Advisors are worth up to four times the 1% fee they typically charge on assets under management, according to Russell Investments’ annual study on the value of a financial advisor.
As in the past four years of this study, Russell concluded that the value an advisor delivers to their clients materially exceeds the 1% fee they typically charge for their services.
This year, Russell assessed the value of an advisor to be approximately 4.08%.
“The technical and emotional guidance that only a trusted, human advisor (as opposed to robo-advisors, for instance) can offer to investors who are attempting to undertake the complex job of coordinating the accumulation, distribution and transfer of their wealth, is invaluable – particularly in an environment that is likely to deliver lower returns and higher volatility than investors have grown accustomed to recently,” the report states.
Of course “invaluable” is a difficult sum to bill a client for, so Russell Investments attempted to estimate the value of an advisor.
To do this, Russell looks at the different ways human financial advisors deliver value – including annual rebalancing of investment portfolios, preventing behavioral mistakes individual investors typically make, cost of basic investment-only management, planning costs and ancillary services, and tax-aware planning and investing – and calculates what percentage fee that service is worth.
Russell Investments’ analysis concludes that standard investment selection has arguably become one of the least valuable parts of an advisor’s value.
“What should an advisor who delivers investment-only management and no financial plan, no ongoing service, no guidance, nothing except for an annual statement, online access and a phone number to call in case of questions charge their clients?” the report states. “Robo-advisors have set that price at approximately 0.33%.”
However, the value advisors deliver rests in many places, according to the report.
Most likely the single largest contributor to the total value advisors bring is being a “behavior coach” to their clients.
“Left to their own devices, many investors will ‘buy high’ and ‘sell low,’” the report states. The average stock fund investor’s inclination to chase past performance cost them about 2% annually from 1984 to 2016.
This is why Russell calculates an advisor’s ability to keep their client to stick to their long-term financial plan – and avoid irrational, emotional decisions – as worth 2%.