Fee-Only Advisors Create Additional ValueSubmitted by Karstens Investments on October 29th, 2015
By D. Scott Beal, CFP®
According to a recent report by Vanguard, using an advisor can add up to 3 percent of additional value to a client’s portfolio. This is a startling admission considering Vanguard has built their reputation as an index oriented low cost mutual fund alternative to active management and an alternative to active advisors.
After the initial shock wore off, I dug into their research. They looked at performance numbers for over 56,000 self-directed IRAs compared to investors with advisor guidance. As one might expect, the study showed that additional value can be created through a balanced portfolio. Still more value increased with regular re-balancing. I was impressed, but not surprised to find that 1 percent to 2 percent of additional value is created through behavioral coaching. By contrast, the Vanguard study revealed that when investors deviated from their initial retirement fund goals, their investments trailed by 150 basis points or 1.5 percent.
Understanding behavioral finance can help us identify and avoid counterproductive behavior. Read more about Behavioral Finance here.
In other words, investors who changed money between funds, pulled out or tried to time the market fared dramatically worse. A similar study by Morningstar revealed that investors’ returns typically trail a mutual fund’s actual returns from anywhere between -0.82 percent to -2.32 percent. Investors should expect some drag because one can never get in at the exact same time as when the performance numbers are calculated. Still the larger difference can be a sign of performance-chasing.
Behavioral coaching derives from behavioral finance, which can help us identify and avoid counterproductive behavior. Further, an advisor on the other hand can act as a coach to help clients stay on track. A financial advisor can help clients control their euphoria and avoid chasing returns while also balancing an investor’s fear to keep them invested.
In summary, “Helping clients maintain a long-term perspective and a disciplined approach is arguably one of the most important elements of financial advice.” -Vanguard, March 2014 •