Earlier this year, Russell Investments put out a piece attempting to calculate a financial advisor’s value. It’s an important topic given many people’s need for wealth management advice, and the reassurance they require that they are not paying too much for it. The paper is geared toward financial advisors, so this is a short post summarizing its findings.
It contains a formula for calculating advisor value, with the conclusion that it can be as high as 3.75% per year.
•Annual portfolio rebalancing: up to .2% per year
•Helping clients avoid investment mistakes: 2.1% per year
•Portfolio management costs: .25% per year
•Financial planning and ancillary services: thousands of dollars a year (exact percentage depends on the portfolio value)
•Tax aware investing: up to .45% per year
The piece elaborates on all of these calculations. Obviously, the one that jumps out is the 2.1% per year for avoiding investment mistakes. It is based on a study showing that investors underperformed the funds they invested in by that amount over 31 years. There are other studies showing a similar investor gap. Whether it’s keeping investors from buying technology stocks in 2000, selling out of the market in 2008-2009, or chasing that can’t miss investment, advisors play a key role in helping clients stick to their long-term plans and avoiding harmful short-term moves.
My overall takeaway after reading this is that it’s hard to pinpoint an exact figure for an advisor’s value. This piece does a better job than most by providing back-up and rationale, and each individual component seems reasonable. Even if you disagree with some of its conclusions, it’s helpful to understand the potential areas where an advisor can add value outside of just performance versus a benchmark.
Source: 2016 Value of a financial advisor update: More than 3.75%, Russell Investments March 15, 2016.