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Even in the face of an increasing number of robo-advisors and do-it-yourselfers, there is an abundance of recent studies that emphasize the importance of client-advisor relationships. These reports prove that advisors can add 3% to clients’ net returns and retirement savers who sought investing advice enjoyed a median annual return almost 3% higher than those who didn’t – even after the fees they paid for that advice.
By working with a financial advisor to create and understand an investment strategy, along with the guidance from the advisor to stick with the strategy, investors have a better chance at avoiding a panic sale at the bottom of the market, overinvesting at a market top (FOMO), chasing returns, not being properly diversified, and the list goes on. Financial advisors still impact client portfolios, but it comes from behavior management more than the portfolio management.
A 2016 study by Vanguard (you can read it here), concluded the single factor providing the greatest value added by advisors is behavioral coaching. I’ve included a chart showing the breakdown of an advisor’s value, and you’ll notice portfolio management factors like rebalancing, keeping expenses low, and asset-allocation have value, but behavioral coaching brings the most. Not only does behavioral coaching bring the most value, it is also the factor that cannot be replicated by robo-advisors and technology–yet.
Rebalancing a portfolio regularly can help an investor stay within a risk tolerance zone and prevent an overreaction to market movements, benefits that outweigh rebalancing costs. Regular systematic rebalancing has the potential to generate higher returns when taking market momentum into account. Vanguard research estimates that annual systematic rebalancing can increase the expected portfolio return by up to 0.35% annually, while Russell and Envestnet estimate this annual return improvement to be 0.30% and 0.44%, respectively.
While investments show up in a financial plan, a comprehensive financial plan also addresses insurance, estate, tax, retirement, and college planning. It is in financial planning where the financial advisor separates himself from the robo-advisor. It takes the coordination of multiple facets of a client’s life to create, implement and monitor a financial plan. And, not only does the financial advisor create, implement and monitor the financial plan, but he makes adjustments when life happens–and it will. A financial plan is a fluid document; it will change multiple times over time, sometimes because of choice, and sometimes because life throws curveballs. Financial advisors have the experience and expertise to provide value to their clients by adjusting the financial plan to keep them moving forward.
Not only will a financial advisor keep you accountable with your budget and saving, but a financial advisor will keep you accountable in areas you may want to ignore. A financial advisor will help address risks associated with death or disability–everyone’s favorite subjects; ignoring these risks leaves a family open to financial devastation by a death, or the inability to earn an income due to a disability. Not only is the family subject to financial risks, but it also runs the risk of allowing the legal system to determine guardianship of minor in the event of the loss of both parents. The conversations surrounding these risks are uncomfortable, and without the encouragement of a financial advisor to discuss them, they often remain unaddressed.
While portfolio management often brings investors into a financial advisor’s office, it won’t be the reason they stay. The true value of a financial advisor comes in a variety of other things that will be different for every individual investor.