What is value? The answer seems simple in one sense: Value is what something is worth. We apply this principle every day when we make purchases. If the value we attach to a certain object or service is equal to or greater than its offer price, we hand over our payment.
But viewed another way, value is harder to define. For example, suppose you have two new cars sitting side by side: one a Lamborghini Huracán Spyder and the other a Chevrolet Cruze. The first is priced at $210,000, and the second at $17,000. Which one has more value? Before you answer, consider: If all you require is basic transportation, and especially if you make less than several million dollars a year, the Cruze is probably the better value, even though its price is much less. Why? Because the value or benefit you receive by purchasing the Lamborghini is less than the cost. You need basic, dependable transportation; you don’t need 0–60 in 3.2 seconds, not to mention what you’d have to pay for insurance!
The same considerations apply when putting a value on a financial advisor. For each investor, the situation is different, because different investors have different needs. For some who feel overwhelmed by all the choices, risks, and other factors, a financial advisor’s value may lie mostly in his or her ability to help make appropriate choices and to relieve the client of the need to keep up with market movements, portfolio rebalancing, and other “confusing” processes. For more informed and involved investors, an advisor’s value may lie more in the ability to provide authoritative research and educated judgments as a counterpoint or even a check to the client’s own ideas and initiatives.
Recently, The Vanguard Group published a white paper that attempts to put value parameters around the client’s relationship with a financial advisor. Interestingly, the Vanguard study came up with seven activities or services usually provided by financial advisors that can be more or less quantified in terms of their addition of value:
1. Assisting with asset allocation,
2. Cost-effective implementation of investments,
3. Disciplined rebalancing,
4. Behavioral coaching,
5. Asset location (taxable vs. tax-deferred or tax-exempt),
6. Spending strategy (maximizing effective withdrawal order), and
7. Assisting with total-return vs. income strategies.
The Vanguard study puts the total value of these activities at between 2.3 and 3.8 percent of portfolio value, annually. The study goes on to stipulate, however, that, similar to the automotive example above, much of an investment advisor’s value remains “in the eye of the beholder:” governed as much by a particular investor’s inclinations, talents, and interests as by the quantifiable categories in the Vanguard list. Further, aspects of portfolio management such as charitable giving preferences, inheritance considerations, and other factors must also be considered as a part of the value equation.
Especially with the financial industry becoming more fee-driven and less commission-oriented, it is entirely appropriate for investors to carefully assess the value they are receiving in return for the services they are paying for. Likewise, financial advisors must keep in mind that value–whether quantitatively or qualitatively assessed–is ultimately in the eye of the client.