What's the Value of a Financial Advisor?
According to a recent study by Vanguard, financial advisors can add up to 3% in net returns for their clients. This study examined a set of "best practices" of advisors operating within a specific framework and quantified the value that advisors might add. The study concluded that "advisors have the opportunity to meaningfully improve investor outcomes".
The results of this study are interesting, expecially considering the source. Vanguard and their founder John Bogle, are well-known for their approach to using low-cost index funds over actively managed mutual funds, contending that over long periods of time it is not possible for a actively managed funds to outpace the performance of index funds when accounting for management fees.
Still, Vanguard's study makes it clear that the value an advisor provides can be substantial. According to the study, "being an effective behavioral coach" has the potential to add up to 1.5% annually to an investor's returns. (This alone is more than the fees charged by many advisors.) A good advisor will help their clients to maintain a long-term perspective on thier investments, preventing them from making rash financial decisions in the face of ever-changing markets.
Advisors can also provide value to their clients by helping them to stay disciplined in thier approach, apply asset allocation and rebalancing strategies, and by choosing cost-effective investment options.
In the final analysis, it's important to consider the ways that a financial advisor can help you. As we often here, it's not so much about the performance of the investments, it's about the performance of the investor.