The community of financial advice and the advisors is acutely aware of the value that they can provide to clients, including proper investment planning, retirement planning, and general financial counseling that can keep customers from going off the rails with their financial plans.
This value can be provided in a variety of ways, including retirement planning, investment planning, and general financial counseling.
However, the general public frequently has a very different impression of the value that financial advisors can bring, particularly in this day and age of low-cost brokerage services, robo-advisors, and the entire spectrum of financial services that customers can access with their smartphones.
On the other hand, the findings of the research that was done on the sector appear to strongly support the advisors’ position regarding this issue.
KEY TAKEAWAYS
- The group of people who provide financial advising services is acutely aware of the value that they may provide to their customers.
- The general public frequently has a very skewed picture of the value that financial advisors are able to deliver, particularly in this day and age of low-cost brokerage services and automated financial advice/advisors.
- Financial advice/Advisors have the ability to step in and assist their customers in maintaining a level head and keeping their long-term goals in mind during times of increased greed and fear in the markets.
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The Vanguard Research Project
Vanguard conducted study in February 2019 that aimed to quantify the benefits that advisers may contribute to clients’ lives by offering sound wealth management in the form of financial planning, discipline, and direction.
This approach has the potential to increase customers’ net returns by around three percent, as stated in the paper titled “Putting a value on your value: Quantifying Vanguard Advisor’s Alpha” published by Vanguard.
This increase does not come about in a manner that is linear or sequential, of course.
The majority of this rise is expected to take place during times of heightened greed and anxiety in the markets. It is at these times that financial advisors are best positioned to assist their customers in maintaining a steady course and keeping their long-term goals in mind.
Vanguard asserts that advisors will be able to differentiate their skills and practice by utilizing the Vanguard Advisor’s Alpha framework. In addition, Vanguard claims that advisors will be able to add approximately 3% more value for their clients by providing relationship-oriented services such as wealth management and behavioral coaching.
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Additional Results from the Research
A research paper written by David Blanchett and Paul Kaplan of Morningstar and titled “Alpha, Beta, and Now…Gamma” aimed to quantify how much economically better off clients are after engaging in financial planning tactics.
The paper was titled “Alpha, Beta, and Now…Gamma.” For the purpose of this study, Blanchett and Kaplan evaluated the ways in which engaging in five different strategies for financial planning can improve the financial outcomes for retirees. These strategies include dynamic withdrawal rate spending approaches, more effective asset allocation, and proper asset location decisions.
According to Blanchett and Kaplan’s research, sound financial planning decisions can increase retirement income by 29%, which is the same as generating 1.82% per year of higher returns on investments. “Gamma” is the term that Blanchett and Kaplan used to quantify the difference between the financial-planning-baseline strategy and the financial-planning-optimal strategy.
These two studies come to the same conclusion, which is that financial advisors earn their fees more effectively when they work as behavioral coaches rather than as money managers.
Research conducted by Aon Hewitt and Financial Engines indicated that 401(k) members who make use of professional assistance are in a better financial position than those who do not make use of such assistance. This view is further buttressed by these findings.
According to the findings of the research project titled “Help in Defined Contribution Plans: 2006 through 2012,” which was conducted by Financial Engines and Aon Hewitt, participants in 401(k) plans who received assistance with their investments from a professional, be it in the form of managed accounts, target-date funds, or online advice, generated higher median annual returns than those who did not receive assistance.
After analyzing the 401(k) investment decisions made by 723,000 workers at 14 large U.S. employers, the researchers came to the conclusion that employees who used professional help had median annual returns that were 3.32% higher (net of fees) than participants who managed their own portfolios. This finding was reached after the researchers examined the 401(k) investing behavior of the workers.
During times of extreme market volatility, when investors are most likely to react with their emotions rather than reasoning, financial advisors can provide the most beneficial guidance. This is because investors are more inclined to make irrational decisions.
New research reveals that financial advisors can also have a favorable impact on their clients’ financial planning in a variety of other ways.
The Investment Funds Institute of Canada published a report in 2012 titled “The Value of Advice Report,” which revealed that clients who pay for financial advice have a probability that is 1.5 times higher of sticking with their long-term financial plan than those who don’t pay for financial advice. In other words, clients who pay for financial advice are more likely to follow their long-term financial plan.
Although sound financial advice may be useful in the short term, it may be exponentially more advantageous for investors over the course of longer time periods.
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The Crux of the Matter
Numerous studies indicate that the primary means by which financial advisers make their living is not via the management of their clients’ assets but rather through the provision of behavioral coaching services to their customers.
When financial advisors go out to win new clients, they need to keep this fact in mind. They also need to remember to emphasize to prospective customers that they will give them both peace of mind and a reliable presence even in times of market volatility.
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