Vanguard studied it & answers the question affirmatively, but leaves out even more added benefits (which we cover in part II)
Part I: Vanguard Alpha
Vanguard studied the question of the whether working with a financial professional added value in a report called ‘Advisor‘s Alpha’. Vanguard’s conclusion was, ‘Yes, it definitely adds value’ and they even quantified how much it can add to your bottom line.
You read that correctly, I’m talking about Vanguard. The world’s largest do it yourself shop for investors. That Vanguard! They now conclude that doing it on your own can lead to lower returns. In fact, on Average doing it yourself generates an average of 3% less return annually over a long period according to their study. And that 3% annual is compounded, and if you read our blog regularly, you know how much lost return that can be over time.
This study confirms the consistent results of the Dalbar study that’s been ongoing & updated for 20 years, so it’s something we professionals have known for a long time already, but it’s nice for Vanguard to quantify it for everyone else. However, I believe the Vanguard study leaves out even more of the benefits to working with a professional (which I will address in part 2 of this article)
So how did Vanguard come to its conclusion that the value of a good planner outweighs the fees an investor pays?
Vanguard indicated several areas of value that added up to a potential 3% Alpha:
- Suitable asset allocation using broadly diversified funds/ETFs
- Cost-effective implementation
- Rebalancing
- Behavioral coaching
- Asset location
- Spending strategy (withdrawal order)
- Total-return versus income investing
Suitable Asset Allocation
The construction of the portfolio itself adds value; Vanguard could only give a range since different investors have different goals based needs. The portfolio, or asset allocation, is like having the correct ingredients to bake a delicious cake; too much of one ingredient and what comes out is a not very tasty dessert. Investing professionals are simply better at designing the right mix of Stocks versus bonds, Domestic versus international, small versus large company, etcetera, to complete a portfolio designed for your goals.
Cost-effective implementation
All investments have cost. The advisor can assist by building a portfolio of low cost funds or ETFs, and can keep an eye on trading and custody costs. Also, if the strategy is built for the long term, trading should be kept at a minimum.
Rebalancing
A disciplined way to sell high and buy low, as well as keep the asset mix for your portfolio from drifting too far off course. Most investors will rebalance very rarely, if ever.
Behavioral coaching
In turbulent times, we often become behavioral coaches. When markets go up or down many investors feel the need to make rash changes based upon what they hear or feel. They may chase hot performance of a mutual fund or stock or try to engage in market timing, thinking that they can know when to get in and out of the market. A good advisor helps their clients build solid portfolios that are designed to weather turbulent storms, and may sacrifice short term ‘hot’ performance for a larger long term payoff. The point is to trust the portfolio that has been built to fit your needs even when it’s stormy outside.
Asset location
Whether an investment should be in the taxable or tax advantaged accounts. (I would also add tax harvesting, and even potential Roth conversions, which Vanguard didn’t discuss)
Spending strategy (withdrawal order)
What order to withdraw from your savings? How much from your tax advantaged accounts like IRAs versus from your taxable accounts in order to minimize taxes and have your money last longer.
Total-return versus income investing
Many retirees are chasing yield right now (a.k.a. current income). The past few years has seen historically low interest rates, so investors are taking more risk to make up for lost income. This could be dangerous, and a qualified advisor can help to minimize this risk.
So all of these factors can add up to 3% annually according to Vanguard. Which is why they argue it is beneficial to have a financial professional at your side. But we at Conestoga Wealth Management think there’s more benefits that add value, which we will look at in part 2 of this topic..
