This interesting study, commissioned by Vanguard, clearly illustrates the positive impact professional advice makes on your investments. Which may seem odd, coming from a company that has built their business helping people that DIY their investments.
But, reading below, it’s pretty clear that they believe what we believe…that a professional advisor adds more value than they cost. That value could add up to 4% or more annually to your portfolio value. Vanguard studied five specific areas where a financial professional can add value to their clients’ investment portfolio. The study then quantifies this added value, drawing on Vanguard’s depth of research into each area. These five areas nearly always apply to every investor, and are the areas which give the highest rates of return.
The first step in aligning someone's investment portfolio with their goals is creating an investment policy statement. A policy statement determines how a person invests their money and the appropriate asset mix, referred to as an asset allocation. It can be a very time-consuming, detail-oriented task to do without the assistance of a financial planner, and because of this, many don’t put forth the effort.
Because each client’s financial goals and circumstances are unique, the value of creating a policy statement is significant, although challenging to quantify. Vanguard estimates that the creation of an Investment Policy Statement and the resulting asset allocation can add value annually, but does not provide a specific amount.
More measurable value additions begin with a cost-effective implementation of one's investment portfolio. A cost conscious financial planner will help their client to utilize low-cost investment positions that meet the criteria of their policy statements. This keeps more money in a person's portfolio as less is passed through to a fund or money manager.
The initial creation and implementation of a properly conceived policy statement and investment portfolio involves extensive attention. However, there is also ongoing maintenance to consider.
Working alone, many find themselves with little free time, leaving the ongoing maintenance task on the back burner. This can ultimately increase the amount of risk assumed.
Others may be paying keen attention to their portfolio but fall victim to recency bias – assuming that their strongest performing investments will always be the strongest performers. This too can increase the amount of risk assumed.
Typically as the portfolio grows, a higher proportion of riskier investments grow in an un-rebalanced portfolio.
Vanguard’s Advisor’s Alpha showed that implementing appropriate rebalancing strategies helps maintain an allocation consistent with the policy statement. This serves to minimize risk rather than maximize return.
Personal finance is intrinsically emotional as a person’s current and future financial stability is at stake. Because of this, it’s very easy to have knee-jerk reactions and abandon the course after a sharp pullback, or be tempted to chase the illusion of a hot investment when it may not actually fit within a prudent strategy.
Advisor’s Alpha founds that self-directed investment portfolios could lose up to 2% in long-term return from emotional decision-making. On the contrary, guidance from an objective professional could add 1.5% in annual return.
One significant complicating factor in successful investment decision-making is navigating the impact of taxes. Striking the right utilization balance between taxable and tax-advantaged accounts can be a daunting task. The cost of improper utilization is higher taxation.
Vanguard’s research notes that a 0% to 0.75% annual return value-add is possible with proper asset location, depending on the investor’s breakdown of assets between taxable and tax-advantaged accounts.
Sound financial planning principles combined with competent execution have been extensively studied and demonstrated to provide additional value to your investment portfolio. Utilizing a financial professional saves you time, a priceless commodity on its own, but prudent strategies can also provide you with tangible, real world benefits.
Please consult an advisor to discuss your individual situation prior to making any investment decision. Past performance is not a guarantee of future results. The rates of return do not represent any actual investment and cannot be guaranteed. Any investment involves potential loss of principal.