This 28-page March, 2014, paper — from Vanguard, no less, famous for advocating low fees — argues that they are.
“Putting A Value On Your Value” — which Vanguard makes available to the financial advisors through whom it sells a lot of Vanguard fund shares — concludes:
For some investors, the value of working with an advisor is peace of mind. Although this value does not lend itself to objective quantification, it is very real nonetheless. For others, we found that working with an advisor can add “about 3%” in net returns when following the Vanguard Advisor’s framework for wealth management, particularly for taxable investors. This 3% increase in potential net returns should not be viewed as an annual value-add, it is likely to be intermittent, as some of the most significant opportunities to add value you occur during periods of market duress or euphoria when clients are tempted to abandon their well thought out investment plan.
So the advisor may add 3% in some years . . . but she or he likely charges you 1% or so every year, and that cuts into your return.
The 3% — 300 basis points — is figured to come from 7 things:
1. Asset Allocation. No specific value is assigned to this one, but Vanguard is right in saying it can be valuable. If you are a person of some wealth who would otherwise fail to allocate his assets intelligently among the various alternatives — stocks, bonds, real estate, and so on — an advisor can help. A sensible blend of asset classes can lower risk without lowering return; or enhance return without raising risk.
2. Cost Effective Implementation — 45 basis points. If you need an advisor to tell you to use low-cost index funds (like Vanguard’s, for example), Vanguard figures that advisor may save you 45 basis points for having done so. I think it’s way more: the typical actively managed fund, between its fees and the extra drag inherent in its active buying and selling of stocks — plus its tax inefficiency — can easily set you back 200 or 300 or 400 basis points — 2% or 3% or 4% — a year. But maybe you don’t need to pay someone to tell you that.
3. Rebalancing — 35 basis points. If you want to be allocated 60/40 between stocks and bonds (say), your portfolio will go out of whack if and as stocks rise relative to bonds. An advisor can help you do that math and remind you to rebalance your holdings from time to time.
4. “Behavioral coaching” — 150 basis points. Basically, this is getting clients not to panic and sell at the bottom (or join the stampede and buy at the top).
5. Asset Location – from 0 to 75 basis points. This has to do with deciding which assets should be in a taxable account and which in a tax-deferred account. If you only have one or the other, there’s nothing to decide. But if you have both, and are an idiot, you certainly would need someone to teach you, each year, to put your taxable bonds in tax-deferred accounts, and the assets on which you hope to have very-long-term capital gains in your taxable account.
6. Withdrawal Order – up to 70 basis points. Again, if you have both taxable and tax-deferred accounts, an advisor can explain that withdrawing money from the retirement account can entail large taxes, so suggest that you fund your spending needs from taxable accounts instead.
7. Total Return Versus Income Investing – no points assigned, but potentially valuable to a retiree trying to decide how to fund his or her spending needs. Should he put more money in high yielding stocks and bonds to produce more current income? Or should he or she keep the balance unchanged, but sell a few shares of stock to make up the income shortfall that results from today’s low interest rates?
It’s an interesting paper, neither overselling nor underselling its case, and providing interesting “backup” to explain its findings and assumptions. I haven’t done it full justice here. If you’re interested, you can read the whole thing.
The goal of my book is to take the place of a financial advisor for those with insufficient assets to afford one . . . (the advisor who gave me the Vanguard booklet has a $1 million minimum) . . . as well as for those who don’t want or need one.
And to help those who do want to work with an advisor chose one — and work with her — with more confidence.
Quote of the Day
RALPH: Before I let you go to work, I'd rather see you starve. We'll just have to live on our savings. ALICE: That'll carry us through the night, but what will we do in the morning?~The Honeymooners
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