When we transitioned from a sole proprietorship to a corporation, I chose The Asset Advisory Group as our company name to emphasize the ongoing advice we provide to our clients. Too often, investments are the primary focus of financial discussions and articles, when the decisions we make around our investments are the true drivers of our long-term financial success.
Vanguard, the mutual fund family known for bringing index funds to individual investors, began a research study in 2001 to track the real value provided by financial advisors. They have continually updated their research, and recently published a report that quantified the importance of advice.
Based on their analysis, they believe financial advisors potentially add “about 3%” in net returns per year through the following:
Being an effective behavioral coach.
Over 26 years, our clients have seen historical, economic and political changes that caused them to alternatively wonder if the world was coming to an end or the DOW was going to reach 30,000 as Harry Dent originally predicted. From the Crash of 1987 to the dot-com bubble to the Great Recession and the subsequent market recovery over the past 5 years; investors’ nerves have been severely tested. In times like these, we can help our clients maintain a long-term perspective and a disciplined approach to investing.
Here at TAAG, from August 2007 through March 2009 we worked to maintain on-going communication with our clients to let them know how we were using the market drops to rebalance their accounts and improve their financial plans. We know, intellectually, that selling high and buying low is the right thing to do. But in the midst of magazine covers showing Depression-era bread lines and frightening news reports, it’s hard to follow through. We helped our clients do the right thing, and the investments purchased at those market lows are now the largest unrealized gains in their portfolios. Vanguard calculated this service as adding up to 1.50% in net annual returns.
Implementing a spending strategy.
Some people are able to follow a disciplined plan to accumulate assets for all their financial goals. They save as much as they can in their 401(K) and other retirement plans, and set aside additional funds to fill in the gaps. Following a plan and a discipline can be a challenge. But at retirement, spending down savings can be even more challenging.
Should you withdrawal from your retirement or taxable accounts? How does it affect your tax picture? What investments should you sell to fund your monthly income? How do you integrate your investment withdrawals with Social Security or stock options exercises? Helping our clients with these important decisions adds another .70% in potential value, according to Vanguard.
Employing cost-effective investments.
This area of benefit is based on simple math. If your investments are cost effective, and you get to keep more of what you make, you will be financially better off. Do it year after year, and you will accumulate and maintain more wealth.
When we review existing portfolios for people outside our client base, we are surprised by the management fees, commissions and investment expenses people are charged. It is not uncommon to see a 2% wrap fee, a 5.75% up-front commission or fund expenses of 1% per year and more. And these fees do not include financial planning advice customized for the client’s needs. No matter what investment skill or expertise these investment managers purport to have, if they are deducting costs of this level, there is little left over for the client to keep – particularly in volatile years. The study measured this advisor benefit as providing up to .45% per year.
Maintaining the proper allocation through rebalancing.
Each year, a different investment type rises to the top of the performance list. The natural impulse is keep as much of that investment in your portfolio as possible, because it’s the best. But time has taught us that the best performing investment today will not be the best forever, which is why rebalancing a portfolio is so important. Vanguard estimated this rebalancing process provided by advisors to add up to .35% per year to their clients’ benefit.
More value in advice
While the above areas were estimated to provide 3% per year of added value, we believe the financial planning and implementation process adds even more. But it’s impossible to quantify the value added by planning, since each individual’s situation is so different.
Issues such as college funding, evaluating direct investment opportunities, quantifying your insurance needs, deciding how much to help your kids, planning the construction and financing of a new home, and others arise as you go through life. Having a resource to help you look at the financial and emotional aspects of each situation, and come to the right decision for you, is priceless.