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A recently released report from Russell Investments assessed the value of an advisor “to be approximately 4.08% a year.” It noted that this value “materially exceeds” the 1% fee advisors typically charge for their services.
This should have been encouraging news to beleaguered advisors coping with a rapidly changing competitive environment.
ValueWalk's Raul Panganiban interviews William Burckart, The Investment Integration Project’s President and COO, and discuss his recent book that he co-authored, “21st Century Investing: Redirecting Financial Strategies to Drive System Change”. Q1 2021 hedge fund letters, conferences and more The following is a computer generated transcript and may contain some errors.
It had the opposite effect on me.
The basis for the value calculation
The Russell study reached the 4.08% number by calculating the value of annual rebalancing, correcting “behavioral mistakes individual investors typically make,” the value of basic investment advice, the value of planning costs and ancillary services and the value of tax-aware planning and investing.
Assuming the accuracy of the items Russell studied, here’s what’s missing:
How much would it cost an investor to obtain these benefits elsewhere?
On the hypothetical $500,000 portfolio, the Russell study attributes a value of 0.20% to annual rebalancing.
The study ignores the fact that some investments don’t require any rebalancing. Target-date funds are one example. Balanced funds, like Vanguard’s LifeStrategy Funds, automatically rebalance. These funds are suitable for many investors.
Investors might also consider rebalancing themselves, at no cost. The process is very simple and should take no more than 30 minutes or so a year.
Investors who need the services of an advisor have many options for rebalancing that don’t involve paying 1% annually. Betterment charges a fee 0.25% annually, which includes regular automatic portfolio rebalancing, among many other services.
The Russell study placed a value of 2% annually on controlling investor behavior. It referenced data indicating that investors tend to buy high and sell low.
But investors can obtain this counseling from a range of low-cost providers, including robo-advisors, Vanguard and Schwab.
Vanguard’s Personal Advisor service will provide access to a qualified advisor who will recommend a portfolio of low-cost index funds, serve as an investing coach and minimize taxes for a total fee of 0.30%.
While controlling investor behavior may well be worth 2% annually, if investors can get this benefit (and a lot more) for 0.30% from a world-class brand, why would they pay an advisor 1%?
by Dan Solin, read the full article here.