Ever Wonder How Much a Financial Advisor Can Add to Your Wealth?
We’re in the do-it-yourself era. It’s easier than ever to open an investment account – you can get started right on your phone. You’ve probably seen the ads.
So, why even think of hiring a financial advisor?
A comprehensive study by Vanguard, one of the world’s largest providers of investment products, makes a compelling case. Vanguard's research reveals that financial advisors may add up to or even exceed 3% in net annualized returns for their clients. [1][2]
Vanguard’s research does not rely on outperforming the market through speculative investment choices. In other words, it’s not about picking the right product to get rich quick. Instead, it’s about advisors applying a systematic approach to wealth management.
This systematic approach is divided into seven critical wealth-management practices:
| Strategy | Typical Value Added for Client | Explanation |
|---|---|---|
| Suitable asset allocation using broadly diversified funds/ETFs | > 0%* | "Asset allocation" means how your money is spread across different types of investments. Investors diversify their investments to reduce risk. Your advisor can help you pick the right mix of investments based on what you're comfortable with and your financial goals. This is a huge factor in managing your investments’ long-term performance. |
| Cost-effective implementation (expense ratios) | 0.3%* | Different investment products will have different costs. Vanguard highlights the difference in expense ratios between the industry average and the lowest-cost funds demonstrating potential savings and thus higher returns for clients. Don’t be afraid to talk to your advisor about expenses! |
| Rebalancing | 0.14% | Your asset allocation can become skewed over time as some of your investments perform better than others. Correcting this is called “rebalancing”. This helps manage risk and can contribute to performance. |
| Behavioral coaching | 0% to > 2% | Your advisor’s role is not only to help you craft an investment strategy but also to coach you to stick with it when emotions run high. Hasty decisions can have a huge impact on your investment portfolio’s performance. This is where you should expect your advisor to really add value. |
| Asset location | 0% to 0.6% | TFSAs, RRSPs, FHSAs, RESPs… Choosing the right account type for the right goal can optimize your after-tax returns. |
| Spending strategy (withdrawal order) | 0% to 1.2% | Once you’re ready to draw from your investments in retirement, you need to make choices that balance minimizing tax and meeting other goals (e.g., maintaining a particular lifestyle, leaving money behind for your heirs). Your advisor can help with these choices. |
| Total return versus income investing | > 0%* | Some investors prefer a focus on income-generating investments. Examples include dividend-paying stocks or interest-paying bonds/GICs. Vanguard argues that it pays off to focus on a portfolio’s total return; i.e., the increase in value over time, not only the income the investments generate. This can lead to better diversified, more tax-efficient, and ultimately more successful investment outcomes. |
* Significant value-add, but too unique to each investor to quantify.
The bottom line? Using a strategic and disciplined approach to investing, advisors can add significant value beyond what the average investor might accomplish on their own.
[1] Review Vanguard’s report here. Be sure to consider Vanguard’s notes on risk and performance data at page 2: “All investments, including a portfolio's current and future holdings, are subject to risk, including the possible loss of the money you invest. Past performance is no guarantee of future returns... Diversification does not ensure a profit or protect against a loss in a declining market. There is no guarantee that any particular asset allocation or mix of funds will meet your investment objectives or provide you with a given level of income. Be aware that fluctuations in the financial markets and other factors may cause declines in the value of your account..."“
[2] “Net annualized returns” means an annually compounded return, net of fees.