annual charge (the average is $10,000 or less per million). Compare that with earning an extra $71,000 a year in income over 30 years, however, and it becomes a phenomenally good buy.

    Rick Kahler MS CFP®


  4. How much value does a fiduciary financial planner add to your investment portfolio each year?

    Four percent, according to Russell Investments’ 2017 update to the firm’s annual “value of an advisor” analysis.

    If you do the math quickly, that seems like an incredible deal. Since most financial planners charge a starting fee of around 1%, earning an extra 4% for that expenditure should be a no-brainer. Why, then, aren’t people lined up outside the doors of financial planners waiting to get a chance to become clients?

    Let’s take a closer look:

    First, this analysis was done by an investment advisory firm. I’m guessing they were unlikely to fund an analysis that found investment advisors to be a terrible waste of money.

    That said, everything in their report is true. It valued five investment functions: rebalancing, behavioral mistakes, investment management, financial planning, and tax planning.

    1. Rebalancing.
    The study found that annual rebalancing—bringing your portfolio back in line with its target asset allocation—adds 0.20%. While that is a seemingly small number, it can add up to a lot over a long period of time.

    2. Behavioral mistakes. The analysis concluded that an average investor’s behavior of trying to time markets and chase returns costs them 2.0% a year. The study found that if an advisor can motivate an investor to not try to beat the market but to stay in an index come hell or high water, this will add 2% to their annual return. There is a huge caveat here that was not mentioned in the article. To add the 2.0% annual return, the advisor must believe in following a passive index allocation and not timing the markets.

    3. Investment management. This is just investment-only management that includes no financial planning, ongoing service, or guidance. Just an annual statement, online access, and a phone number to call, which is what robo advisors offer for about 0.33%.

    4. FPA cost.
    Russell analyzed the value of financial planning based on cost data of doing financial plans obtained from the Financial Planning Association. They defined financial planning services as those over and above investment management, including investment advice, customized financial planning with annual updates, Social Security and retirement income planning, and custom requests. They concluded the value was 0.75%.

    5. Tax planning. The analysis concluded that a non-tax-managed U.S. equity mutual fund costs the average investor 1.53% annually in reduced return because of taxes, while a tax-managed fund cost just 0.73% annually. They concluded the value of tax-aware planning and investing was 0.80%.

    Adding all that up, the study concluded the value of an advisor was 4.08% a year.

    The study didn’t mention some of the advisor services that you could do for yourself if you chose. If you are willing to do your own annual rebalancing, invest in a passively managed portfolio of sensibly selected tax-managed index funds, and never sell out during market drops, you could add 3.0% of annual value yourself.

    Granted, most people don’t want to do that, but it’s not that difficult.

    That leaves investment management and financial planning being worth 1.08%. This is just a bit higher than what the average fee-only planner charges, but it’s considerably lower than what most people pay in commissions to an insurance company or brokerage firm.

    Here’s the bottom line: If your financial planner is a fiduciary, charges a fee of around 1%, doesn’t try to time the markets, uses index and tax-managed mutual funds, rebalances your portfolio annually, and encourages you to stay in the market during a crash when you desperately want to bail out, you are probably getting great value.

    Rick Kahler MS CFP®


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