Using a financial advisor significantly improves investors’ portfolio construction by adding much more diversification, according to a new white paper released Tuesday by Vanguard Research.
The implementation of advice improved portfolio construction for nearly 90% of the more than 44,000 Vanguard self-directed investors who adopted Vanguard Personal Advisor Services between 2014 and 2018, Vanguard researchers Cynthia A. Pagliaro and Stephen P. Utkus found after analyzing the investors’ asset allocations, Vanguard said.
Once added by those investors, the Vanguard advisors addressed equity risk-taking, increased international exposures and reduced cash holdings, the company said.
“Cognitive or behavioral biases, as well as a lack of financial literacy, can lead many individual investors to make common portfolio construction errors,” according to the white paper, The Value of Advice: Improving Portfolio Diversification. “These include taking an undisciplined approach to risk-taking, holding too much cash, or concentrating assets in domestic securities,” it said.
“Advice remedied these common portfolio construction errors and will ultimately improve outcomes for investors,” Pagliaro, senior researcher in Vanguard’s Investment Strategy Group, said in a statement.
Equity risk-taking is the “most fundamental decision an investor makes when constructing a portfolio,” according to Vanguard. Prior to adopting advice, the distribution of equity allocations among investors varied widely, suggesting they were inattentive to or uncertain about appropriate equity risk-taking levels relative to their financial goals, the company said.
More than two-thirds of the investors saw a change of more than 10% in their equity distributions after implementing advice, including 30% who saw their equity allocations increase or decrease by more than 30%, Vanguard said. Only 31% of investors needed a minor equity change of less than 10%, according to the firm.