To answer this question I want to clarify that we are talking about an actual human advisor and not automated financial advice or a “robo advisor.” Also, we’re addressing more that returns. Today’s trusted advisor provides cogent wealth management advice that encompasses financial planning and investment policy, as well as decision-making discipline and guidance. Outperforming the market is not the goal, nor should it be the measure of value.
Since 2001, the Vanguard Advisor’s Alpha framework has outlined how advisors can add value through relationship-oriented services such as wealth management and behavioral coaching. Most recently, Vanguard quantified advisors’ potential positive impact on clients’ net annual returns at “about 3%.” The Vanguard whitepaper states, “For some clients, you may offer much more than 3 percentage points of increased returns. For others, less. The 3 percentage points come after taxes and fees. This return is not added over a specific time frame but varies each year and according to client circumstances. It can be added quickly and dramatically, especially during periods of market decline or euphoria. It may be provided slowly. It will not appear on a client’s quarterly statement but is real nonetheless.”
Remember, services such as estate and succession planning, or advice on long-term care insurance, and charitable giving contribute real value to the advisory relationship, even if they are not absolutely quantifiable. Other services are more quantifiable and Vanguard offers these value estimates (expressed in basis points, i.e., 50 basis point is 0.5% or half of one percent). Cost-effective implementation (choosing low cost funds): 45 basis points; Asset location (dividing assets appropriately between taxable and non-taxable accounts): Up to 75 basis points; Rebalancing: 35 basis points; and Developing a Spending strategy (withdrawal order in retirement): Up to 70 basis points.
The value we deliver to clients comes from focusing on what we can control—product costs, portfolio diversification, and tax efficiency. We also deliver value by helping our clients to set clear goals, to remain invested during the market’s inevitable downward swings and to remain focused on the long-term. As I reflect on the investors’ experiences during the tech bubble, 9/11 and Great Recession, it gives me a great sense of satisfaction knowing our “advisor worth” and how we helped protect the dreams and legacies of our clients.