Trying to determine what makes financial advice great may not be as difficult as imagined. A recent report from mutual fund giant Vanguard Group, Inc. identified 5 primary factors where financial advice renders substantial, quantifiable value. The most significant value (1.5% per year according to Vanguard’s research) is derived from advisors keeping clients focused on their long-term goals and staying with their plan. This is followed by asset allocation, cost-effective implementation, re-balancing, and developing a spending strategy. In total, the research estimates about 3% per year of value to net returns for clients.
Your Role in Defining Value
It has always been easier to describe the value of un-conflicted financial advice than it is to define this value. Some clients follow advice more carefully than others. This is, of course, the case with all forms of professional advice.
I recall many years ago when I had a surgical repair to my ACL (knee ligament). The surgeon explained that he was confident in his ability to perform his end, the technical aspects of the procedure. But, the real outcome would be determined by how compliant I was with physical therapy post-surgery. In other words, I had almost as much to do with the result as he did.
The same holds true in our client relationships. We can provide great advice, but there is diminishing value if the advice is not implemented.
Advice or Sales?
It is important to distinguish between actual advice, like ours “without conflict or compromise,” and the “sales direction” received from traditional financial services firms (brokers, banks, insurance companies). Expensive, packaged investment products usually work against long-term goals.
Obviously, the exact value of advice will vary depending on the specific circumstances. But, at the very least this Vanguard study should reinforce the importance of developing and sticking to a long-term financial plan. When markets look bad (late 2008) or when they look good (now), it is critical to understand that short-term price movements are just a distraction.
Since the market bottom in 2008, aggregate stock market values have almost tripled. If you stayed invested in 2008, likely all is well and benefits have accrued. Instead, if you panicked and got out of the market (some estimate 25% of investors have still not returned), you likely have suffered. Behavioral advice can indeed provide substantial, tangible value.